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Test answers for Day Trading Test 2016

(80) Last updated: September 27
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80 NOT Answered Yet Test Questions:

(hold on, will be updated soon)
1. When a stock has a breakout, what has happened?

Answers:

• The stock has taken off quickly and its popularity grown like a virus breakout.

• The price has moved outside of the normal trading range either on the higher or on the lower end.

• The price has declined so quickly that the company is forced to close its doors.

• The volume has tripled.

2. What is the idea behind fundamental analysis?

Answers:

• Extensive mathematics will find winning stocks.

• Fraud can be spotted.

• The fundamentals of a company help dictate what the share price should be.

• Opportunities for arbitrage trading can be found.

3. How are day traders able to quickly analyze information in order to make decisions?

Answers:

• They are math geniuses.

• They hire a team of people to analyze the data ongoing.

• They just make random guesses.

• Complex software is available to conduct analysis and give alerts based on the traders' criteria.

4. What is "margin trading?"

Answers:

• Trading only in stocks with high potential for return

• Using money borrowed from the brokerages to conduct stock transactions

• Trading stocks of companies who have high gross margins

• Selling stocks without owning them

5. When is stock analysis performed?

Answers:

• After the trading day to plan for the following day

• A week in advance

• Over several months

• Always on the fly

6. What is "fundamental analysis"?

Answers:

• Stock analysis based on price and volume

• Stock analysis based on the fundamentals of a company such as financial reports

• Stock analysis based on a normal trading band

• Stock analysis based on the previous day's trading mistakes

7. How is 'days to cover' calculated?

Answers:

• Always ten days as a rule

• Number of shares outstanding / Daily share volume

• Number of shares less shares held by execs / Daily share volume

• Depends on the stock market; the formula varies from market to market

8. What would be the best technique for a day trader to utilize?

Answers:

• Fundamental analysis

• Technical analysis

• Multiple techniques

• Charting

9. What does the $25,000 margin account requirement do to protect a day trader?

Answers:

• It guarantees they will always have $25,000 money available if they decide to quit day trading.

• Little — the requirement is more to protect the brokerage.

• It is a reserve they can use for trading at some later date.

• It buys insurance from the NASD.

10. What is a simple technique a beginning day trader would use?

Answers:

• Options contracts trading

• Fundamental analysis

• Regression analysis

• News trading — using news releases about companies as indicators of stock prices

11. How effective is fundamental analysis in day trading?

Answers:

• It guarantees profit and success.

• It identifies short sale opportunities only.

• Not as effective as it is thought to be; it can at best be used for identifying long term pricing.

• It is never effective and is a waste of time.

12. Why is short selling risky?

Answers:

• Because if the price of the security rises endlessly, there is no limit on the losses that can be incurred

• Because the brokers can mandate the seller cover their position at any point

• Because there are no laws protecting short sellers

• Because inexperienced short sellers can create havoc in the market

13. What is meant by days to cover?

Answers:

• The number of days available for trading in the month

• The number of days until a locate must be found

• The number of days until a transaction clears

• The maximum number of days available to the trader to cover their short position

14. Why should an investor have predetermined exit points?

Answers:

• To maintain their trading goals and profit margins

• Because they are required to by law

• To make sure they stay classified as a day trader

• Because it allows for low taxes

15. How does a day trader immediately set their exit point?

Answers:

• By telling their friends to watch the stock for them

• By placing a limit order to sell after purchase

• By selling options contracts

• By trying to arbitrage the stock

16. What is "FOREX"?

Answers:

• Over the Counter Bulletin Board

• A stock exchange

• An options exchange

• A foreign currency exchange

17. Why is short selling looked on negatively by some traders?

Answers:

• Because short sellers make larger profits

• Because short sellers introduce volatility to the market

• Because short sellers profit on the misfortune of others

• Because short sellers are too cavalier

18. What is a margin account most resemble outside of the stock trading world?

Answers:

• Borrowing money from friends

• A bank loan with collateral

• An unsecured credit card

• Selling bonds

19. What is "news trading?"

Answers:

• Buying and selling stocks based on recently released news information

• Buying stocks in newspaper companies

• The buying and selling of news stories

• Giving other traders false information

20. What is a "locate"?

Answers:

• A person who locates hot stock tips

• A person who locates potential short sale deals

• A person who will provide the securities being sold temporarily, typically a brokerage

• A person who locates short sales which are out of compliance

21. What is meant by "swing trading"?

Answers:

• Trading 10 or more times in one day

• Trading stocks with your friends

• Holding stocks for more than a day, but typically not more than a few weeks

• Trading stocks as a hobby

22. What is the concept of ignoring predetermined exit points to allow for further profit?

Answers:

• Short selling

• Selling options contracts

• Letting a stock run

• Margin trading

23. What is meant by a margin call?

Answers:

• When a brokerage asks the investor to put money up front before extending the margin

• When a brokerage requires a stock trader to pay for loans the brokerage has made to the trader

• When an investor executes a call option

• When an investor executes a short sale

24. What is the assumption of a trader who cannot produce the $25,000 margin?

Answers:

• They are using their money for trading risky stocks.

• They would rather buy homes.

• They have their money tied up in bonds instead of stocks.

• They are less wealthy, less sophisticated, and cannot sustain a sizeable loss.

25. What is the SEC definition of a "pattern day trader"?

Answers:

• A trader who profits from short selling

• A trader who buys and sells on the same trading day, and does this four or more times within a 5 day period

• A trader who sells and buys stock options instead of stocks

• A trader who makes profits; the ones who lose money are not day traders

26. What is the end result of most technical analyses?

Answers:

• Short selling stocks

• A chart indicating price movements and a prediction for future price movements

• Calling companies for more information about their stock price

• Nothing; it usually results in useless information.

27. What is meant by "arbitrage"?

Answers:

• Selling a stock without owning it

• Profiting on price differences between the markets

• Selling stock options

• Illegally selling stocks

28. What is the usual way traders will leverage their trading capital?

Answers:

• Borrowing money from friends and family

• Taking out a bank loan

• Trading on margin, borrowed money

• Mortgaging their homes

29. What would be an entry point for a range trader who is going long?

Answers:

• The high point in a price band

• A price in the middle of a price range band

• A price near or at the typically lower end of the range for a security

• When the stock of an appliance manufacturer hits a new low

30. What is the fundamental idea behind arbitrage trading?

Answers:

• That profit can be made on the pricing differences between two markets on the same security

• That profit can be made based on information leaked by an insider

• That profit can be made by short selling stocks

• That profit can be made by artificially promoting a stock

31. What is "technical analysis"?

Answers:

• Stock analysis based on price movements and charting

• Stock analysis based on company fundamentals such as financial statements

• Stock analysis based on new reports during the day

• Stock analysis based on volume sales

32. When a range trader sees a breakout, what does he see?

Answers:

• A stock is new to the market.

• A stock is now trading outside of its normal price band.

• A stock has issued a press release.

• A stock has had lower than the normal volume of trading.

33. What is the "settlement date"?

Answers:

• The date on which a transaction is executed

• The date on which an account holder's statement comes out

• The date on which a company's dividend is declared

• The day on which a transaction is finalized by the broker transferring ownership of the security

34. Why is it important for a day trader to have a methodology to adhere to?

Answers:

• Because it is required to by law

• Because it reduces their tax obligations

• Because the brokerage will ask from time to time what their strategy is

• In order to consistently pick stocks which fit their portfolio without getting distracted by other opportunities

35. Which of the following is a method of leveraging the capital available?

Answers:

• Going into currency exchange even if you know nothing about it

• Diversifying trading into multiple stocks

• Stopping trading all together

• Investing in the community

36. Why is news trading a relatively simple strategy?

Answers:

• Because it is cheaper to trade

• Because it can be done months in advance

• Because it does not require as much analysis

• Because brokerages will provide you with the news and tell you what to do

37. On which of the following counts are the legal requirements on day traders criticized?

Answers:

• Traders will often enter transactions overnight in order to avoid the classification, exposing themselves to more risk and potential loss than if they were allowed to trade as they know best.

• No one can afford a $25,000 margin account.

• It makes day trading non accessible to inexperienced people.

• The government should not meddle in the public's well being.

38. What stipulation does the SEC place on a pattern day trader?

Answers:

• They must make at least ten transactions a week.

• They must pay minimum commissions of $10 per transaction.

• They must maintain at least $25,000 in a margin account.

• They can only trade on the US exchanges.

39. What type of order will a short seller subsequently place in order to limit their potential losses?

Answers:

• Purchase limit order

• Option contract purchase

• Stop loss order

• Arbitrage trade

40. Which of the following is closest in meaning to arbitrage trading?

Answers:

• Day trading

• Short selling

• Scalping

• Profiting

41. What requirements do brokerages have for day traders?

Answers:

• No requirements are there.

• Minimum deposits must be at least $1,000.

• They must come into the office and sign an agreement.

• Brokerages must ask traders if they understand the risky style of trading and that there is a possibility of losing their investment capital.

42. Why is arbitrage trading a day trading method only?

Answers:

• Because the transactions on both markets are made simultaneously

• Because it is required by law that all arbitrage transactions be cleared out daily

• Because it is too risky for the average investor

• Because it mitigates the tax implications

43. Which of the following provides some form of ongoing return on investment?

Answers:

• Investing in companies with drastic price range history

• Investing in companies with a solid history of consistent dividends

• Investing in new companies

• Short selling only

44. What would a range trader who sees a breakout most likely do?

Answers:

• Nothing, wait and see what else happens.

• Tell their friends to buy the stock.

• Call the company to find out what is happening.

• Purchase or sell the stock depending on the direction as the price is likely to continue in the same direction for some time.

45. What is meant by "range trading"?

Answers:

• Trading in stocks of appliance manufacturers

• Trading in stocks based on news releases

• Trading in stocks based on the analysis of company financials

• Buying and selling stocks based on the history of trading within a certain price range

46. By doing which of the following would a day trader be leveraging capital?

Answers:

• Buying 100 shares of a hot new company

• Buying stock options

• Short selling stock

• Passing on a transaction

47. What is the best way to reduce variable expenses?

Answers:

• Working at the library using their computers

• Working with a brokerage which charges low commissions from frequent traders

• Refusing to pay commissions

• Refusing to pay the margin requirements

48. What would a trader do if they calculated a price based on fundamental analysis which was higher than the current market price?

Answers:

• Purchase the stock as it will potentially normalize back to the calculated price.

• Nothing; they would wait and see what happens.

• Tell their friends to short sell the stock.

• Call the company and ask why.

49. What is the requirement on short sellers regarding locates?

Answers:

• Locates must be in place before a short sale can be made.

• Locates must be made if requested by the broker.

• Locates are not required.

• Locates must be wealthy individuals.

50. Which of the following is a positive attribute often associated with short sellers?

Answers:

• They have lower commission rates.

• They tend to do extensive dilligent research on securities due to the substantially risky nature of the trades.

• Their errors create opportunities for others.

• Their actions often indicate market direction.

51. What is day trading?

Answers:

• Trading stocks during the market hours

• Trading at least 1 stock per day

• Buying stocks using borrowed money

• Buying and selling securities on the same day

52. What does algorithmic trading look to profit from?

Answers:

• From misinformation in news reports

• From company financial statements

• From misinforming other traders

• From mistakes made during the previous trading day by other day traders

53. What would an investor infer from a stock price which has steadily risen for three days?

Answers:

• That someone inside the company is giving false news reports

• That insiders are selling all of their stock

• That short sellers are covering their positions

• That the stock will most likely continue in this direction

54. What is "spread"?

Answers:

• The difference in price between the bid and ask amounts

• The difference between opening and closing prices

• The difference between the price of the same security on two markets

• The difference between strike price and current price

55. What would be the exit point for an arbitrage trader?

Answers:

• Within one year

• Within one week

• None; transactions are done simultaneously both for entry and exit

• Some time during the day when the other side of the transaction can be completed

56. Why do arbitrage opportunities seldom exist?

Answers:

• Because the SEC looks for them and fixes them before traders can profit

• Because the profits are so small they are not worthwhile

• Because the law of one price — supply and demand will close the gap quickly

• Because they are illegal

57. What is short selling?

Answers:

• Selling less shares than you own

• Selling a security before owning it, with the intent of later purchasing it at a lower price

• Selling a stock for less than it is trading for

• Creating a limit order for a lower price than the current market price

58. How can an investor ensure a specific entry point?

Answers:

• By placing stop loss orders

• By placing a limit order

• By short selling a stock

• By not trading it

59. Why are traders sufficiently secure in leveraging their capital?

Answers:

• Because they don't know any better

• Because they think they can disappear if they lose the borrowed money

• Because it lowers their tax burden

• Because they have a proven model which works for them, consistently returning profits

60. What is the ruling for margin requirement?

Answers:

• Exchange Rule 431

• Exchange Rule 200

• Exchange Rule 001

• FASB 111

61. What type of trading style is short selling?

Answers:

• Growth

• Conservative

• Return based

• Speculative

62. What is a speculative trader?

Answers:

• A trader who trades without the proper knowledge of the market

• A trader who trades in volatile and higher risk stocks only

• A trader who trades only in stocks listed on the OTCBB

• A trader who does business in currency exchange transactions only

63. What view of the market does a short seller have?

Answers:

• Bearish

• Bullish

• Indifferent

• It does not factor into short selling.

64. What is the purpose of sliding the stop loss upwards?

Answers:

• It allows for less taxes on additional profits.

• It allows the trader to short sell the stock.

• It is only for risky traders.

• It allows the trader to lock in additional profits on a stock that is increasing in price.

65. How have some day traders avoided being classified as day traders under the legal definition?

Answers:

• By not alerting the broker

• By holding at least 1 in 4 trades overnight

• By setting up illegal brokerage houses

• By telling the broker they have full time jobs apart from trading

66. Which of the following is an additional requirement of a day trader's account?

Answers:

• Deposits are restricted for two months.

• Deposits cannot be withdrawn for two days.

• They must make at least ten transactions a week or their account is closed.

• The minimum trade commission is $10.

67. What is required of a brokerage when they spot a pattern day trader?

Answers:

• Automatically extend $25,000 in margin

• Freeze the trader's account until the $25,000 margin requirement is met

• Nothing; it is the trader's obligation to self regulate

• Send a notice

68. What does a limit order do?

Answers:

• It limits other traders' ability to buy the same stock.

• When the stock price hits a certain trigger point, a market order to sell or buy a stock becomes effective.

• It limits your taxation.

• It limits how many transactions you can make in a day.

69. Why would an investor have an exit before entry?

Answers:

• Because they do not know how to trade properly

• Because they are trading on margin

• Because they are short selling a stock

• Because they are writing options contracts

70. Why are margin requirements often lower for spread traders?

Answers:

• Because they do not have to pay taxes

• Because they often do not trade on margin

• Because they trade outside of the government's jurisdiction

• Because they have opposing positions, with offsetting risk

71. Why is it dangerous for a day trader to place market orders?

Answers:

• Because they are illegal

• Because there is a higher tax rate on the transactions

• Because price changes can happen instantly and they may not receive the buy/sell price they hoped for

• Because it may deplete their entire margin account

72. What would a day trader do to ensure that profits earned from a security are maintained without selling it immediately?

Answers:

• Place a stop loss order

• Short sell the stock

• Sell an options contract on the stock

• Just watch the price and see what happens

73. How does a day trader fundamentally leverage their capital?

Answers:

• By referring friends to a brokerage and thus earning referral fees

• By consistently buying and selling and thus increasing value

• By not executing some transactions just to save the $10 commission

• By not reporting their activity to the government

74. What is the main benefit of leveraging capital?

Answers:

• If the deal doesn't work, there is no obligation on the trader's part.

• It has potential for substantially large returns using borrowed money.

• It reduces taxes.

• It allows them to avoid being classified as a day trader.

75. Why is it risky to utilize margin accounts?

Answers:

• Because if the transactions do not result in success, the trader will be responsible for paying for the losses

• Because there are higher taxes on them

• Because if other brokers know you are trading on margin, they will purposefully make your deal not work

• Because it is illegal

76. Why is the ruling of a minimum margin often argued?

Answers:

• Because traders feel the government is impeding their ability to make decisions in their own best interest

• Because it creates red tape in the process of becoming a day trader

• Because it eliminates a lot of people's ability to become a full time day trader

• Because the government has no authority to do so

77. What is the "futures market"?

Answers:

• An exchange for futures contracts on commodities

• An exchange for stocks based on anticipated prices one year from now

• An exchange for options contracts

• An exchange for foreign currency

78. What is the primary risk with short selling?

Answers:

• Other brokers see your transactions and try to profit as well.

• The stock price never goes down, and the broker calls on the trader to pay for the security.

• It is illegal.

• Taxes on short sale transactions are higher.

79. What is "after hours trading"?

Answers:

• Trading on foreign exchanges

• Setting limit orders which will be executed after market hours

• Trading in currency transactions

• Trading in stocks after the market has closed, creating orders which will be executed the following day

80. What is another name for arbitrage trading?

Answers:

• Day Trading

• Short Selling

• Scalping

• Profiting


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Myra July 29, 2015
some real questions have images, but here they are absent. Can you add them
Administrator July 30, 2015
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