22 Trading & Margin Practice Questions & Answers

1. 1. A customer holds a long position in a stock currently trading at $60 per share and wants to limit the loss if the stock falls. Which order should be entered, and where must it be placed relative to the current market?

   • A.A sell limit order placed below $60
   • B.A buy stop order placed above $60
   • C.A buy limit order placed above $60
   • D.A sell stop order placed below $60✓ Answer

   A sell stop protects a long position and is always entered below the current market. It lies dormant until the stock trades at or through the stop price, at which point it is elected and becomes a market order to sell, closing the position. A sell limit placed below the market would be executable immediately, since a limit to sell fills at the limit price or higher; buy stops (above the market) protect short positions, not long ones.

   Source: FINRA Series 7 Content Outline, Function 4 (order types); NYSE Rule 7.31 (Orders and Modifiers)Report a problem with this question

2. 2. A customer enters an order to buy 5,000 shares with an immediate-or-cancel (IOC) qualifier. Only 1,800 shares are available at the customer's price when the order reaches the market. What happens?

   • A.1,800 shares are executed and the balance of the order is cancelled✓ Answer
   • B.The order is held until all 5,000 shares can be executed at one time
   • C.1,800 shares are executed and the remaining 3,200 shares stay on the book for the day
   • D.The entire order is cancelled because it cannot be filled in full

   An immediate-or-cancel order accepts partial execution: whatever can be filled immediately is filled, and the unexecuted balance is cancelled rather than left resting on the book. This is the key contrast with fill-or-kill, which requires the entire quantity immediately or nothing at all, and with all-or-none, which requires the full quantity but not immediacy.

   Source: FINRA Series 7 Content Outline, Function 4 (order qualifiers: AON, FOK, IOC)Report a problem with this question

3. 3. A customer places an order to sell 500 shares at $42 or better, marked good-till-cancelled. The stock trades between $38 and $41 for the rest of the day. What is the status of the order at the close?

   • A.It is executed at the closing price because it went unfilled all day
   • B.It is automatically converted into a market order at the close
   • C.It remains unexecuted and stays on the book into subsequent sessions until filled or cancelled✓ Answer
   • D.It expires at the close of the session in which it was entered

   A sell limit can only be executed at the limit price or higher, so at prices of $41 and below the $42 limit cannot be reached. Because the order carries a good-till-cancelled designation rather than a day designation, it does not expire at the close of that session; it remains open on the book across sessions until it is executed or the customer cancels it. A day order, by contrast, would have expired unexecuted at the close.

   Source: FINRA Series 7 Content Outline, Function 4 (order types and time-in-force)Report a problem with this question

4. 4. On the ex-dividend date for an ordinary cash dividend, which of the following open orders on the book must be reduced by the dividend amount?

   • A.Open sell limit orders and open buy stop orders
   • B.All open orders on the book, regardless of type
   • C.Only open orders marked "do not reduce"
   • D.Open buy limit orders and open sell stop orders✓ Answer

   Orders resting below the current market — buy limits and sell stops — are reduced on the ex-date because the stock price itself drops by roughly the dividend, and without adjustment those orders would be elected purely by the mechanical price drop. Orders resting above the market (sell limits and buy stops) are not reduced. A customer who marks an order "do not reduce" prevents the adjustment for ordinary cash dividends, so DNR orders are precisely the ones left alone.

   Source: FINRA Rule 5330 (Adjustment of Orders)Report a problem with this question

5. 5. A broker-dealer buys stock into its own inventory and then sells that stock to a customer from inventory. How is the firm acting, and how is its compensation disclosed on the customer confirmation?

   • A.As a principal (dealer), with its compensation taken as a commission
   • B.As a principal (dealer), with its compensation taken as a mark-up✓ Answer
   • C.As an agent (broker), with its compensation taken as a mark-down
   • D.As an agent (broker), with its compensation taken as a commission

   When a firm trades from its own inventory it takes the other side of the customer's trade for its own account and is acting as a principal or dealer; its compensation is built into the price as a mark-up on a sale to the customer (a mark-down on a purchase from the customer). Commissions arise only when the firm acts as an agent, arranging the trade between the customer and a third party without taking a position. Rule 10b-10 requires the confirmation to disclose the capacity in which the firm acted.

   Source: SEC Rule 10b-10 (Confirmation of Transactions); FINRA Rule 2121 (Fair Prices and Commissions)Report a problem with this question

6. 6. Which statement best describes FINRA's 5% policy as it applies to mark-ups, mark-downs and commissions in non-exempt secondary market transactions?

   • A.It is a safe harbor: any charge of 5% or less is automatically deemed fair
   • B.It applies only to new issues sold under a prospectus
   • C.It is a guideline, not a rule, and whether a charge is fair depends on the facts of each transaction✓ Answer
   • D.It is a hard ceiling: any charge above 5% is automatically a rule violation

   The 5% policy is expressly a guideline rather than a fixed rule or a safe harbor. Fairness is judged on relevant factors such as the type of security, its availability, the price, the dollar amount of the transaction, and the total services the firm rendered — so a charge under 5% can still be unfair and one above 5% can occasionally be justified. The policy does not apply to securities sold under a prospectus, such as new issues, mutual funds and variable contracts.

   Source: FINRA Rule 2121 and its Supplementary Material (the 5% Policy)Report a problem with this question

7. 7. Which of the following best distinguishes a market maker on a quotation-driven over-the-counter market from a designated market maker on a listed auction market?

   • A.A market maker may not quote both a bid and an offer, while a designated market maker must quote both
   • B.Multiple market makers compete by publishing their own two-sided quotes, while a designated market maker has assigned obligations to maintain a fair and orderly market in its securities✓ Answer
   • C.A market maker sets the opening price by auction, while a designated market maker executes only customer limit orders
   • D.A market maker acts only as an agent, while a designated market maker acts only as a principal

   A quotation-driven (dealer) market relies on multiple competing market makers, each publishing a firm bid and offer and trading for its own account, and the best of those quotes forms the inside market. An auction market centralizes order flow and assigns one designated market maker per security with affirmative and negative obligations to maintain a fair and orderly market, including quoting and facilitating the open and close. Both types trade as principal, so capacity is not the distinguishing feature.

   Source: FINRA Series 7 Content Outline, Function 4 (market making); NYSE Rule 104 (Dealings and Responsibilities of DMMs)Report a problem with this question

8. 8. A market maker quotes a stock 20.10 bid, 20.35 offer. A customer places a market order to sell 100 shares and it is executed against that quote. What price does the customer receive, and what is the spread?

   • A.$20.10, and the spread is $0.25✓ Answer
   • B.$20.35, and the spread is $0.35
   • C.$20.35, and the spread is $0.25
   • D.$20.10, and the spread is $0.10

   The bid is the price at which the market maker will buy, so a customer selling at the market hits the bid and receives $20.10; a customer buying at the market would pay the offer of $20.35. The spread is the difference between the offer and the bid, $20.35 − $20.10 = $0.25, and it represents the market maker's gross compensation for standing ready on both sides.

   Source: FINRA Series 7 Content Outline, Function 4 (quotations, bid, ask and spread)Report a problem with this question

9. 9. Under SEC Regulation SHO, what must a broker-dealer generally do before effecting a short sale in an equity security for a customer?

   • A.Confirm that the last trade in the security was at a price above the previous trade
   • B.Require the customer to deposit 100% of the market value of the security in cash
   • C.Borrow the security, arrange to borrow it, or have reasonable grounds to believe it can be borrowed for delivery when due, and document that before the sale✓ Answer
   • D.Obtain written approval from FINRA for the specific short sale

   This is the locate requirement. A broker-dealer may not accept or effect a short sale order unless it has borrowed the security, entered into a bona fide arrangement to borrow it, or has reasonable grounds to believe it can be borrowed and delivered by the due date, and it must document compliance before effecting the sale. The purpose is to reduce fails to deliver. A limited exception exists for short sales by a market maker in connection with bona fide market making.

   Source: SEC Regulation SHO, Rule 203(b) (locate requirement)Report a problem with this question

10. 10. A customer sells short 1,000 shares of a stock at $40 per share. Which statement correctly describes the risk profile of this uncovered short position?

    • A.The maximum gain is limited to $40,000 if the stock goes to zero, while the potential loss is theoretically unlimited✓ Answer
    • B.The maximum gain and the maximum loss are both limited to $40,000
    • C.The maximum loss is limited to $40,000 because the stock cannot fall below zero
    • D.Both the potential gain and the potential loss are theoretically unlimited

    A short seller borrows stock, sells it, and must eventually buy it back to return it. The best case is that the stock falls to zero, producing a gain equal to the sale proceeds of 1,000 × $40 = $40,000. Because there is no ceiling on how high a stock price can rise, the buy-back cost is unbounded, so the loss on an uncovered short is theoretically unlimited. That asymmetry is why short positions carry higher maintenance margin than long positions.

    Source: FINRA Series 7 Content Outline, Function 4 (short sales); FINRA Rule 4210(c)(4) (short position maintenance)Report a problem with this question

11. 11. Under Regulation SHO, how must a broker-dealer mark a customer's sell order when the customer owns the security and will deliver it against the sale?

    • A.No marking is required for sales by customers
    • B."Long"✓ Answer
    • C."Short exempt"
    • D."Short"

    Regulation SHO requires every sell order in an equity security to be marked long, short, or short exempt. An order may be marked long only if the seller owns the security and the broker-dealer reasonably believes the seller will deliver it against the sale. Accurate marking is what drives the locate and close-out obligations, so mismarking a short sale as long is a substantive violation, not a clerical one.

    Source: SEC Regulation SHO, Rule 200(g) (order marking)Report a problem with this question

12. 12. A customer buys 1,000 shares of a marginable stock at $50 per share in a margin account. Assuming the Regulation T initial requirement is 50%, what is the customer's required initial deposit and the resulting debit balance?

    • A.Deposit $12,500; debit balance $37,500
    • B.Deposit $2,000; debit balance $48,000
    • C.Deposit $50,000; debit balance $0
    • D.Deposit $25,000; debit balance $25,000✓ Answer

    The purchase costs 1,000 × $50 = $50,000. Regulation T's initial requirement of 50% means the customer must deposit 50% × $50,000 = $25,000 in equity. The broker-dealer lends the remainder, so the debit balance is $50,000 − $25,000 = $25,000, and equity equals long market value minus the debit: $50,000 − $25,000 = $25,000.

    Source: Regulation T, 12 CFR 220.12 (margin equity security initial requirement)Report a problem with this question

13. 13. A customer's long margin account shows a long market value of $80,000 and a debit balance of $50,000. Assuming the minimum maintenance requirement for long positions is 25% of market value, what is the account's equity and is a maintenance call outstanding?

    • A.Equity is $30,000, which is below the $40,000 Regulation T requirement, so a maintenance call has been triggered
    • B.Equity is $20,000, which exactly meets the maintenance requirement, so no call is outstanding
    • C.Equity is $50,000, which exceeds the maintenance requirement, so no call is outstanding
    • D.Equity is $30,000, which exceeds the $20,000 maintenance requirement, so there is no maintenance call✓ Answer

    Equity in a long margin account equals long market value minus the debit balance: $80,000 − $50,000 = $30,000. The maintenance requirement is 25% × $80,000 = $20,000. Since equity of $30,000 exceeds $20,000, no maintenance call exists. Equity falling below the Regulation T initial requirement makes the account restricted, which limits withdrawals, but a restricted account is not the same thing as a maintenance call.

    Source: FINRA Rule 4210(c)(1) (25% maintenance for long positions); Regulation T, 12 CFR 220Report a problem with this question

14. 14. A customer sells short 1,000 shares at $30 per share in a margin account and deposits the Regulation T requirement of 50%. Assuming the minimum maintenance requirement for a short position in a stock priced above $5 is 30% of current market value, at what price per share would the account first reach the maintenance level?

    • A.$40.00
    • B.$34.62✓ Answer
    • C.$45.00
    • D.$30.00

    The short sale produces proceeds of $30,000 and the customer deposits 50% × $30,000 = $15,000, so the credit balance is $30,000 + $15,000 = $45,000. Short equity equals credit balance minus short market value, and the maintenance point is where equity equals 30% of short market value: CR = 1.30 × SMV, so SMV = $45,000 ÷ 1.30 = $34,615, or about $34.62 per share on 1,000 shares. Because a rising price hurts a short seller, the maintenance level is reached on the way up.

    Source: FINRA Rule 4210(c)(4) (short position maintenance: greater of $5 per share or 30% of current market value)Report a problem with this question

15. 15. Which statement about the $2,000 minimum equity requirement for a margin account is correct?

    • A.It must be met in cash even when the total cost of the securities purchased is less than $2,000
    • B.It replaces the Regulation T initial requirement whenever the purchase is smaller than $2,000
    • C.It applies only to short sales, never to long purchases
    • D.It applies to opening and carrying a margin account, but a customer need not deposit more than the full purchase cost of the security bought✓ Answer

    FINRA's margin rule sets a $2,000 minimum equity to open and carry a margin account, but it expressly provides that cash need not be deposited in excess of the cost of any security purchased. So a customer buying $1,500 of stock deposits $1,500, not $2,000. The Regulation T percentage still applies on larger purchases, and the $2,000 floor operates alongside it rather than replacing it.

    Source: FINRA Rule 4210(b) (minimum equity requirement)Report a problem with this question

16. 16. Which statement about the special memorandum account (SMA) in a long margin account is correct?

    • A.SMA is reduced dollar for dollar whenever the market value of the securities in the account declines
    • B.SMA is created only by depositing additional cash into the account
    • C.SMA may always be withdrawn in cash regardless of the account's resulting equity
    • D.SMA does not decrease merely because the market value of the securities falls, and it may not be used to meet a maintenance call✓ Answer

    SMA is a line of credit representing excess equity above the Regulation T requirement. Once created it is retained and does not fall simply because market value declines, though it does decrease when it is used. It arises from excess equity, from cash dividends and interest received, and from sale proceeds. Critically, it cannot be used to satisfy a maintenance call, and it may not be withdrawn if doing so would drop the account below minimum maintenance.

    Source: Regulation T, 12 CFR 220.5 (special memorandum account); FINRA Rule 4210Report a problem with this question

17. 17. Which of the following correctly describes the relationship among the ex-dividend date, the record date and the payable date, assuming a regular-way settlement cycle of T+1?

    • A.The payable date always precedes the record date, so entitlement is fixed when the dividend is paid
    • B.A purchase made on the record date entitles the buyer to the dividend regardless of settlement
    • C.A regular-way purchase made on the ex-dividend date settles too late for the buyer to be a holder of record, so the seller receives the dividend✓ Answer
    • D.A regular-way purchase made on the ex-dividend date entitles the buyer to the dividend because it settles before the payable date

    Entitlement to a dividend or a proxy depends on being a holder of record on the record date, and ownership is established at settlement, not at trade execution. The ex-dividend date is derived from the settlement cycle: it is set so that a regular-way trade on or after that date settles too late to make the buyer a holder of record. The payable date comes after the record date and is simply when the issuer distributes the dividend to those already determined to be entitled.

    Source: SEC Rule 15c6-1 (settlement cycle); FINRA Rule 11140 (Transactions in Securities "Ex-Dividend")Report a problem with this question

18. 18. A customer and a broker-dealer agree that a trade will settle on the same day it is executed rather than in the regular-way cycle. This is best described as which type of settlement?

    • A.Seller's option settlement
    • B.Regular way settlement
    • C.When-issued settlement
    • D.Cash settlement✓ Answer

    A cash trade settles the same day it is executed and requires the agreement of both parties, since the seller must have the security immediately available and the buyer must have funds. Seller's option is the opposite extension, letting the seller deliver on a later specified date beyond regular way. When-issued applies to securities that are authorized but not yet issued, so settlement cannot be fixed until the securities exist.

    Source: FINRA Rule 11000 Series (Uniform Practice Code), Rule 11300 (Trade Terms)Report a problem with this question

19. 19. A customer owns 400 shares of a stock purchased at $60 per share. The issuer declares a 4-for-1 forward stock split. After the split, what does the customer own and what is the adjusted cost basis per share?

    • A.100 shares at an adjusted cost basis of $240 per share
    • B.1,600 shares at an adjusted cost basis of $60 per share
    • C.400 shares at an adjusted cost basis of $15 per share
    • D.1,600 shares at an adjusted cost basis of $15 per share✓ Answer

    A forward split multiplies the share count and divides the per-share price and cost basis by the same ratio: 400 × 4 = 1,600 shares, and $60 ÷ 4 = $15 per share. Total cost basis is unchanged at 400 × $60 = 1,600 × $15 = $24,000, and the customer's proportional ownership of the company is unchanged. A reverse split works in the opposite direction, cutting the share count and raising the per-share basis.

    Source: FINRA Series 7 Content Outline, Function 3 (corporate actions: stock splits and cost basis)Report a problem with this question

20. 20. Under SEC rules governing tender offers, what position must a person have in the subject security in order to tender shares?

    • A.Any position, long or short, provided the shares are delivered by the expiration of the offer
    • B.A net long position at least equal to the number of shares tendered✓ Answer
    • C.A net long position of at least 5% of the outstanding shares
    • D.A short position, since tendering is economically equivalent to covering

    SEC Rule 14e-4 prohibits short tendering: a person may tender only a net long position at least equal to the amount tendered. The rule exists because tender offers are often oversubscribed and shares are accepted on a pro rata basis, so tendering shares one does not own would let a person capture more than a fair allocation of the premium at other holders' expense.

    Source: SEC Rule 14e-4 (Prohibited Transactions in Connection with Partial Tender Offers)Report a problem with this question

21. 21. In a firm-commitment underwriting, what is the role of the syndicate members, and how does it differ from that of the selling group?

    • A.Syndicate members buy the securities as principals and bear the risk of unsold shares, while the selling group acts as agent and has no liability for unsold shares✓ Answer
    • B.Neither the syndicate nor the selling group takes any risk, because the issuer repurchases unsold shares
    • C.Syndicate members act as agents for the issuer, while the selling group buys the securities as principal
    • D.Both the syndicate and the selling group purchase the shares as principals and share the risk equally

    In a firm-commitment deal the syndicate purchases the entire issue from the issuer as principal, guaranteeing the proceeds and absorbing the loss on anything it cannot resell. Selling group members are brought in only to distribute shares as agents; they earn the selling concession but take no principal position and have no liability for unsold securities. Under a best-efforts arrangement, by contrast, the underwriter acts as agent and unsold shares simply return to the issuer.

    Source: FINRA Series 7 Content Outline, Function 1 (underwriting commitments and syndicate formation); FINRA Rule 5110Report a problem with this question

22. 22. A registered representative of a member firm wants to buy shares of a new issue — an initial public offering of common stock — for the account of her adult brother, who lives in his own household and neither provides nor receives material support from her. Under FINRA's new issue rule, may the purchase be made?

    • A.Yes, because an immediate family member who neither provides nor receives material support and does not live in the same household is generally not a restricted person✓ Answer
    • B.No, because any purchase of a new issue for a relative of an associated person is prohibited without FINRA approval
    • C.Yes, but only if the brother's interest in the account does not exceed 25% of the account
    • D.No, because all immediate family members of an associated person are automatically restricted persons

    The new issue rule restricts immediate family members of associated persons only where material support exists — meaning one directly or indirectly provides more than 25% of the other's income in the prior calendar year, with persons living in the same household deemed to support each other. A sibling in a separate household with no material support flowing either way falls outside the restriction. The 25% figure in the wrong answer belongs to a different rule's de minimis test; the new issue rule's own de minimis allowance for restricted persons' collective interest is 10%.

    Source: FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings)Report a problem with this question

Practice questions based on the FINRA Series 7 content outline and on named federal securities statutes and FINRA, MSRB and SEC rules. Not affiliated with or endorsed by FINRA, and not investment advice. Amounts that are re-set periodically — rates, fee schedules, contribution limits and penalty amounts — are deliberately kept out of the answers; where a computation needs such a figure, the question supplies it. Confirm current requirements with FINRA and your firm before testing. About the Series 7 exam (FINRA) →