Q.1 What is a security in the context of securities law?
A type of insurance policy
A financial instrument representing ownership or debt
A legal contract for employment
A criminal law document
Explanation - A security is a financial instrument, such as stocks or bonds, that represents ownership in a company or a creditor relationship.
Correct answer is: A financial instrument representing ownership or debt
Q.2 Which regulatory body oversees securities markets in the United States?
Federal Trade Commission
Securities and Exchange Commission
Internal Revenue Service
Federal Reserve Bank
Explanation - The SEC regulates securities markets in the U.S., ensuring transparency, fairness, and investor protection.
Correct answer is: Securities and Exchange Commission
Q.3 What is the primary purpose of securities law?
To regulate the police
To prevent unfair trade practices in financial markets
To enforce copyright
To regulate real estate
Explanation - Securities law aims to protect investors, ensure market transparency, and prevent fraud or unfair practices in financial markets.
Correct answer is: To prevent unfair trade practices in financial markets
Q.4 Which of the following is an example of an equity security?
Corporate bond
Stock
Treasury bill
Certificate of deposit
Explanation - Equity securities represent ownership in a company. Stocks are the primary form of equity securities.
Correct answer is: Stock
Q.5 What does an investor become when buying a bond?
Owner of a company
Creditor to the issuer
Government agent
Stockbroker
Explanation - When buying a bond, the investor lends money to the issuer and is entitled to receive interest and repayment of principal.
Correct answer is: Creditor to the issuer
Q.6 What is insider trading?
Buying securities for retirement
Trading based on confidential, non-public information
Day trading for profit
Investing in mutual funds
Explanation - Insider trading occurs when someone trades a company's securities based on material non-public information, which is illegal.
Correct answer is: Trading based on confidential, non-public information
Q.7 Which law primarily governs securities in the U.S.?
Securities Act of 1933
Sherman Antitrust Act
Federal Reserve Act
Bankruptcy Code
Explanation - The Securities Act of 1933 regulates the issuance of securities and requires transparency to protect investors.
Correct answer is: Securities Act of 1933
Q.8 What is a prospectus in securities issuance?
A government bond
A legal document describing an investment offering
A type of stock option
A stock market index
Explanation - A prospectus is a disclosure document provided to investors before issuing securities, detailing risks, finances, and company information.
Correct answer is: A legal document describing an investment offering
Q.9 What is meant by 'market manipulation' in securities law?
Investing in multiple stocks
Deliberately influencing market prices unfairly
Trading with a broker
Filing taxes on investments
Explanation - Market manipulation involves actions that artificially affect the supply or demand of a security to mislead or defraud investors.
Correct answer is: Deliberately influencing market prices unfairly
Q.10 Which of the following is a debt security?
Preferred stock
Corporate bond
Common stock
Mutual fund
Explanation - Debt securities represent money borrowed by the issuer that must be repaid, often with interest, like corporate bonds.
Correct answer is: Corporate bond
Q.11 What does the term 'IPO' stand for?
International Purchase Option
Initial Public Offering
Investor Protection Order
Interest Payment Obligation
Explanation - IPO refers to the first sale of a company's stock to the public, allowing it to be traded on stock exchanges.
Correct answer is: Initial Public Offering
Q.12 Which of the following is illegal under securities law?
Buying stocks legally through a broker
Using inside information for trading
Investing in a mutual fund
Purchasing government bonds
Explanation - Using non-public, material information for trading constitutes insider trading, which is prohibited by law.
Correct answer is: Using inside information for trading
Q.13 What role does the Securities and Exchange Commission play?
Regulates labor disputes
Monitors and enforces securities laws
Issues currency
Manages corporate taxes
Explanation - The SEC protects investors, ensures fair markets, and enforces securities regulations.
Correct answer is: Monitors and enforces securities laws
Q.14 Which of these represents ownership with preferential dividends?
Common stock
Preferred stock
Corporate bond
Treasury bill
Explanation - Preferred stockholders have priority over common stockholders in receiving dividends but usually have limited voting rights.
Correct answer is: Preferred stock
Q.15 What is the purpose of the 'Securities Act of 1934'?
To regulate the issuance of new securities
To govern secondary trading and exchanges
To set banking regulations
To protect labor rights
Explanation - The 1934 Act regulates trading of securities on secondary markets, like stock exchanges, and governs brokers and reporting requirements.
Correct answer is: To govern secondary trading and exchanges
Q.16 Which of the following is a primary market activity?
Buying existing shares on the stock exchange
Company issuing new shares to the public
Short selling stocks
Trading government bonds
Explanation - The primary market is where new securities are issued and sold for the first time, such as in an IPO.
Correct answer is: Company issuing new shares to the public
Q.17 What is the main risk associated with investing in securities?
Legal liability
Financial loss due to price fluctuations
Inability to vote
Lack of insurance
Explanation - The primary risk in securities investment is market risk, where the value of securities may rise or fall, affecting returns.
Correct answer is: Financial loss due to price fluctuations
Q.18 What is a 'derivative' in securities law?
A stock with voting rights
A financial contract based on the value of an underlying asset
A type of corporate bond
A government-issued security
Explanation - Derivatives derive their value from underlying assets like stocks, bonds, or commodities and are used for hedging or speculation.
Correct answer is: A financial contract based on the value of an underlying asset
Q.19 Which of these is considered a highly liquid security?
Treasury bill
Private real estate
Collectibles
Private equity
Explanation - Treasury bills are short-term government securities that can be easily sold or converted into cash, making them highly liquid.
Correct answer is: Treasury bill
Q.20 What is meant by 'diversification' in investment?
Investing all funds in one stock
Spreading investments across different securities to reduce risk
Focusing only on government bonds
Trading derivatives exclusively
Explanation - Diversification reduces investment risk by holding a mix of different asset classes or securities.
Correct answer is: Spreading investments across different securities to reduce risk
Q.21 What is a 'mutual fund'?
A company issuing bonds
A pool of funds from investors managed by professionals
A government savings plan
A type of derivative contract
Explanation - A mutual fund pools money from investors to invest in diversified securities managed by professional fund managers.
Correct answer is: A pool of funds from investors managed by professionals
Q.22 Who is primarily responsible for enforcing securities regulations?
The Federal Reserve
Securities and Exchange Commission
Internal Revenue Service
Department of Commerce
Explanation - The SEC enforces securities laws to maintain fair and orderly markets and protect investors.
Correct answer is: Securities and Exchange Commission
Q.23 Which document is required for an IPO in the U.S.?
Form 10-K
Prospectus
Employment contract
Bank statement
Explanation - A prospectus discloses important information about the company and its financials to investors before the IPO.
Correct answer is: Prospectus
Q.24 What is 'securities fraud'?
Legal trading of stocks
Deceptive practices that manipulate investors or markets
Government bond issuance
Buying shares through brokers
Explanation - Securities fraud involves misleading investors, such as providing false information or manipulating stock prices for illegal profit.
Correct answer is: Deceptive practices that manipulate investors or markets
Q.25 What is a 'blue chip stock'?
A high-risk startup stock
A stock from a well-established, financially stable company
A government bond
A type of derivative
Explanation - Blue chip stocks are shares of large, reputable companies with a history of stable earnings and reliable dividends.
Correct answer is: A stock from a well-established, financially stable company