Practice: How You Actually Invest
Fourteen scored problems on account types, order types, settlement, fees, account safety, and what borrowing does to a loss.
What you'll do
This set covers the practical module. You'll match account types to how they're taxed, choose the right order for a situation and work out what each one guarantees, calculate what a fund's fee costs in dollars, buy a fraction of a share, sort what SIPC covers from what it doesn't, and see how a loss doubles when half the money was borrowed. Each answer comes with the working, and your score appears as you go. Nothing is recorded outside this browser.
This draws on
Work through the problems in order and check each answer once you've committed to it. The score counts your first try. The companies, firms, and numbers are fictional, and the last three problems use the optional lesson on margin.
Accounts
1. Which kind of brokerage account does each statement describe?
- You pay for every purchase in full with money you've deposited
- You can borrow from the firm, using your investments as collateral
- The most you can lose is what you put in
- You pay interest, and gains and losses are both magnified
A cash account limits you to your own money, which also limits the damage a mistake can do. A margin account adds borrowing. Some firms open margin accounts by default, so it's worth checking which you have. Review: Brokerage Accounts.
2. Which account type does each statement describe?
- Dividends are generally taxed for the year you receive them
- Contributions can lower your taxes now, and money generally isn't taxed until it's withdrawn
- Contributions are made with money that's already been taxed, and qualified withdrawals can be tax-free
- You can put in as much as you like and take it out at any time
The account type decides when tax is paid. A taxable account is taxed along the way. A traditional account is generally taxed on the way out, and a Roth on the way in. Part 6 covers the rules and limits. Review: Taxable vs. Tax-Advantaged Accounts.
Orders
3. Which order type is each of these?
- Trades only at the price you name or better, and might never trade
- Trades right away, at whatever price the market gives
- Waits for a trigger price, then trades only at a set price or better
- Waits for a trigger price, then trades at whatever price the market gives
A market order guarantees a trade and not a price. A limit order guarantees a price and not a trade. A stop order becomes a market order when triggered, and a stop-limit becomes a limit order. Review: Order Types: Market, Limit, and Stop.
4. STU Corp has a bid of $49.95 and an ask of $50.05. You place a market order to buy 40 shares. Roughly what will you pay in total?
A market buy generally fills at or near the ask: 40 × $50.05 = $2,002. The quote you see between the two prices isn't the price you'll pay.
5. You place a limit order to buy STU Corp at $48 while the ask is $50.05. What happens?
A buy limit fills at the limit price or lower. You've named your price, and the cost of doing so is that the trade might not happen. Review: Order Types: Market, Limit, and Stop.
6. You own a stock at $50 and set a sell stop at $45. Bad news comes out overnight and the stock opens at $38. What does your stop order do?
The stop price is a trigger and not a guaranteed price. When the stock opens below it, the order becomes a market order and sells at what the market pays, about $38. A stop-limit would avoid that price and might not sell at all.
Settlement and costs
7. You sell shares on a Friday. With one-business-day settlement and no holiday, when does the trade settle?
Most US securities trades settle one business day after the trade date, known as T+1. Weekends don't count, so a Friday trade settles on Monday. Review: Settlement, Fees, and Fractional Shares.
8. You have $20,000 in a fund with an expense ratio of 0.75%. Roughly what does the fund cost you this year?
$20,000 × 0.0075 = $150. You never see a bill. It's taken out of the fund's returns, every year, whether the fund rises or falls. Review: Settlement, Fees, and Fractional Shares.
9. Two funds hold the same investments. One charges 0.05% a year and the other 0.85%. On $50,000, how much more does the second cost in a year?
The difference is 0.80 percentage points, and $50,000 × 0.008 = $400. That amount is lost every year, and so is everything it would have earned if it had stayed invested.
10. A stock trades at $600 a share. Your broker offers fractional shares, and you invest $150. How many shares do you own?
$150 ÷ $600 = 0.25 of a share. You own a quarter of a share and get a quarter of any dividend it pays. Review: Settlement, Fees, and Fractional Shares.
Safety
11. A member brokerage firm is involved in each case. Does SIPC protection apply?
- The firm fails, and shares that should be in your account are missing
- Your shares fall 40% in a market decline
- You were sold an investment that turned out to be worthless
- The firm fails, and cash from your account is missing, within the limits
- You followed advice from the firm that turned out badly
SIPC covers missing cash and securities when a member firm fails, up to its limits. It doesn't cover a fall in value, worthless investments, or bad advice. Review: Keeping Your Account Safe.
12. A text says your brokerage account has been locked and gives a link to verify your details. The firm's name is spelled correctly. What's the safest response?
A link in a message can lead to a fake site that captures your login. If there's really a problem, it'll show when you sign in through the app or the address you type yourself. Urgency is part of the trick. Review: Keeping Your Account Safe.
Borrowing to invest
13. You put in $8,000 of your own money, borrow $8,000 on margin, and buy $16,000 of a stock. It falls 25%. Ignoring interest, what percentage of your own money have you lost?
The shares are now worth $12,000. You still owe $8,000, so $4,000 is yours: half of what you started with, a loss of 50%. Borrowing half the money doubled the loss. Review: Margin and Short Selling.
14. In the same position, how far does the stock have to fall for all of your own money to be gone?
50%. At that point the shares are worth $8,000, exactly what you owe. Any further fall means you owe the firm more than the shares are worth. In practice a margin call would come well before then.
Check your own account
15. If you have a brokerage account, find out and write down: whether it's a cash or a margin account, what order type the app uses by default, the expense ratio of any fund you hold, and whether two-factor authentication is switched on. If you don't have one yet, write down what you'd want each of those to be. This isn't scored.
What to look for
For someone learning, a cash account is the simpler choice. Know your default order type before you need it, because the default may be a market order. An expense ratio is a yearly cost, so even a small difference matters over decades. And two-factor authentication is among the most effective protections against someone else getting into the account.