Tuesday, January 20, 2009

Practice Questions step-by-step

As I mentioned in the previous post, your job is not to look for the right answer. Your job is to find and elminate as many WRONG answers as possible. Let's apply this strategy to the following question:

Which of the following can be determined by looking at a corporation's balance sheet?
II. net income
III. quick ratio
IV. shareholders equity
A. I, II

Step one, read the answer choices A, B, C, and D just to see how the little Roman Numerals have been distributed. Right away, you see that this question either has a "I" in it, or it doesn't. Once we make that decision, two answer choices will be eliminated.
Or, for the extreme strategists, notice that three answers have a "II" in it and three have a "III" in it. If you could eliminate either "II" or "III," then, you would be done.
I know, some of you are thinking--but that has nothing to do with learning the information!
So what? Neither does the friggin' Series 65 or Series 66. It's just a hazing ritual that the regulators use to keep a certain percentage of folks out of the business and, thereby, claim to be "providing necessary protection to investors."
It's a game, people. Play it with strategy, win it, and move on with your lives.
So, as an extreme strategist myself, I have to go for the knockout punch here. I'm looking at choice "II" and choice "III" first.
Choice "II" says "net income."
Where would net INCOME be found? Perhaps on the other financial statement called the INCOME STATEMENT?
A-ha! This question is just a bully and is about to get its butt kicked. There is a balance sheet, and there is an income statement. Net income is on the INCOME STATEMENT, not on the balance sheet. So, let's eliminate any answer choice with a "II" in it.
Let's see, that eliminates Choice A, B, and D.
Leaving us with the right answer, C.

People who say they "hate the Roman Numeral questions" aren't using strategy. These so-called "multiple multiples" are, by far, the easiest type of question to answer. You just have to be patient and analytical.

Send in a hard Series 65/66 question, and I'll break it down for the community step-by-step.


  1. I have a question as a result of one of your practice questions on the passthe66 DVD. The question involved an investor who had purchased 100 shares at 20 and the stock had risen to 60. Investor was still bullish long term but wanted to protect against a short term downturn. I could not figure why the choice would be a sell stop @ 59 vs. a sell limit @ 59? Why the one and not the other. I thought sell limit would be the better choice. Thanks.

  2. Steve, excellent question. I would guess that maybe 80% of all test-takers struggle with the subtle but major difference between a sell-limit and a sell-stop order. When I opened my first online investment account through Ameritrade, I remember reading and re-reading their definitions several times before the light bulb finally went off. Basically, there are two ways to look at it, from a math perspective and from an emotional perspective. Let's start with the math approach. If the stock is trading at $60, and you want to protect against a DOWNturn, you have to place the trigger price below the current market price. In other words--only sell this stock IF it goes down. If it stays at $60, I want to hold it. If it goes down to 59 or lower, sell it. But, only if it goes down. Sell stop orders (stop loss orders) are placed below the current market price so that the investor will only sell the stock if the stock drops. If you're still bullish, you want to hold the stock. In this case, the investor wants it both ways. He wants to hold a winner, but if it turns out to be a loser, he wants it sold automatically. That's how sell-stop orders work.
    A sell-limit order is placed above the current market price. In fact, if you were to place a sell-limit at @59 with the stock at $60, your order would be immediately executed, right? You're saying you want to get at least $59 for your stock--the market is already there. I did this once in my first days in the Ameritrade account 10 years ago. Cost me an extra $5 to place the limit order, which acted just like a market order due to my inattentiveness. I learned fast that sell-limits are only placed above the current market price.
    From the "emotional" perspective, if you really want to sell, you use a sell limit order. You want to sell IF you can get a little bit more than folks are paying right now. You're like a seller on Ebay--you have a minimum price you'll accept before you'll sell your stuff. As long as someone will give you X amount, you'll sell. But not until you can get at least that minimum (limit) amount.
    When you want to hold the stock as long as it stays where it is, but cut your losses if it drops, you use a sell-stop, placing it below the current market price, just as far down there as you're willing to watch it drop before puking.
    To me, sell limits make no sense whatsoever--if my stock is rising, why would I want to sell it? Get out of a rising market? Huh?
    I only sell when faced with disaster. I could place sell-stops about 20% below my purchase price and not have to look at that stock so much. Right? If it drops 20% or so, it's gone automatically If it behaves itself, I'm holding it. That's the beauty of the sell-stop or "stop loss" order. Stop my LOSSES. Let my winners run as long as they want to run.