How Financial Markets Work: Checkpoint 1

Quick checkpoint - five questions on exchanges, spreads, order types, short selling and options.

Question 1 of 5 What does liquidity mean in a stock market?

How much water a company uses Being able to buy or sell quickly without moving the price much A company's profits The number of companies listed

Exchanges gather many buyers and sellers, making trading easier.

Question 2 of 5 What is the bid-ask spread?

The difference between the highest price buyers offer and the lowest price sellers accept A broker's commission A tax on trading The daily price change

The spread is a hidden cost of trading and the income of market makers.

Question 3 of 5 What is the main advantage of a limit order?

It always executes immediately It controls the price at which you trade It avoids all fees It guarantees a profit

A limit order trades only at your chosen price or better, but may not execute.

Question 4 of 5 Why can a short seller's losses be unlimited?

Because share prices can rise without limit Because short selling is illegal Because prices cannot fall Because brokers charge unlimited fees

A buyer can lose at most the price paid, but a rising price has no ceiling.

Question 5 of 5 What does a put option give its buyer?

The obligation to buy The right to sell at a set price Ownership of the company A guaranteed dividend

Puts can act like insurance against falling prices.

← Back to Derivatives: Contracts on Other Assets Next lesson → Hedge Funds and Private Equity

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