Financial Industry Regulatory Authority (FINRA) Practice Exam

What term describes selling a stock purchased before payment is made?

1. Freeriding

2. Pegging

3. Wash sale

4. Backing away

The correct answer is: Freeriding

The term that describes selling a stock purchased before payment is made is "freeriding." Freeriding occurs when an investor buys securities and sells them before paying for the initial purchase, effectively using the proceeds from the sale to cover the cost of the purchase. This practice is generally prohibited under Regulation T, which governs the extension of credit by brokers and dealers. Freeriding is specifically discouraged because it allows investors to take advantage of price movements without having actual capital at risk. This can lead to instability in the market and is seen as abusive trading behavior. If a broker identifies freeriding, they may place the trading account on a cash-only basis or take other measures to prevent such actions. Other terms in the choices relate to different concepts in trading and do not pertain to the act of selling before payment. For example: - "Pegging" refers to attempting to influence the price of a security by buying or selling shares in a way to maintain a particular price level. - "Wash sale" involves selling a security at a loss and then repurchasing it to claim a tax deduction while not actually being out of the market. - "Backing away" typically describes a situation where a market maker withdraws from the market or is unwilling to provide