Securities Trader Representative (Series 57) Practice Exam

What type of transaction occurs when a broker-dealer buys stock for its own account and sells it to a client at a higher price?

1. Riskless principal transaction

2. Agency transaction

3. Netting transaction

4. Market maker transaction

The correct answer is: Riskless principal transaction

In this scenario, the transaction described is one where a broker-dealer purchases stock for its own account and then sells it to a client at a markup. This type of transaction is known as a riskless principal transaction. In a riskless principal transaction, the broker-dealer acts in a dual capacity: first, as the buyer when acquiring the securities and then as the seller when transferring them to the client. This process allows the broker-dealer to manage the inventory of securities while also earning a profit on the sale through the difference in price. The term "riskless" indicates that the broker-dealer has matched the buy and sell orders in a way that eliminates the market risk typically associated with holding the securities. Other types of transactions have different implications. For instance, an agency transaction involves the broker acting solely on behalf of the client without taking ownership of the securities, thus earning a commission rather than a profit from the sale. A netting transaction typically refers to a process where offsetting transactions are combined for the purposes of settlement, which does not fit the scenario presented. Lastly, while market makers may perform similar functions by buying and selling securities to provide liquidity, the focus of this question is specifically on the transaction type that denotes the broker-de