Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is the difference between a dealer's purchase price and selling price called?

1. Underwriting spread

2. Transaction cost

3. Market spread

4. Execution price

The correct answer is: Underwriting spread

The difference between a dealer's purchase price and selling price is known as the underwriting spread, which reflects the risk and costs associated with facilitating the transaction. This spread is effectively the compensation dealers receive for providing liquidity to the market, and it accounts for the expenses incurred in executing trades. In the context of this term, the underwriting spread is crucial because it encompasses not just the raw difference between buying and selling prices, but also the anticipated risks that the dealer takes on and the range of costs involved in the pricing strategy for a security. This helps investors and market participants understand how pricing structures work, especially within the realm of securities trading. The other terms refer to different concepts. For instance, transaction cost typically encompasses all fees and expenses incurred during a trade, including commissions and fees, rather than focusing solely on the price differential. Market spread, while related to price differences within the trading environment, may involve broader market dynamics rather than the specific dealer context. Execution price usually refers to the actual price at which an order is completed, not the difference between buying and selling prices. Each of these terms offers valuable insights into trading and pricing mechanisms, but the underwriting spread specifically identifies the dealer's profit mechanism tied to buying and selling behaviors in the market.