5: Selling Short / 2nd Market Trades Flashcards
What is a short sell?
1 - The broker borrows the security from someone else and sells it on behalf of the investor.
2 - Later the investor buys the security and the broker returns it to the lender.
Explain the risks of a short sell.
- No limit as to how high a stock’s price might rise (huge loss exposure)
- The investor might be forced to buy back the security at an undesirable time if the lender wants to sell it and a new loan cannot be found.
Extremely large trades generally require a ______ distribution (sale) or ______ offer (buy).
secondary
tender
Intermediate-sized trades may be handled by a ______ trader or as a ______ offering.
block
special
What are the fee components of a transaction?
- Commission (explicit)
- Bid-Ask Spread (implicit)
- Price impact (implicit)
What fee component is the dealer’s primary source of income?
the bid-ask spread
20 bid and 20 1/4 ask means…
dealer will buy at $20 and sell at $20.25
What is price impact?
refers to the correlation between an incoming order (buy or sell) and the subsequent price change
What does explicit mean?
stated clearly and in detail
What does implicit mean?
implied though not plainly expressed
A request to activate a market order if the stock price trades at or below the designated stop price.
stop-sell (a.k.a. stop-loss) order
What is a stop-buy order?
Used in conjuction with a short sell, this is a request to activate a market order shoudl the stock price trade at or above the designated stop price, usually set above the current market price.
A ______ is a variation of the limit order. It can be to sell or buy. It automatically converts to a limit order when the stop price is hit.
stop-limit order
How are good-‘til-canceled orders, Day, Week, Month, Fill-or-Kill, and All-or-Nothing Orders related?
each of these deal with limit, stop-sell, or stop-limit orders
Describe a day order.
an order executable only during the day the order is placed
What order is canceled if not immediately executed?
Fill-or-Kill order
When are commissions computed?
- At the close of each day.
2. When trades take multiple days to complete, commissions are calculated separately on each day’s trading.
All-or-nothing orders must trade as a ______ that incurs a single commission but can be executed only when sufficient ______ is available.
- unit
2. Volume
All-or-nothing orders are superseded by any other ______ that other customers have placed at that same price.
limit orders
What does it mean to go long?
involves buying a security, hoping the price goes up, and then selling it
What does it mean to sell short?
an investor will sell a security that he does not own, hoping the price goes down, and then buys it at the lower price
What requirements does the short seller have to fulfill?
- pay dividends that accrue on the borrowed stock
- leave short-sale proceeds and an additional percentage (margin) of the sale price in a non-interest-bearing account at the brokerage house
- be ready to pay a margin call should the price of the shorted stock start to go up
Which carries the risk of losing far more than what was invested: going long or selling short?
selling short
What is the Uptick Rule and under what circumstances is it activated?
- Created in February 2010 to eliminate the unscrupulous activity known as bear raids
- only activated when a stock’s price has fallen by 10 percent or more in one day. Short sales can then only take place at a price that is about the current national best bid.
