Buying and Selling Securities Flashcards
Asset Management Account
The brokerage account can also include other investments. If there are enough different investments, combining these different accounts into an all-in-one account, called an asset management account, might be best.
An asset management account is a comprehensive financial services package offered by a brokerage firm that can include a checking account; a credit card; a money market mutual fund; loans; automatic payment on any fixed debt (such as mortgages); brokerage services (buying and selling stocks or bonds); and a system for the direct payment of interest, dividends, and proceeds from security sales into a money market mutual fund.
Wrap Accounts
A wrap account is an investment portfolio managed by professional money managers. The key regulatory difference is that the client is paying a fee (typically based on assets under management for advice, not trade execution).
Benefits of a wrap service include access to investments at wholesale prices, efficient administration, and sophisticated reporting. Some also provide the option for investors to manage their own portfolio or allow planners to manage it on their behalf.
Round Lot and Odd Lot
In general, round lot means that the order is for 100 shares, or a multiple of 100 shares. Odd lot orders generally are for 1 to 99 shares. Orders that are for more than 100 shares, but are not a multiple of 100, should be viewed as a mixture of round and odd lots. Thus, an order for 259 shares should be viewed as an order for two round lots and an odd lot of 59 shares.
Block Trade
A block trade is for 10,000 shares. This is typically carried out by institutional traders who make large volume transactions throughout the trading day.
Stop Orders
Two special kinds of orders are stop orders, also known as stop-loss orders, and stop-limit orders. The investor specifies a stop price for a stop order. If it is a sell order, the stop price must be below the market price at the time the order is placed. Conversely, if it is a buy order, the stop price must be above the market price at the time the order is placed. If later someone else trades the stock at a price that reaches or passes the stop price, then the stop order becomes, in effect, a market order. Hence a stop order can be viewed as a conditional market order.
Stop Limit Orders
The stop limit order is a type of order that is designed to overcome the uncertainty of the execution price associated with a stop order. With a stop limit order the investor specifies not one but two prices, a stop price and a limit price. When someone else trades the stock at a price that reaches or passes the stop price, then a limit order is created at the limit price. Hence a stop limit order can be viewed as a conditional limit order.
Initial Margin Requirement
The minimum percentage of the purchase price that must come from the investor’s own funds is known as the initial margin requirement. Regulations T, U, G, and X prescribed in accordance with the Securities Exchange Act of 1934, gives the Federal Reserve Board the responsibility for setting this percentage when either common stocks or convertible bonds are being purchased. However, the exchanges on which purchase orders are filled are allowed to set a percentage higher than the one set by the Federal Reserve Board, and brokers are allowed to set it even higher. Thus, hypothetically, the Federal Reserve Board could set the initial margin requirement at 50%, the New York Stock Exchange could then make it 55%, and the broker could ultimately make it 60%.
Actual Margin
The actual margin in the account of an investor is calculated in percentage as = (Asset value - Loan amount)/ Asset Value
Maintenance Margin Requirement
To prevent an occurrence where the broker has to bear an amount on account of the investor, brokers require investors to keep the actual margin in their accounts at or above a certain percentage. This percentage is known as the maintenance margin requirement. It is set by the exchanges, not by the Federal Reserve Board, and brokers have the right to set it as high as they want. As of 1998, the New York Stock Exchange had set this percentage for common stock and convertible bond purchases at 25%.
Short Selling
Most investors hope to buy securities first and sell them later. However, with a short sale this process is reversed. The investor sells a security first and buys it back later. Borrowing stock certificates for use in the initial trade, then repaying the loan with certificates obtained in a later trade, accomplishes a short sale.
