Chapter 9: Equity Securities - Equity Trading Flashcards
1
Q
what is a cash account
A
- Most basic type of investment account
- Not granted credit (they are not lent money) to purchase securities
- must make full payment before settlement date
2
Q
What account is more risky and has the greater chance of increased gains (and losses)?
A
- margin accounts
- since they securities are purchased on loans
- if you get gains, you got them without needing to spend a lot of your money and are able to pay off the amount you borrowed with your gains
- if you lost money from the investment, you would loose you money, and would need to pay back whoever lent you money
3
Q
what is a margin account
A
- The investment dealer / brokerage firm lends clients money to buy securities (like a loan)
- Client must contribute part of the full price; remainder is borrowed
- Interest is charged on the borrowed amount
3
Q
what is long position
A
- when you own the security
- you hope the price goes up
- so you can sell it for a higher price than you paid for
- ex. “i am long RBC” means you own RBC shares
4
Q
what is short position
A
- you sell the securities you dont own
- you expect the price of the shares to go down
5
Q
what is the risk of loss when you sell short
A
- can loose an unlimited amount
- the share price can go up instead of down
- you would have to buy the share back and return it since it wasn’t yours originally
- if it increased much higher than it was when you bought it, you still have to purchase it at that amount, making you loose money
5
Q
what is the risk of loss when you sell long
A
only loose the amount you invested
6
Q
what are margin loan values
A
The maximum % that can be borrowed for purchasing a securities (other than bonds / debentures)
6
Q
what is a short squeeze
A
- when you buy a bunch of stock of a company another person is short selling
- when you buy a bunch, it causes the share price of the company to go up
- makes the short seller loose a lot of money
7
Q
what are the margin loan values (%)
A
- 70% for securities eligible for reduced margin (most equities)
- 50% for prices > $2 not eligible for reduced margin
- 40% for prices between $1.75 - $1.99
- 20% for prices between $1.50 - $1.74
- Nothing for prices < $1.50
7
Q
Why would an investor sell something that they don’t own now and buy it back in the future?
A
- you sell the share now when it is “higher” since you expect the share price to go down
- Since you expect the share price to go down, you buy it again in the future when it is supposedly cheaper and return it to the owner
- then you would make a gain from the difference in the price you sold it for and the price you bought it back for
7
Q
what is the margin
A
- the difference between market value and borrowed funds
- the amount an investor needs to contribute to the margin account
7
Q
what happens when the margin falls below a certain level
A
- Client receives “margin call”
- Firm that has lent money requires more money from client
- the firm makes sure the client has enough money to return the loan
- If no funds are paid; securities are sold
- If securities increase in value – margin is created and can be used by client
8
Q
what is a short sale
A
- when an investor sells securities they don’t own
- they borrow securities from an investor who owns them
- the investor who shorts the securities must buy them back in the future to settle the trade
- The investor receives proceeds when they short the security and must deposit a % of the market value of the securities
9
Q
what are the required account balances (% of market value of shorted securities)
A
- 130% for securities eligible for reduced margin (most equities)
- 150% for prices > $2 not eligible for reduce margin
- $3.00 per share for prices between $1.50 - $1.99
- 200% for prices between $0.25 - $1.49
- 100% plus $0.25 per share for prices < $0.25
