Chapter 9: Equity Securities - Equity Trading Flashcards
what is a cash account
- Most basic type of investment account
- Not granted credit (they are not lent money) to purchase securities
- must make full payment before settlement date
What account is more risky and has the greater chance of increased gains (and losses)?
- 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
what is a margin account
- 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
what is long position
- 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
what is short position
- you sell the securities you dont own
- you expect the price of the shares to go down
what is the risk of loss when you sell short
- 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
what is the risk of loss when you sell long
only loose the amount you invested
what are margin loan values
The maximum % that can be borrowed for purchasing a securities (other than bonds / debentures)
what is a short squeeze
- 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
what are the margin loan values (%)
- 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
Why would an investor sell something that they don’t own now and buy it back in the future?
- 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
what is the margin
- the difference between market value and borrowed funds
- the amount an investor needs to contribute to the margin account
what happens when the margin falls below a certain level
- 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
what is a short sale
- 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
what are the required account balances (% of market value of shorted securities)
- 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
what must there be for there to be an order
- there must be both buyers and sellers
- if you buy, you don’t buy from buyers
- if you sell, you dont sell to sellers
what are the types of orders
- Market order
- Limit order
- Day order
- Open or Good Till Cancelled (GTC) order
- All or None (AON) order
- Any part order
- Good through order
- Stop-loss order
- Stop-buy order
- Professional (Pro) order
what is a limit order
- executed only if a specific price can be obtained
- Ex. current price = $58; place a limit buy order at $55 – stock will only be bought if price declines to $55
- it wont be bought any higher than that price
- if the price doesn’t go to the limit price, no sale happens
what is a market order
- executed at the best available price
- best available price = the cheapest price sellers are selling and the highest price buyers are buying
what is an all or none (AON) order
- executed only if total # of shares can be bought or sold
- Alternatively, a minimum # of shares can be specified to be bought if not all shares can be bought
what is a day order
- only valid for the current day
- cancelled if not executed by end of day
- trading day ends @ 4 pm
what is an open or good till cancelled (GTC) order
limit orders that remain open until executed or specific date
what is an any part order
- opposite of All or None order
- accept any # of shares up to the total # of shares in the order
what is a good through order
remain valid for a specified period of time after which they are cancelled
what is a stop-loss order
- when you won the shares/wish to sell
- market order to sell if price drops below a certain price
- would want the sell price to be higher
what is a stop-buy order
- opposite of a stop-loss order
- when you don’t own shares/wish to buy
- market buy order if price rises above a certain price
- want the price to be lower when bought
what is a professional (pro) order
- order involving directors, management, shareholders or specified employees of investment dealer/brokerage
