Chapter 9 - Equity Securities, Equity Transactions Flashcards
Can you compare a cash account to a margin account?
Unlike cash accounts, clients with margin accounts can buy or sell securities on credit. Margin accounts can also hold long or short positions, whereas cash accounts can hold only long positions.
What does the word ‘margin’ refer to?
Margin refers to the amount of funds the investor must personally provide. The margin plus the loan provided by the dealer makes up the total amount required to complete the transaction.
Can you describe the two types of margin positions possible?
A long position represents actual ownership in a security. A short position is created when an investor sells a security that the investor does not own.
What are securities eligible for reduced margin?
IIROC produces a quarterly list of securities eligible for reduced margin. Restricted to those securities that demonstrate both sufficiently high liquidity and sufficiently low price volatility.
Can you explain what a margin call is?
The sum of the margin and the loan must always be equal to the original purchase price, at minimum. If the price of the security falls, the client must immediately provide additional funds in the account to cover the shortfall up to the original purchase price.
Can you describe why a price drop on the shares you hold in your long margin account would lead to a net margin deficiency?
When the share price drops the amount the lender is willing to lend drops. Because the original price must be in the account at all times, the margin requirement increases and the firm will issue a margin call.
Can you name and explain three margin risks?
Margin increases market risk.
Loan and interest must be repaid.
Margin calls must be paid without delay.
Can you describe the process short selling in a margin account?
A short margin position allows investors to sell securities they do not own. The dealer lends the securities to be shorted to the investor and the investor sells those securities in the market. The investor earns a profit when the initial sale price exceeds the repurchase cost.
Can you describe why a price drop on the shares you sold short in your short margin account would lead to excess margin?
When the share price drops the client can buy back the securities at a reduced cost, pay back the loan and have the excess.
What is the limit on short sales and why?
Unlimited loss is a risk for short sellers if the price of the security rises rather than falls.
Under what conditions would a short seller be forced to cover her short position?
In some cases, the short seller may be unable to borrow enough stock from the investment dealer to maintain or carry a short position. In such cases, the client must buy the necessary shares to cover the short sale.
Can you name and explain the seven risks of short selling?
Borrowing shares. Adequate margin. Liability. Buy in requirements. Insufficient information. Price action. Unlimited risk. Regulatory risk.
Can you describe how order types are categorized?
Duration.
Price restrictions.
Special instructions.
Other.
Can you describe a market order?
A market order is an order to buy or sell a specified number of securities at the prevailing market price.
Can you describe a limit order?
A limit order is an order to buy or sell securities at a specific price or better. Order will be executed only if the market reaches that price or better.
