Chapter 9 Equity Securities: Equity Transactions RQ Flashcards
Stefan’s client has asked for an explanation of the term margin. Select the explanation Stefan could provide to explain the concept.
A. Total value of security transaction.
B. Amount of funds that the investor provides for the security purchase.
C. Amount of credit the broker loans to the client.
D. Percentage of the transaction value the broker will loan to the client.
B. Amount of funds that the investor provides for the security purchase.
Margin is the amount of funds the investor must personally provide to buy securities on margin.
Select the characteristic of a margin account.
A. A purchase on margin requires only partial payment for purchases from the client.
B. Maximum loans on margin accounts are set by the Exchanges.
C. The term margin refers to the loan provided by the dealer member.
D. Interest on the margin loan is calculated and charged monthly on the debit balance
A. A purchase on margin requires only partial payment for purchases from the client.
A purchase on margin requires only partial payment for purchases from the client. The word margin refers to the amount of funds the investor must personally provide. Interest on the margin loan is calculated daily on the debit balance in the account and charged monthly. Maximum loans on margin accounts are set by IIROC.
Identify the characteristics of margin risk.
Margin increases market risk.
Margin calls must be paid within 3 business days.
Client must pay interest during the period the security is margined.
Dealer must obtain client consent to sell securities from account to secure loan.
A. 2, 3
B. 3, 4
C. 1, 3
D. 1, 4
C. 1, 3
Margin increases market risk: borrowing to buy securities magnifies the outcome, either in a positive or negative way.
Loan and interest must be repaid: the client must pay interest during the period the security is margined and must repay the loan at the end when the position is offset, regardless of the value of the security.
Margin calls must be paid without delay.
The dealer can sell securities from the account to secure its loan without the client’s consent: if the security has fallen in price and the client fails to meet the margin call, the dealer can sell the security without notice.
Identify a criterion that may require a short sale position to end.
A. Increase in price of securities sold short.
B. Announcement of a stock split or consolidation.
C. Dealer inability to facilitate delivery out of inventory.
D. Delisting of the securities sold short.
D. Delisting of the securities sold short.
There is no time limit on how long a short sale position may be maintained, provided that the stock does not become de-listed or worthless. As well, the position remains open as long as equivalent amounts of the shorted security can be borrowed by the short seller’s dealer, and as long as adequate margin is maintained in the short account. For short sales of listed securities, borrowing can be arranged between dealers to facilitate the delivery required by the short sale.
Identify the individual or group that is liable for payment of the dividend to the investor who lends shares in a short sale.
A. Buyer of shares.
B. Short seller.
C. Issuer of shares.
D. Broker who loans stock.
B. Short seller.
The short seller is liable for any dividends or other benefits paid during the period the account is short. When shares are sold short in the market, the issuer recognizes the new buyer as the shareholder entitled to receive the dividend payment from the corporation. However, the original owner that loaned the shares is still entitled to receive a dividend payment because they haven’t sold their shares – they merely loaned their shares to the short seller. The short seller is required to pay the original owner the dividend payment based on the number of shares borrowed for the short sale.
Select the limit order.
A. Buy 10,000 shares of Beta Corp until October 15th.
B. Buy 1,000 shares of ABC company at the best available price.
C. Sell 5,000 shares of XYZ company at $75.25 or better.
D. Buy 20,000 shares of ABC at the market.
C. Sell 5,000 shares of XYZ company at $75.25 or better.
In a limit order, the client sets a specified price at which the transaction may be executed. In this case, sell 5,000 shares of XYZ at $75.25.
An investor purchased 2,000 shares of ABC for $75. He is concerned that the stock price might decline suddenly and does not wish to lose more than $10 on the stock and as a result asked his Investment Advisor to place an order to sell his shares of ABC if the price drops to $65 or below. Determine the type of order the IA will place.
A. On-stop sell order.
B. Market order.
C. On-stop buy order.
D. Good til order.
A. On-stop sell order.
An on-stop sell order is an order to sell, which becomes effective as a market order when the price declines to or below the stated limit order. The purpose is to reduce potential losses or to protect part of a paper profit that the investor may have earned.
Vinit recommends purchasing XYZ Corporation based on a positive analyst outlook, and decides that he will also purchase shares. Kareem, a major client, calls and requests 500 shares; an institutional client calls immediately after requesting 300 shares; another client calls requesting that Vinit close a short position. Determine the order that will be executed last.
A. Kareem.
B. Short seller.
C. Institutional client.
D. Vinit, the Investment Advisor.
D. Vinit, the Investment Advisor.
A fundamental trading regulation to protect the public relates to the priority given to clients’
orders. Where the order of a client competes at the same price with a non-client order (i.e., an order of an account in which a partner, director, officer, shareholder, IA or in some cases other employee of a member holds a direct or indirect interest or an arbitrage order), the client’s
order is given priority of execution over the non-client order. This rule is applied within member firms in its dealings with clients so that client orders have priority over pro orders.
Darby sold short shares in NFR Industries that have recently dropped in value. She is about to leave on a four-week vacation and wants to ensure her investment gains are protected while she is away. Determine the type of order her Investment Advisor could place.
A. Day order.
B. On-stop sell.
C. On-stop buy.
D. Limit.
C. On-stop buy.
Darby’s IA should enter an on-stop buy order on the NFR shares. By having the IA place an on-stop buy, she can ensure that if the stock starts to rise in price, the on-stop buy will be in place to be executed, even though she is travelling.
Identify the action a dealer member must take when accepting a short sale from a client.
A. Report short sale to OSC before execution.
B. Mark sell-order ticket “Short”.
C. Report short sale on the TSX website immediately.
D. Check short sale report to ensure trade is allowed.
B. Mark sell-order ticket “Short”.
IAs entering an order for a short sale of a security for anyone must clearly mark the sell-order ticket Short or S, so that the trading department may process the order properly. The TSX Venture Exchange and the TSX compile and publicly report total short positions in applicable securities twice a month.
Identify a characteristic of a short sale.
A. Short seller is bullish on the shares being sold.
B. Profit is made when the price of the shares sold short rises.
C. Short sale position may be maintained up to a specified time limit.
D. Short seller sells borrowed securities.
D. Short seller sells borrowed securities.
Short selling is generally carried out in the belief that the price of a stock is going to fall. The short seller feels bearish towards a particular security and sells it short, hoping to buy it back later at a lower price. If the sale is made at a higher price than the subsequent purchase, the investor has made a profit. When the short seller finally purchases the stock originally sold short, the stock is returned to the lender. There is no time limit on how long a short sale position may be maintained, provided that the stock does not become de-listed or worthless. The profit or loss on a short sale transaction is calculated in the same way as on a long transaction. It is simply the difference between the purchase and sale prices, or between the sale proceeds and the purchase cost.
Select the most common way for stocks to be held in Canada.
A. Paper form by the dealer member.
B. Electronically by the stock exchange.
C. Electronically by the clearing corporation.
D. Street form by the securities administrator.
C. Electronically by the clearing corporation.
In Canada, stock and bond certificates are not in the form of paper but held electronically to a very large extent by a clearing corporation. At the end of each trading day, the clearing corporation settles all purchases and sales of stock and bonds among dealers. The entries are made in the dealer’s book of record showing who owns the stocks and bonds, and who owes money to pay for them.
On Monday, Kami places an order for her client to purchase 1,000 shares of DEF at $15 or less. DEF is a share with a lower than average trading volume. Identify the day on which the order will expire if it is not filled.
A. Monday.
B. Tuesday.
C. Wednesday.
D. Thursday.
A. Monday.
A day order is an order to buy or sell that expires if it is not executed on the day it is entered. All orders are considered to be day orders unless otherwise specified. As Kami did not specify any additional criteria for the order, it will expire at the end of Monday’s trading.
On Tuesday, Mario’s client purchases $250,000 in Canada Treasury bills in a cash account. Determine the day that the client is expected to make full payment for the purchase.
A. Monday.
B. Tuesday.
C. Wednesday.
D. Thursday.
B. Tuesday.
Clients with regular cash accounts are expected to make full payment for purchases or full delivery for sales on or before the settlement date. The settlement date is specified in the contract, and, for Canada Treasury bills, is the same as trade date.
Thuy purchases 1,000 shares of XYZ on margin. He contributes the minimum margin amount to his account on the settlement date. Three days later, XYZ falls in price. Identify the action Thuy’s dealer member will take as a result.
A. Increase loan amount.
B. Close out Thuy’s position.
C. Sell a portion of Thuy’s XYZ holdings.
D. Issue a margin call.
D. Issue a margin call.
As the price of XYZ has fallen, the value of the loan the dealer member can offer drops accordingly, the client must then immediately provide additional funds in the account to cover the shortfall up to the original purchase price. This requirement to deposit additional money is known as a margin call.
