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Canadian Securities Course VO1 > Chapter 9: Equity Transactions > Flashcards

Chapter 9: Equity Transactions Flashcards

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SIE Exam flashcards
1
Q

What is cash account?

A

have to make full payment for purchases or full delivery for sales on or before settlement date.

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2
Q

What is margin account?

A

the client pays only a portion of the purchase price and the investment dealer lends the balance to the client, charging interest on the loan

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3
Q

When is the settlement date?

A
  • Government of Canada T-Bill - same day that the transaction takes place
  • All other securities: 2 days after the transactions takes place.
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4
Q

What is long position?

A

A long position represents actual ownership in a

security.

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5
Q

What is short position?

A

a short position is created when an investor sells a security that the investor does not own.

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6
Q

How they charge interest in margin account?

A

Interest on a margin loan is calculated daily and charged monthly. with the rates the clients are charged on their chartered bank loans.

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7
Q

What does the word margin mean?

A

refers to the amount of funds the investor must personally provide. The margin plus the loan
provided by the dealer member together make up the total amount required to complete the transaction.

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8
Q

How many types of margin positions are there?

A
  1. A long margin position (investors to partially finance the purchase of securities by borrowing money from the dealer. with the expectation that the price of the security will rise).
  2. a short margin (investors to sell borrowed securities in the expectation that the price will fall, allowing the investor to buy back the shares at a lower price for a profit)
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9
Q

Do all dealer member allows margin account?

A

No, and they must obtain an authorized Margin Account Agreement Form from the client before any business is transacted.

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10
Q

Who regulate the credit that dealer member extend to its clients?

A

By IIROC with examiners conduct spot checks, in addition to regular field examinations. (IIROC produces a quarterly list of “securities eligible for reduced margin”. Inclusion in the list is restricted to those securities that demonstrate both sufficiently high liquidity and sufficiently low price volatility, based on specific price risk and liquidity risk measures.)

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11
Q

What are the maximum equity loan value? (maximum but dealer members may choose to set more stringent requirement)

A
  1. At $2.00 and over (50% of market value)
  2. At $1.75 to $1.99 (40% of market value)
  3. At $1.50 to $1.74 (20% of market value)
  4. Under $1.50 (no Loan)
  5. Securities Eligible for Reduced Margin* (70% of market value)
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12
Q

What is margin call?

A

is the requirement to deposit additional money when the price of security falls.

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13
Q

What is excess margin?

A

The amount that client has access to additional fund when the security price rises. (the client still pay interest on initial amount loaned from dealer, if the client cash out the additional amount, they would pay interest on that too)

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14
Q

What are the margin risk?

A
  1. Increases market risk (both in positive and negative way).
  2. Loan and interest must be repaid regardless the value of securities.
  3. Margin calls must be paid without delay. (if not dealer can sell the security)
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15
Q

What is short selling?

A

Is the sale of securities that the seller does not own.

transactions is reversed with long position

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16
Q

What is the difference in term of risk between short and long position?

A

Short selling has an element of leverage because the investor borrows stock from the dealer and puts up less money than the minimum required balance -> short selling is considered riskier than purchasing an outright long position. (short selling has unlimited risk because the security that the investor sold short could potentially rise to infinity)

17
Q

What is the benefit of the dealer?

A

the investment dealer is free to use the money put up by the short seller in the firm’s business or in interestearning activities.

18
Q

What are Minimum Credit Balance Requirements?

A
  1. At $2.00 and over (150% of market value)
  2. At $1.50 to $1.99 ($3.00 per share)
  3. At $0.25 to $1.49 (200% of market value)
  4. Under $0.25 (100% of market plus $0.25 per share)
  5. Securities eligible for reduced margin (130% of market value)
19
Q

What is the time limit on short sales?

A

no limit provided that the stock does not become delisted or worthless and adequate margin is maintained in the short account.

20
Q

why do client need cover a short position?

A
  • In some cases, the short seller may be unable to borrow enough stock from the investment dealer to maintain
    or carry a short position -> need to buy the necessary shares to cover the short sale.
21
Q

What do dealer and client have to do when conducting a short sell?

A
  • dealers need to confirm whether a sale is a short or a long sale, upon accepting an order for the sale of a security.
  • Investment advisors entering an order for a short sale of a security for any client must clearly mark the sell-order ticket Short (or S), so that the trading department may process the order properly.
  • The Toronto Stock Exchange (TSX) and the TSX Venture Exchange compile and publicly report total short positions in applicable securities twice a month.
22
Q

What are the risks of short selling?

A
  1. Borrowing shares (may be difficult)
  2. Adequate margin ( maintain adequate margin in the short account)
  3. Liability (is liable for any dividends or benefits paid)
  4. Buy-in requirements (similar to margin call)
  5. Insufficient information (difficult to obtain up-to-date information on total short sales on a security cause The exchanges do not report short positions on a daily basis)
  6. Price action (The price may become volatile when a number of short sellers try to cover their short sales at the same time, creating a buying rush)
  7. Unlimited risk ( can have dramatic rise in price)
  8. Regulatory risk (regulators may ban short selling for certain types of stocks).
23
Q

What is the role of stock exchange in transacsion?

A

Stock exchange trades may involve the investment dealer acting as agent or as principal.

24
Q

How is the trading procedure of retails securities transaction?

A

both seller and buyer contact their dealers, and both dealers work with the stock exchange.
(The exchange’s data transmission system reports the trade over the exchange’s ticker. It also provides the buying and selling dealers with specific details of the trade, such as the time of the trade and the identity of the other firm.Details are relayed to the investment advisors and then they phone their clients to confirm the transaction. Each dealer mails a written confirmation to its client that day or the next business day at the latest).

25
Q

What is the settlement procedure?

A
  • Once receiving a confirmation, buyer and seller must settle the transaction.
  • The buyer’s confirmation shows details of the purchase and the amount payable, including commission. The amount will be withdrawn from the client’s account, if the buyer has sufficient funds on deposit with the firm. Otherwise, the buyer must provide sufficient funds by the settlement date (two business days after the trade date). The buyer’s firm then makes payment for the purchase to the seller’s firm.
  • The seller’s confirmation also shows details of the sale, as well as the amount to be received by the seller after
    commission is deducted.
26
Q

what are the different types of order?

A

market, limit, day, good through, on-stop sell, on-stop buy, and professional.

27
Q

what is market order?

A
  • is to buy or sell a specified number of securities at the prevailing market price. Generally, the buyer can expect to pay the ask price, and the seller can expect to accept the bid price.
  • The benefit is that the investor is certain that it will be executed. However, the price is not certain.
  • Market orders are often best used in a liquid market, where the bid/ask spread is tight
28
Q

what is limit order?

A
  • is to buy or sell securities at a specific price or better. - - - The advantage is that the order will be executed only if the market reaches that price or better. The downside to a limit order is that there is no certainty that the order will be filled.
  • In particular, the limit order is used in a market that is less than liquid.
29
Q

what is day order?

A

to buy or sell that expires at the end of the day, if it is not executed on the day it is entered. All orders are considered to be day orders unless otherwise specified.

30
Q

what is good through order?

A

is an order to buy or sell that is good for a specified number of days. The order is then automatically cancelled if it has not been filled by the end of the trading session on the date specified in the order

31
Q

what is on-top sell order?

A
  • The order is triggered when the stock drops to the specified level. The purpose is to reduce the amount of loss that might be incurred or to protect at least part of a
    paper profit when a stock’s price declines.
  • On the Toronto Stock Exchange and TSX Venture Exchange all on-stop sell orders must be entered with a limit attached. Once an on-stop sell order is triggered, it enters as an order at its on-stop (limit) price.
32
Q

what is on-top buy order (stop buy order)?

A

• To protect a short position when the stock’s price is rising.
• To ensure that a stock is purchased while its price is rising.
- On the Toronto Stock Exchange and TSX Venture Exchange all on-stop buy orders must be entered with a
limit attached. Once an on-stop buy order is triggered, it enters as an order at its on-stop (limit) price.

33
Q

what is professional order (stop loss order)?

A
  • is executed when a client’s order competes with a non-client order at the same price for the same security, the client’s order is given priority of execution over the non-client order.
  • A non-client order is an order for partner, director, officer, advisor, or other employee of a dealer member.
  • Tickets for non-client orders must be clearly labelled PRO, N-C (non-client), or EMP (employee).

Canadian Securities Course VO1 (13 decks)

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