Unit 23: Trading Securities Flashcards
cash account
must pay in full for all securities purchased
margin account
may borrow funds to pay for securities, or use already paid for securities to borrow against.
marginable securities
-Exchange-listed stocks and bonds
-Stocks traded on the Nasdaq Stock Market
-Warrants traded on either of the above
**Mutual funds/New Issues (including preemptive rights) cannot be purchased on margin, but can be used as collateral after owned for 30 days.
Margin Agreement
-credit agreement
-hypothecation agreement
-optional loan consent
**must secure written margin agreement from client promptly AFTER initial transaction in account
Must secure written margin agreement promptly…
AFTER initial transaction in account
Credit Agreement
discloses terms, interest methods, assurance notices are done as frequently as interest charges
Hypothecation agreement
Gives the firm permission to pledge securities to a lending institution
Loan Consent
Gives the firm permission to loan securities to other brokers
risk disclosure document (FINRA)
-delivered prior to or at the time of account opening.
-discusses risks associated with margin trading
broker call loanrate
interest rate banks charge B/Ds on money borrowed to lend to margin customers.
margin call
deposit needed for margin transaction
maintenance call
if equity falls below 25%, additional funds must be deposited. if not met, firm will liquidate securities.
house maintenance
if a firm imposes stricter than 25% requirements for equity
long equity
Long CMV - debit balance
short equity
Credit Balance - Short CMV
net equity
short + long equity
positive margin
returns are exceeding cost of borrowed money
margin interest
is tax deductible (unless purchasing muni’s)
primary market
proceeds of sales go to issuer
secondary market
previously issued securities traded on an exchange
listed security
traded on an exchange
SEC power over exchanges
-suspend trading in any nonexempt security for up to 10 days without prior notice;
-suspend trading on an entire exchange for up to 90 days (SEC must give prior notification to the president of the United States)
specialist/DMM
maintains orderly markets and price continuity
OTC market
where unlisted securities trade
-includes stocks, corporate bonds, and muni/govt bonds
-negotiated markets, buyer and seller can negotiate with each other
Dual capacity of B/D
-cannot act as both broker and dealer in same transaction
-capacity must be disclosed on trade confirm
Acting as Broker
-agency capacity;
-facilitates trades between buyer and seller;
-earn a commission
Acting as Dealer
-principal capacity;
-buy/sell for their own account and inventory
-earns markup/markdown
Carrying B/D
-holds accounts, securities, and funds of its clients
-provide clearing and settlement services
-must follow Customer Protection Rule
Introducing B/D
-must disclose to clients that it is an introducing firm.
-does not need to follow Customer Protection Rule
two items that DO NOT need to be on order ticket
-current market price
-client’s name/address
items required on order ticket
-account number;
-solicited, unsolicited, or discretionary (including time or price);
-if a sale, long or short;
-market, limit, or stop;
-number of shares or aggregate par value;
-the time of order entry (execution time and execution price will be added);
-name of broker-dealer and registered individual responsible for order.
market order
-guaranteed execution, unless security is no longer trading
-has priority over other order types
limit order
-can only be executed at specified price or better
-held with DMM if not executed immediately
-will do partial fills if able
selling short
-borrows and sells shares of stock
-must “buy” shares to close position
-must occur in margin account
stop order
-entered to protect profit or prevent loss
-stop price triggers order and becomes market order
-can do stop limit order where becomes a limit order
uses of a buy stop order
-protect against loss in short position
-protect gain in short position
-establish long position when breakout occurs above line of resistance
uses of a sell stop order
-protect against loss in long position
-protect gain in long position
-establish short position when breakout occurs below line of support
capping
form of market manipulation where sell orders are entered to prevent it from rising above a certain price
pegging
form of market manipulation where buy or sell orders are entered to keep price from moving
block trade - NYSE Rule 72
an order with the lower of 10,000 shares or $200,000 USD.
High Frequency Trading
using algorithms and automated systems to frequently trade and profit from small movements and differences in markets.
-increases market efficiency and liquidity
-potential cause of market manipulation due to many trades entered and cancelled, sending trade signals to other traders
-can cause snowballing effect.
dark pools are typically used by
institutions due to anonymity
Which act authorizes use of margin?
Securities Exchange Act of 1934
Payment for order flow
is permitted.
disclosing markup/markdown
does not always need to be disclosed.
mixed margin acount; own/owe
You OWN: Long CMV & Short credit balance
You OWE: Short CMV & Long debit balance
