Unit 4 - Session 18

Question 1

Cash Account

Answer 1

Basic investment account, anyone is eligible to open an investment account can purchase one. The security purchased must be paid in full

Question 2

Margin Accounts

Answer 2

Allow customers to control investments for less money than they would need if they were to buy the securities outright through the customer borrowing money to invest. BD can also lend up to the margin limit the FED has set to the customer against their securities if the borrower needs cash.

Question 3

Documentation of a Margin Account

Answer 3

More than a cash account and includes:

1. ) Margin Agreement
2. ) Credit Agreement
3. ) Hypothecation Agreement
4. ) Optional Loan Consent (gives the firm permission to lend securities held in the margin account to other brokers, usually for short sales)
5. ) Not required by NASAA, but most firmst provide a disclosure requirement at or before the trade

Question 4

SEC Rule 10b-16

Answer 4

Requires the firms to disclose the method of computer interst and the conditions under which interest rate and charges will be charged in margin accounts

Question 5

What is the minimum maintenance level of equity in a margin account established by SROs?

Answer 5

25% equity. If the account drops below this amount the BD can liquidate enough securities (of their choosing) to bring the equity back to the maintenance level.

Question 6

House Maintenance

Answer 6

Usually stricter limits on equity requirement levels by BDs, typically 35%

Question 7

Margin Call

Answer 7

Set by the Federal Reserve Board under Regulation T. This i the initial deposit required when you purchase securities on margin. For most securities, the initial margin requirement is 50% of the purchase price.

Question 8

Mixed Margin Account

Answer 8

When a margin account contains both long and short positions. Equity is calculated based on the long and short positions then combined.

Long = What own minus what you owe (current market value minus debt balance)

CMV Long - Debt Balance = Equity

Short = Credit balance minus current market value of the short stock (What you owe in a short position is the cost to buy back the stock borrowed. What you own is the credit balance representing what you received when you sold the stock)

Credit Balance - CMV short = Short Equity

Question 9

Positive Margin

Answer 9

Your returns are higher than the cost of the borrowed money to carry the positions

Question 10

Primary Market

Answer 10

The market in which the proceeds of sales go to the issuer of the securities sold.

Question 11

Secondary Market

Answer 11

Where previously issued securities are bought and sold

Question 12

Exchange Market

Answer 12

Composed of the NYSE and other exchanges on which listed securities are traded. Listed securities refers to any securities listed for trading on an exchange

Question 13

How many registered exchanges are there with the SEC?

Answer 13

18

Question 14

What is the pricing system of most markets

Answer 14

auction markets

Question 15

Specialist

Answer 15

Maintains orderly market and provides price continuity. Fills limit and market orders for the public and trades for his own account to either stabilize. Aka designated market makers (DMM)

Question 16

Over-the-counter (OTC) Market

Answer 16

Functions as an interdealer market in which unlisted securties not listed on any exchange - trade. Connected by computer and telephone. Thousands of securities are traded OTC, including all municipal and US government securities. No central market place. Registered Market Makers (usually BDs) compete to post bid and ask prices.

Question 17

Brokers

Answer 17

When acting in a broker capacity, it is said to be acting in an agency capacity, the firm represents clients who wish to buy securities by finding a seller, or finding a buyer for those clients with a security to sell, for this service they charge a commission. They facilitate trades.

Question 18

Dealers

Answer 18

When acting in a dealer capacity, it is said that the dealer is acting in a principal capacity. Always two principals - buyer and seller. Dealers buy and sell securities for their own account. When they receive a customer order to buy a security, they sell that security out of their inventory (just like an automobile dealer selling a car from a car lot). When they receive an order to sell, dealers buy that security for their inventory (similar to when a car dealer buys a old clunker from you). When selling from their inventories, dealers charge the buying customers a markup rather than a commission. When buying from an inventory, dealers charge the selling customers a markdown (dealers buy for less than they can sell it for - same as the auto dealer, buys you used car form you and what it sells for on the lot a week later after they’ve cleaned it up)

Question 19

BAC / DPP / ABCD (acronyms)

Answer 19

Brokers act as Agent for Commissions
Dealers act as Principals for Profits
Agents that Brokers for Commissions that must be Disclosed

Question 20

Firm Quote

Answer 20

Market maker’s current bid and offer on a security

Question 21

Current Bid

Answer 21

Highest price at which the dealer will buy

Question 22

Current Offfer

Answer 22

Lowest price at which the dealer will sell

Question 23

Spread

Answer 23

Difference between the bid and ask of the current bid and current offer

Question 24

Orders that restrict price

Answer 24

Market - Executed immediately at the market price, no restrictions (aka inside market or inside quote)
Limit - client limits the acceptable amount paid or receive for securities
Stop - becomes a market order if the stock reaches or goes through the stop price
Stop Limit - entered as stop order and changed to a limit order if the stock hits or through the trigger price

Question 25

Limit Orders based on time

Answer 25

Day - expires if not filled by the end of the day

Good till canceled - does not expire until filled or canceled

Question 26

Short Sales

Answer 26

A technique used to profit from the decline in a stock’s price. The short seller initially borrows stock fro the BD to sell at the market. The investor expects the stock price to decline enough to allow him to buy shares at a lower price and replace the borrowed stock at a later date. The short seller is obligated to buy the stock and replace the borrowed shares to close the short positions.

Question 27

Stop Order

Answer 27

Entered to protect a profit or prevent a loss if the stock begins to move in the wrong direction. The stop order becomes a market order once the stock trades at or moves through a certain price, know as the stop price. Stop orders for listed stocks are usually left with and executed by the specialist. A trade at or through the stop price triggers the order, which then becomes a market order. As a market order, there is no assurance of any specific price

Question 28

Buy Stop Orders

Answer 28

1. ) Protect Against loss in a short stock position
2. ) Protect a gain from a short stock position
3. ) Establish a long when a breakout occurs above the line of resistance (stock prices rise above historical high levels)

Question 29

Sell Stop Orders

Answer 29

1. ) Protect against loss in a long stock position
2. ) Protect a gain from a long stock positions
3. ) Establish a short position when a breakout occurs below the line of support

Question 30

Block Trade

Answer 30

at least 10,000 shares or $200,000, whichever is less

Question 31

High Frequency Trading (HFT)

Answer 31

Autonomous computerized trading that seeks quick profits using high-speed connections to financial exchanges. The objective is to take advantage of minute discrepancies in prices and trade on them quickly and in huge quantities.

Benefits:

1. ) increased liquidity in the markets, especially for active stocks
2. ) Market Efficiency - prices differences are arbitraged away leading to narrow spreads
3. ) reduced costs, especially for institutional purchases such as mutual funds

Negatives

1. ) Market manipulation - HFT traders can enter phony trades that are later cancelled can prompt market activity that would not have happened
2. ) Hurts small investors b/c they do not have access to the same trading information
3. ) Snowballing effect of HFT - acceleration of stop orders at such a large volume creates larger market movements

Question 32

Dark Pools

Answer 32

Trading volume that occurs or liquidity that is not openly available to the public. institutional trading desks that choose to use dark pools are able to execute large block orders w/o impacting public quotes or price or revealing their investment strategy regarding any of their holding accumulations or divestitures