Volume 1- Chapter 9 Flashcards
Define cash accounts.
Clients with regular cash accounts are expected to make full payment for purchases or full delivery for sales on or before the settlement date.
Define margin accounts.
Margin accounts are used by clients who wish to buy or sell securities on partial credit, paying only a portion of the purchase price with the dealer lending the balance.
What is a long position?
A long position represents actual ownership in a security.
What is a short position?
A short position is created when an investor sells a security that the investor does not own.
What is required to close a long position?
To close a long position, the investor sells the stock in the market.
What must a client do to close a short position?
The investor buys back the stock from the market.
What is the initial deposit in a margin account?
The client must make an initial deposit of a specified portion of the value of the securities.
What does the term ‘margin’ refer to?
The margin refers to the amount of funds the investor must personally provide.
What are the two types of margin positions?
- Long margin position
- Short margin position
What is the role of the Canadian Investment Regulatory Organization (CIRO) regarding margin accounts?
CIRO regulates and enforces the amount of credit that a dealer member may extend to clients for the purchase of securities.
What are the minimum margin requirements for long positions in equity securities listed on a recognized exchange in Canada?
- At $2.00 and over: 50% of market value
- At $1.75 to $1.99: 60% of market value
- At $1.50 to $1.74: 80% of market value
- Under $1.50: 100% of market value (i.e., no loan value)
What happens if the price of a security falls in a long margin account?
The client must provide additional funds in the account to cover the shortfall up to the original purchase price, known as a margin call.
What occurs if the price of a security rises in a long margin account?
The client has access to additional funds in the account, termed excess margin.
What are the risks associated with using a margin account?
- Margin increases market risk
- Loan and interest must be repaid
- Margin calls must be paid without delay
What is short selling?
Short selling is defined as the sale of securities that the seller does not own and can only be done in a margin account.
What is the order of transactions in short selling?
The investor sells the security first, then waits to buy it back at a lower price.
What happens if the price rises after a short sale?
The investor may incur a loss if they have to buy back the security at a higher price.
What is the theoretical risk associated with short selling?
Short selling has unlimited risk because the security sold short could potentially rise to infinity.
Fill in the blank: The proceeds of a short sale are deposited in the client’s _______.
account.
True or False: Not every dealer member allows margin accounts.
True.
Describe the process of establishing a long margin position.
Sufficient funds or securities with excess loan value must be in the account to cover the purchase, and the dealer lends some of these funds.
What is a margin call?
A margin call is a request for the client to deposit additional funds when the security price falls and the margin requirement increases.
What is the first step in the short selling process?
Your client calls you and instructs you to sell 10,000 shares of ABC short.
What does the investment dealer gain by lending securities for short selling?
The investment dealer is free to use the money put up by the short seller in the firm’s business or in interest-earning activities.
What is required for a short position in terms of margin?
Margin is always required for a short position.
What is the margin requirement for short sales of listed equities priced at $2.00 and over?
50% of market value.
Fill in the blank: For short sales priced under $0.25, the margin required is _______.
$0.25 per share.
What is the minimum account balance required for shorting 100 shares at $5.00 with a 50% margin?
$750.00.
If the price of a stock declines to $4.00 after a short sale, what is the excess margin if the initial margin was $250?
$150.00.
What happens if the price of FED’s shares rises to $6.00 after a short sale?
A margin call is issued to cover the margin deficiency.
How is profit or loss on a short sale calculated?
It is the difference between the purchase and sale prices, or between the sale proceeds and the purchase cost.
True or False: There is no limit on the amount of time a short sale position may be maintained.
True.
What must a short seller do if they cannot borrow enough stock to maintain a short position?
They must buy the necessary shares to cover the short sale.
Why is it difficult to maintain a short position in thinly traded shares?
It can be difficult to borrow sufficient stock with low marketability.
What must investment advisors mark on a sell-order ticket for a short sale?
Short (or S).
List some risks associated with short selling.
- Borrowing shares
- Adequate margin
- Liability for dividends
- Buy-in requirements
- Insufficient information
- Price action volatility
- Unlimited risk
- Regulatory risk
What is the difference in margin requirements between buying long on margin and selling short?
Buying long does not require margin for the purchase, while short selling requires margin to cover potential losses.
What happens after a trade is executed in terms of transaction confirmation?
Both the buyer and seller receive a confirmation detailing the transaction.
How long after a trade date must a buyer provide sufficient funds?
By the settlement date, which is one business day after the trade date.
What form do stock and bond certificates take in Canada?
They are mainly held electronically by a clearing corporation.
What is the trade date?
The date on which a trade is executed.
What does the seller’s confirmation include?
Details of the sale and the amount to be received by the seller after commission is deducted.
How are stock and bond certificates held in Canada?
They are mainly held electronically by a clearing corporation.
What is the role of a clearing corporation at the end of each trading day?
It settles all purchases and sales of stock and bonds among dealers.
What are the primary characteristics used to categorize order types?
Duration, price restrictions, special instructions, other changes.
What is the bid price?
The highest price that a buyer is ready to pay for a stock.
What is the ask price?
The lowest price that a seller will accept for a stock.
What is the bid-ask spread?
The difference between the bid price and the ask price.
What is a market order?
An order to buy or sell a specified number of securities at the prevailing market price.
What is the main advantage of a market order?
The investor is certain that it will be executed.
What is a limit order?
An order to buy or sell securities at a specific price or better.
What is a day order?
An order that expires at the end of the day if not executed.
What is a good til date (GTD) order?
An order that expires on a date specified by the investor.
What is a good til cancelled (GTC) order?
An order that expires 90 calendar days from entry unless cancelled sooner.
What is an on-stop sell order?
An order that is triggered when the stock drops to a specified level.
What is the purpose of an on-stop sell order?
To reduce the amount of loss or protect part of a paper profit.
What is an on-stop buy order?
An order to buy a stock at or above a certain price.
What is the purpose of an on-stop buy order?
To protect a short position or ensure stock purchase while its price is rising.
What is a professional (PRO) order?
An order for accounts in which a partner, director, officer, or employee of a dealer member holds an interest.
What is the priority rule for client orders?
Client orders have priority of execution over non-client orders at the same price.
What must be done to tickets for orders from partners or employees?
They must be clearly labelled as PRO, N-C (non-client), or EMP (employee).
