CHAPTER 2
BUYING AND SELLING
SECURITIES
THE SECURITIES MARKET
BROKERS
•
DEFINITION: act as agents for investors and compensated by commissions.THE SECURITIES MARKET
Types of Firms:
•
Retail•
Regional•
DiscountORDERING
Order Size
•
Round lots•
Odd lotsORDERING
Time Limits to Orders
•
the investor must specify a time limit when ordering from a brokerORDERING
Time Limits to Orders
•
some typical time limits:
day
good-til-canceled (GTC)
fill-or-killORDERING
Types of Orders:
•
Market orderORDERING
Types of Orders:
•
Limit orderORDERING
Types of Orders:
•
Stop orderORDERING
Types of Orders:
•
Stop limitMARGIN ACCOUNTS
THE PURPOSE OF MARGIN ACCOUNTS:
•
these accounts act as a line of credit for more money than is in the investor’s cash account.MARGIN ACCOUNTS
SOME FEATURES OF MARGIN ACCOUNTS:
•
a hypothecation agreement:
allows pledging and lendingMARGIN ACCOUNTS
SOME FEATURES OF MARGIN ACCOUNTS:
•
a street name:
facilitates pledging/lendingMARGIN ACCOUNTS
MARGIN PURCHASES:
•
Initial Margins are required•
Actual Margin:= Market Value - Loan Market Value
MARGIN ACCOUNTS
MAINTENANCE MARGINS:
•
Purpose:
to prevent default by the investor
to be maintained at the level or above
to restore when undermarginedMARGIN ACCOUNTS
UNDERMARGINED
•
the investor’s account value has fallen below the maintenance levelMARGIN ACCOUNTS
UNDERMARGINED
•
results in a margin call by broker to investor who may
deposit cash or securities into the account
pay off pay off part of the loan
sell some securitiesMARGIN ACCOUNTS
OVERMARGINED:
•
if the price of the securities rises above the maintenance marginMARGIN ACCOUNTS
OVERMARGINED:
•
investor may withdraw some fundsSHORT SALES
WHAT IS A SHORT SALE?
•
a sale which involves the investor borrowing stockfrom his/her broker
to sell at a higher price and repurchase at a later time at a lower price
SHORT SALES
RULES FOR SHORT SALES:
•
The Up-tick Rule•
Delivery•
Term of the LoanSHORT SALES
SHORT-SALE MARGINS
•
Initial marginSHORT SALES
SHORT-SALE MARGINS
•
Actual margin= (Short Sales Proceeds + Initial Margin) - Loan Loan
SHORT SALES
