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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 Discount. ORDERING. Order Size Round lots Odd lots. ORDERING.

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CHAPTER 2

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Chapter 2 l.jpg

CHAPTER 2

BUYING AND SELLING SECURITIES


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THE SECURITIES MARKET

  • BROKERS

    • DEFINITION: act as agents for investors and compensated by commissions.


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THE SECURITIES MARKET

  • Types of Firms:

    • Retail

    • Regional

    • Discount


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ORDERING

  • Order Size

    • Round lots

    • Odd lots


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ORDERING

  • Time Limits to Orders

    • the investor must specify a time limit when ordering from a broker


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ORDERING

  • Time Limits to Orders

    • some typical time limits:

      • day

      • good-til-canceled (GTC)

      • fill-or-kill


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ORDERING

  • Types of Orders:

    • Market order


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ORDERING

  • Types of Orders:

    • Limit order


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ORDERING

  • Types of Orders:

    • Stop order


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ORDERING

  • Types of Orders:

    • Stop limit


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MARGIN 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.


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MARGIN ACCOUNTS

  • SOME FEATURES OF MARGIN ACCOUNTS:

    • a hypothecation agreement:

      • allows pledging and lending


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MARGIN ACCOUNTS

  • SOME FEATURES OF MARGIN ACCOUNTS:

    • a street name:

      • facilitates pledging/lending


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MARGIN ACCOUNTS

  • MARGIN PURCHASES:

    • Initial Margins are required

    • Actual Margin:

      = Market Value - Loan

      Market Value


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MARGIN ACCOUNTS

  • MAINTENANCE MARGINS:

    • Purpose:

      • to prevent default by the investor

      • to be maintained at the level or above

      • to restore when undermargined


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MARGIN ACCOUNTS

  • UNDERMARGINED

    • the investor’s account value has fallen below the maintenance level


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MARGIN 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 securities


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MARGIN ACCOUNTS

  • OVERMARGINED:

    • if the price of the securities rises above the maintenance margin


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MARGIN ACCOUNTS

  • OVERMARGINED:

    • investor may withdraw some funds


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SHORT SALES

  • WHAT IS A SHORT SALE?

    • a sale which involves the investor borrowing stock

      from his/her broker

      to sell at a higher price and

      repurchase at a later time

      at a lower price


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SHORT SALES

  • RULES FOR SHORT SALES:

    • The Up-tick Rule

    • Delivery

    • Term of the Loan


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SHORT SALES

  • SHORT-SALE MARGINS

    • Initial margin


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SHORT SALES

  • SHORT-SALE MARGINS

    • Actual margin

      = (Short Sales Proceeds + Initial Margin) - Loan

      Loan


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SHORT SALES

  • SHORT-SALE MARGINS

    • Maintenance margin

      • equal to the current dollar value of the loan.


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END OF CHAPTER 2


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