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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

CHAPTER 2

BUYING AND SELLING SECURITIES

the securities market
THE SECURITIES MARKET
  • BROKERS
    • DEFINITION: act as agents for investors and compensated by commissions.
the securities market3
THE SECURITIES MARKET
  • Types of Firms:
    • Retail
    • Regional
    • Discount
ordering
ORDERING
  • Order Size
    • Round lots
    • Odd lots
ordering5
ORDERING
  • Time Limits to Orders
    • the investor must specify a time limit when ordering from a broker
ordering6
ORDERING
  • Time Limits to Orders
    • some typical time limits:
      • day
      • good-til-canceled (GTC)
      • fill-or-kill
ordering7
ORDERING
  • Types of Orders:
    • Market order
ordering8
ORDERING
  • Types of Orders:
    • Limit order
ordering9
ORDERING
  • Types of Orders:
    • Stop order
ordering10
ORDERING
  • Types of Orders:
    • Stop limit
margin accounts
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.
margin accounts12
MARGIN ACCOUNTS
  • SOME FEATURES OF MARGIN ACCOUNTS:
    • a hypothecation agreement:
      • allows pledging and lending
margin accounts13
MARGIN ACCOUNTS
  • SOME FEATURES OF MARGIN ACCOUNTS:
    • a street name:
      • facilitates pledging/lending
margin accounts14
MARGIN ACCOUNTS
  • MARGIN PURCHASES:
    • Initial Margins are required
    • Actual Margin:

= Market Value - Loan

Market Value

margin accounts15
MARGIN ACCOUNTS
  • MAINTENANCE MARGINS:
    • Purpose:
      • to prevent default by the investor
      • to be maintained at the level or above
      • to restore when undermargined
margin accounts16
MARGIN ACCOUNTS
  • UNDERMARGINED
    • the investor’s account value has fallen below the maintenance level
margin accounts17
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
margin accounts18
MARGIN ACCOUNTS
  • OVERMARGINED:
    • if the price of the securities rises above the maintenance margin
margin accounts19
MARGIN ACCOUNTS
  • OVERMARGINED:
    • investor may withdraw some funds
short sales
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

short sales21
SHORT SALES
  • RULES FOR SHORT SALES:
    • The Up-tick Rule
    • Delivery
    • Term of the Loan
short sales22
SHORT SALES
  • SHORT-SALE MARGINS
    • Initial margin
short sales23
SHORT SALES
  • SHORT-SALE MARGINS
    • Actual margin

= (Short Sales Proceeds + Initial Margin) - Loan

Loan

short sales24
SHORT SALES
  • SHORT-SALE MARGINS
    • Maintenance margin
      • equal to the current dollar value of the loan.
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