Chapter 3. How Securities are Traded How firms issue securities How securities are traded Trading basics Trading cost Order type Buying on margin Short sales. Primary vs. Secondary Security Sales. Primary New issue Key factor: issuer receives the proceeds from the sale Secondary
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How Securities are Traded
How firms issue securities
How securities are traded Trading basics
Buying on margin
Private placement: sale to a limited
number of sophisticated investors not
requiring the protection of registration
Instructions to the brokers on how to
complete the order
Stock $70,000 Borrowed $35,000
Stock price falls to $60 per share
Stock $60,000 Borrowed $35,000
Margin% = $25,000/$60,000 = 41.67%
If sock price falls 41.67%, equity will be wiped out (equity value will be zero).
How far can the stock price fall before amargin call?
(1000P - $35,000)* / 1000P = 40%
P = $58.33
* 1000P - Amt Borrowed = Equity
Purpose: to profit from a decline in the price of a stock or security
Z Corp100 Shares
Margin & Equity 5,000
Stock Owed 10,000
Stock Price Rises to $110
Initial Margin 5,000
Stock Owed 11,000
Net Equity 4,000
Margin % (4000/11000) 36%
If stock price rises 36%, equity will be zero.
How much can the stock price rise before a margin call?
($15,000* - 100P) / (100P) = 30%
P = $115.38
* Initial margin plus sale proceeds