BrokerageTransactions Brokerage Firms An investor selects a broker or brokerage house by personal contact, referral, reputation. Full Service Broker A brokerage firm offering a full range of services, including information and advice.
Discount Broker A brokerage firm offering execution services at prices typically significantly less than full-line brokerage firms. On-Line Discount Brokers
Types Of Brokerage Accounts Cash Account The most common type of brokerage account in which a customer may make only cash transactions. Margin Account An account that permits margin trading.
Types of Orders Market Order An order to buy and sell at the best price when the order reaches the trading floor. Limit Order An order to buy or sell at a specified or better price. Stop Order An order specifying a certain price at which a market order takes effect.
Margin That part of a transaction’s value that a customer has as equity to the transaction. Initial Margin That part of a transaction’s value the customer must pay to initiate the transaction, with the other part being borrowed from the broker. Initial Margin = Amount Investor Puts Up Value of the Transaction
Margin (Continued) Q: If the initial margin requirement is 50 percent on a $10,000 transaction (100 shares at $100 per share), what is the initial margin?
Margin (Continued) Maintenance Margin The percentage of a security’s value that must be on hand as equity. Q: The maintenance margin is 30 percent, with a initial margin of 50 percent, and that the price of the stock declines from $100 to $90 per share. Calculate the actual margin?
Margin (Continued) Actual Margin = Current value of securities - Amount borrowed Current value of securities Margin Call A demand from the broker for additional cash or securities as a result of the actual margin declining below the maintenance margin.
Margin (Continued) Q: Assume that the maintenance margin is 30 percent. If the price of the stock drops to 1. $80, 2. $66.66, check in which case investor gets a margin call from the broker. The price at which a margin call (MC) will be issued can be calculated as: Margin Call (MC) price= Amount borrowed Number of Shares (1 – Maintenance margin percentage)
Margin (Continued) Short Sale The sale of a stock not owned but borrowed in order to take advantage of the expected decline in the price of the stock.