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How securities are traded

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  • 1. How Securities Are Traded
  • 2. 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.
  • 3.  Discount Broker  A brokerage firm offering execution services at prices typically significantly less than full-line brokerage firms. On-Line Discount Brokers
  • 4. 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.
  • 5. 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.
  • 6. 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
  • 7. 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?
  • 8. 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?
  • 9. 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.
  • 10. 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)
  • 11. 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.