Csc3 Inv Products Ch 9

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Csc3 Inv Products Ch 9

  1. 1. CSI Global Education Inc. Investment Products CHAPTER 9: Equity Securities: Equity Transactions
  2. 2. Chapter Highlights <ul><li>There are a variety of ways in which you can buy and sell equities. </li></ul><ul><li>You can buy the security outright through a cash account or go long or short through a margin account. </li></ul><ul><li>There are also many types of orders to consider when buying and selling securities. </li></ul>
  3. 3. Speculative Trading Practices <ul><li>Buying on Margin  Long </li></ul><ul><li>Predicting prices will rise </li></ul><ul><li>Short Selling on Margin  Short </li></ul><ul><li>Predicting prices will fall </li></ul><ul><li>Advantages & disadvantages of each? </li></ul><ul><li>Which position is riskier? Why? </li></ul>
  4. 4. Margin Example – Long Position <ul><li>An investor believes that a stock will increase from $25 to $30. The investor has $2,500 to invest ($2,500 is usually the minimum required investment for margins, and stock margin accounts are generally based on a 50% margin). </li></ul><ul><li>Cash Account </li></ul><ul><li>The investor purchases 100 shares and the stock moves as predicted. The investor’s rate of return would be: </li></ul>
  5. 5. Margin Example <ul><li>Margin Account – Advantage of Leverage </li></ul><ul><li>The investor opens a margin account and purchases 200 shares. The broker puts up $2,500 and the investor puts up the other $2,500. </li></ul><ul><li>The share price goes to $30 per share. The investor’s rate of return would be: </li></ul>
  6. 6. Margin – Long Position <ul><li>On listed securities selling: Maximum Loan Value: </li></ul><ul><li>Securities Eligible for Reduced Margin ____________________ </li></ul><ul><li>at $2.00 and over ____________________ </li></ul><ul><li>at $1.75 to $1.99 ____________________ </li></ul><ul><li>at $1.50 to $1.74 ____________________ </li></ul><ul><li>under $1.50 ___________________ </li></ul>
  7. 7. Margin <ul><li>On listed selling: Maximum Securities Loan Value: </li></ul><ul><li>Securities Eligible for Reduced Margin 70% of market </li></ul><ul><li>at $2.00 and over 50% of market value </li></ul><ul><li>at $1.75 to $1.99 40% of market </li></ul><ul><li>at $1.50 to $1.74 20% of market </li></ul><ul><li>under $1.50 No loan value </li></ul>
  8. 8. Margin Exercise <ul><li>a) Assume an investor goes long 5,000 shares of ABC Co. on margin when it sells for $2.25 per share (not eligible for reduced margin). How much would the investor have to put up as margin? </li></ul><ul><li>Total cost to buy ABC shares $ 11,250 </li></ul><ul><li>Less: Dealer’s maximum loan (50% of $2.25 x 5,000) $ 5,625 </li></ul><ul><li>Equals: Margin which is put up by the client $ 5,625 </li></ul><ul><li>Or 50% x $11,250 = $5,625 </li></ul>
  9. 9. Margin Exercise <ul><li>b) Assume the price of ABC’s shares decline to $1.85. Will the investor get a margin call? If so how much? </li></ul><ul><li>Original cost of ABC shares (from above) $ 11,250 </li></ul><ul><li>Less: Dealer’s revised maximum loan (40% of $1.85 x 5,000) $ 3,700 </li></ul><ul><li>Equals: Gross margin requirement $ 7,550 </li></ul><ul><li>Less: Client’s original margin deposit (2 above) $ 5,625 </li></ul><ul><li>Equals: Net margin deficiency (for which a margin call is issued to the client) $ 1,925 </li></ul>
  10. 10. Margin Exercise <ul><li>c) Assume in this case the price of ABC’s shares – instead of declining to $1.85 – had increased from $2.25 to $2.75. What amount must be added to, or can be withdrawn from the account? </li></ul><ul><li>Original cost of ABC shares (1 above) $ 11,250 </li></ul><ul><li>Less: Dealer’s revised maximum loan (50% of $2.75 x 5,000) $ 6,875 </li></ul><ul><li>Equals: Gross margin requirement $ 4,375 </li></ul><ul><li>Less: Client’s orig. margin deposit (2 above) $ 5,625 </li></ul><ul><li>Equals: Excess margin in account $ 1,250 </li></ul><ul><li>The $1,250 can be used as margin toward the purchase of another security, or withdrawn from the account. </li></ul>
  11. 11. Short Sales on Margin <ul><li>On listed Minimum Credit securities selling: Balance in the Account: </li></ul><ul><li>Securities Eligible for Reduced Margin ____________________ </li></ul><ul><li>at $2.00 and over ____________________ </li></ul><ul><li>at $1.50 to $1.99 ____________________ </li></ul><ul><li>at $0.25 to $1.49 ____________________ </li></ul><ul><li>under $0.25 ____________________ </li></ul>
  12. 12. Short Sales <ul><li>On listed Minimum Credit securities selling: Balance in the Account: </li></ul><ul><li>Securities Eligible for Reduced Margin 130% of market </li></ul><ul><li>at $2.00 and over 150% of market </li></ul><ul><li>at $1.50 to $1.99 $3.00 per share </li></ul><ul><li>at $0.25 to $1.49 200% of market </li></ul><ul><li>under $0.25 100% of market plus $0.25 per share </li></ul>
  13. 13. Short Selling <ul><li>a) Assume that an investor sells short 500 shares of FED Company Ltd. (eligible for reduced margin) at its current market price of $15. How much must the investor put up as margin? </li></ul><ul><li>Minimum account balance required 130% of $15 x 500 shares $ 9,750 </li></ul><ul><li>Less: Proceeds from short sale 500 x $15 $ 7,500 </li></ul><ul><li>Equals: Minimum margin required $ 2,250 </li></ul>
  14. 14. Short Selling <ul><li>b) Assume that, later on, the price of FED’s shares declines to $12. Will the client have to put up more margin? How much must be added to or could be withdrawn from the account? </li></ul><ul><li>Minimum account balance required 130% of $12 x 500 shares $ 7,800 </li></ul><ul><li>Less: Proceeds from short sale 500 x $15 $ 7,500 </li></ul><ul><li>Equals: Minimum margin required $ 300 </li></ul>
  15. 15. Short Selling <ul><li>Since the client has already deposited margin of $2,250, the account now has excess margin of $1,950 ($2,250 – $300). </li></ul><ul><li>This amount may be withdrawn, or used to purchase more securities, or left in the account to cover possible margin calls should FED’s price begin to rise. </li></ul>
  16. 16. Short Selling <ul><li>c) If the price of FED’s shares advanced to $18 instead of declining, would the client receive a margin call? If so, for how much? </li></ul><ul><li>Minimum account balance required (based on current price) 130% of $18 x 500 shares $ 11,700 </li></ul><ul><li>Less: Proceeds from short sale (based on original price) (500 x $15.00) $ 7,500 </li></ul><ul><li>Equals: Minimum margin required $ 4,200 </li></ul><ul><li>Less: Amount already deposited $ 2,250 </li></ul><ul><li>Equals: Margin deficiency (for which a margin call is issued to the client) $ 1,950 </li></ul>
  17. 17. Types of Orders <ul><li>Market Order (“At the Market”) </li></ul><ul><li>Limit Order </li></ul><ul><li>Day Order </li></ul><ul><li>GTC </li></ul><ul><li>AON </li></ul><ul><li>Any Part </li></ul><ul><li>Stop loss/buy </li></ul><ul><li>Pro / N-C </li></ul>
  18. 18. Types of Orders <ul><li>Market Order (“At the Market”) </li></ul><ul><li>An order to buy or sell a specific number of securities at the best price. </li></ul><ul><li>Limit Order </li></ul><ul><li>An order to buy or sell at a specific price or better. </li></ul><ul><li>Day Order </li></ul><ul><li>An order to buy or sell that is valid only for the day it is given. All orders are considered day orders unless otherwise stated. </li></ul>
  19. 19. Types of Orders <ul><li>Good Till Cancelled (GTC) Order </li></ul><ul><li>An order that remains outstanding until executed or cancelled. </li></ul><ul><li>All or None Order </li></ul><ul><li>An order whereby the broker must execute the total number of securities specified before the client will accept a fill. </li></ul><ul><li>Any Part Order </li></ul><ul><li>An order in which the client will accept all stock in odd, broken or board lots up to the full amount of his order. </li></ul>
  20. 20. Types of Orders <ul><li>Stop Loss </li></ul><ul><li>An order to sell that becomes effective when the price of a board lot declines to a specified level. </li></ul><ul><li>Becomes a market order when the stop price is reached. </li></ul><ul><li>Stop Buy Order </li></ul><ul><li>An order to protect a short sale. It instructs the broker to purchase shares when they reach a specified price. </li></ul><ul><li>Becomes a market order when the stop price is reached. </li></ul>
  21. 21. Types of Orders <ul><li>The Pro or N-C Order </li></ul><ul><li>Orders from members (partners, directors, IAs etc.) are stamped “Pro” (Professional) N-C (Non-Client) or EMP (employee), to deal with the preferential trading rule. </li></ul><ul><li>The Preferential Trading Rule </li></ul><ul><li>A trading regulation that means that the client’s order always has priority over a member’s order. </li></ul>

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