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Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
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Csc3 Inv Products Ch 9

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  • 1. CSI Global Education Inc. Investment Products CHAPTER 9: Equity Securities: Equity Transactions
  • 2. Chapter Highlights
    • There are a variety of ways in which you can buy and sell equities.
    • You can buy the security outright through a cash account or go long or short through a margin account.
    • There are also many types of orders to consider when buying and selling securities.
  • 3. Speculative Trading Practices
    • Buying on Margin  Long
    • Predicting prices will rise
    • Short Selling on Margin  Short
    • Predicting prices will fall
    • Advantages & disadvantages of each?
    • Which position is riskier? Why?
  • 4. Margin Example – Long Position
    • 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).
    • Cash Account
    • The investor purchases 100 shares and the stock moves as predicted. The investor’s rate of return would be:
  • 5. Margin Example
    • Margin Account – Advantage of Leverage
    • 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.
    • The share price goes to $30 per share. The investor’s rate of return would be:
  • 6. Margin – Long Position
    • On listed securities selling: Maximum Loan Value:
    • Securities Eligible for Reduced Margin ____________________
    • at $2.00 and over ____________________
    • at $1.75 to $1.99 ____________________
    • at $1.50 to $1.74 ____________________
    • under $1.50 ___________________
  • 7. Margin
    • On listed selling: Maximum Securities Loan Value:
    • Securities Eligible for Reduced Margin 70% of market
    • at $2.00 and over 50% of market value
    • at $1.75 to $1.99 40% of market
    • at $1.50 to $1.74 20% of market
    • under $1.50 No loan value
  • 8. Margin Exercise
    • 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?
    • Total cost to buy ABC shares $ 11,250
    • Less: Dealer’s maximum loan (50% of $2.25 x 5,000) $ 5,625
    • Equals: Margin which is put up by the client $ 5,625
    • Or 50% x $11,250 = $5,625
  • 9. Margin Exercise
    • b) Assume the price of ABC’s shares decline to $1.85. Will the investor get a margin call? If so how much?
    • Original cost of ABC shares (from above) $ 11,250
    • Less: Dealer’s revised maximum loan (40% of $1.85 x 5,000) $ 3,700
    • Equals: Gross margin requirement $ 7,550
    • Less: Client’s original margin deposit (2 above) $ 5,625
    • Equals: Net margin deficiency (for which a margin call is issued to the client) $ 1,925
  • 10. Margin Exercise
    • 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?
    • Original cost of ABC shares (1 above) $ 11,250
    • Less: Dealer’s revised maximum loan (50% of $2.75 x 5,000) $ 6,875
    • Equals: Gross margin requirement $ 4,375
    • Less: Client’s orig. margin deposit (2 above) $ 5,625
    • Equals: Excess margin in account $ 1,250
    • The $1,250 can be used as margin toward the purchase of another security, or withdrawn from the account.
  • 11. Short Sales on Margin
    • On listed Minimum Credit securities selling: Balance in the Account:
    • Securities Eligible for Reduced Margin ____________________
    • at $2.00 and over ____________________
    • at $1.50 to $1.99 ____________________
    • at $0.25 to $1.49 ____________________
    • under $0.25 ____________________
  • 12. Short Sales
    • On listed Minimum Credit securities selling: Balance in the Account:
    • Securities Eligible for Reduced Margin 130% of market
    • at $2.00 and over 150% of market
    • at $1.50 to $1.99 $3.00 per share
    • at $0.25 to $1.49 200% of market
    • under $0.25 100% of market plus $0.25 per share
  • 13. Short Selling
    • 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?
    • Minimum account balance required 130% of $15 x 500 shares $ 9,750
    • Less: Proceeds from short sale 500 x $15 $ 7,500
    • Equals: Minimum margin required $ 2,250
  • 14. Short Selling
    • 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?
    • Minimum account balance required 130% of $12 x 500 shares $ 7,800
    • Less: Proceeds from short sale 500 x $15 $ 7,500
    • Equals: Minimum margin required $ 300
  • 15. Short Selling
    • Since the client has already deposited margin of $2,250, the account now has excess margin of $1,950 ($2,250 – $300).
    • 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.
  • 16. Short Selling
    • 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?
    • Minimum account balance required (based on current price) 130% of $18 x 500 shares $ 11,700
    • Less: Proceeds from short sale (based on original price) (500 x $15.00) $ 7,500
    • Equals: Minimum margin required $ 4,200
    • Less: Amount already deposited $ 2,250
    • Equals: Margin deficiency (for which a margin call is issued to the client) $ 1,950
  • 17. Types of Orders
    • Market Order (“At the Market”)
    • Limit Order
    • Day Order
    • GTC
    • AON
    • Any Part
    • Stop loss/buy
    • Pro / N-C
  • 18. Types of Orders
    • Market Order (“At the Market”)
    • An order to buy or sell a specific number of securities at the best price.
    • Limit Order
    • An order to buy or sell at a specific price or better.
    • Day Order
    • 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.
  • 19. Types of Orders
    • Good Till Cancelled (GTC) Order
    • An order that remains outstanding until executed or cancelled.
    • All or None Order
    • An order whereby the broker must execute the total number of securities specified before the client will accept a fill.
    • Any Part Order
    • An order in which the client will accept all stock in odd, broken or board lots up to the full amount of his order.
  • 20. Types of Orders
    • Stop Loss
    • An order to sell that becomes effective when the price of a board lot declines to a specified level.
    • Becomes a market order when the stop price is reached.
    • Stop Buy Order
    • An order to protect a short sale. It instructs the broker to purchase shares when they reach a specified price.
    • Becomes a market order when the stop price is reached.
  • 21. Types of Orders
    • The Pro or N-C Order
    • 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.
    • The Preferential Trading Rule
    • A trading regulation that means that the client’s order always has priority over a member’s order.

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