V. STOCKS (PART 2) Long and Short Purchases and Sales,

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V. STOCKS (PART 2) Long and Short Purchases and Sales,

  1. 1. V. STOCKS (PART 2)
  2. 2. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Stock Purchase Basics </li></ul><ul><ul><li>Broker – Buys and sells securities for individuals and institutions in return for a commission or a set fee </li></ul></ul><ul><ul><li>Dealer – Buys and sells securities for themselves and/or their firms </li></ul></ul><ul><ul><li>Broker – Dealer – SEC licensed to buy and sell securities for both their firms and their clients </li></ul></ul><ul><ul><li>Traders – Buy and sell securities exclusively for their own portfolios </li></ul></ul>
  3. 3. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Types of Investors </li></ul><ul><ul><li>Retail Investors – Can be any size, but generally individuals </li></ul></ul><ul><ul><li>Mini Institutional – Generally purchase or sell stock in 1,000 to 9,999 share blocks, can be small pension and health funds (corporate), trust funds, etc. </li></ul></ul><ul><ul><li>Institutional – 10,000 or more shares per transaction, includes financial institutions, large trust funds, and mutual funds ( http:// nystrs.org/main/library/AnnualReport/Investments.pdf ) </li></ul></ul><ul><ul><li>Managed Account – Paid money manager, can be discretionary (can conduct trades without client approval) or non-discretionary (all trades must be approved by the client) </li></ul></ul>
  4. 4. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Types of Brokerage Firms </li></ul><ul><ul><li>Full Service – Provide information on investments along with brokerage services – most expensive </li></ul></ul><ul><ul><li>Discount Brokers – Carry out transactions, but generally offer limited research and services or research and services on a fee basis only </li></ul></ul><ul><ul><li>Online Brokerage – Trades initiated online, clients may have limited or no contact at all with a broker, and limited or fee based advice - cheapest </li></ul></ul><ul><ul><li>In all instances, cost of trading = commission (to broker and to firm) + fees (to the firm) + taxes </li></ul></ul>
  5. 5. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Types of Orders </li></ul><ul><ul><li>Market Order – Purchase or sale of stock at whatever the current market price is </li></ul></ul><ul><ul><li>Stop Order – The trade occurs once the stock hits a specified price – once the price is hit, it converts to a market order – stock price at purchase or sale can be higher or lower than stop order price depending upon when execution of the trade occurs </li></ul></ul>
  6. 6. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><ul><li>Limit Order – Purchase or sale of a security occurs only at the specified price </li></ul></ul><ul><ul><li>Stop Limit Order – Purchase or sale occurs when the stop price is reached, however, the trade may only be executed at more than the limit price for a sale or less than the limit price for a purchase </li></ul></ul><ul><ul><li>Good Till Cancelled (GTC) – The order remains open until filled </li></ul></ul><ul><ul><li>Day Order – Only remains open until the close of business on the day placed </li></ul></ul>
  7. 7. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Buying on Margin </li></ul>
  8. 8. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Buying on Margin </li></ul><ul><ul><li>Leverage – Borrowing money to make an investment – can multiply both gains and losses </li></ul></ul><ul><ul><li>Types of Margin </li></ul></ul><ul><ul><ul><li>Initial Margin – Must have at least 50% of the purchase price of the securities in cash or securities to purchase on margin </li></ul></ul></ul><ul><ul><ul><li>Maintenance Margin – Once purchased, cash and securities must have a market value of at least 25% (by regulation) or 30% (per most brokerage firms) of the total value of the account </li></ul></ul></ul>
  9. 9. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><ul><li>Margin Call – When the price of securities falls, the customer must either “pay up” additional cash and securities until the 25% (30%) minimum is met </li></ul></ul>
  10. 10. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Examples </li></ul>
  11. 11. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Selling Short – When an investor sells a stock that he or she does not own, anticipating a profit when the stock price falls </li></ul><ul><ul><li>Covering the Short – Purchasing stock to replace the stock that you did not own but sold </li></ul></ul><ul><ul><li>Squeeze Play – When a heavily shorted stock rises in price, forcing a high volume of purchasers to cover their open short sale positions </li></ul></ul>
  12. 12. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><ul><li>Short Ratio </li></ul></ul><ul><ul><li>= Number of Shares Sold Short </li></ul></ul><ul><ul><li> Average Daily Share Transactions </li></ul></ul><ul><ul><li>An indicator of whether share transactions are purchases, sales, or sales by traders and others who believe that the stock will go down in price. </li></ul></ul><ul><ul><li>Short as a Percentage of Float </li></ul></ul><ul><ul><li> = Number of Shares Short </li></ul></ul><ul><ul><li>Total Number of Shares Outstanding </li></ul></ul><ul><ul><li>Indicates how much of the total stock available is “tied up” in short sales. </li></ul></ul>
  13. 13. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul>
  14. 14. <ul><li>Long and Short Purchases and Sales, Margin Purchases, and Leverage </li></ul><ul><li>Examples </li></ul>

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