CHAPTER 2 BUYING AND SELLING SECURITIES

THE SECURITIES MARKET n BROKERS DEFINITION: act as agents for investors and compensated by commissions.

THE SECURITIES MARKET n Types of Firms: Retail Regional Discount

ORDERING n Order Size Round lots Odd lots

ORDERING n Time Limits to Orders the investor must specify a time limit when ordering from a broker

ORDERING n Time Limits to Orders some typical time limits: 3 day 3 good-til-canceled (GTC) 3 fill-or-kill

ORDERING n Types of Orders: Market order

ORDERING n Types of Orders: Limit order

ORDERING n Types of Orders: Stop order

ORDERING n Types of Orders: Stop limit

MARGIN ACCOUNTS n THE PURPOSE OF MARGIN ACCOUNTS: these accounts act as a line of credit for more money than is in the investor’s cash account.

MARGIN ACCOUNTS n SOME FEATURES OF MARGIN ACCOUNTS: a hypothecation agreement: 3 allows pledging and lending

MARGIN ACCOUNTS n SOME FEATURES OF MARGIN ACCOUNTS: a street name: 3 facilitates pledging/lending

MARGIN ACCOUNTS n MARGIN PURCHASES: Initial Margins are required Actual Margin: = Market Value - Loan Market Value

MARGIN ACCOUNTS n MAINTENANCE MARGINS: Purpose: 3 to prevent default by the investor 3 to be maintained at the level or above 3 to restore when undermargined

MARGIN ACCOUNTS n UNDERMARGINED the investor’s account value has fallen below the maintenance level

MARGIN ACCOUNTS n UNDERMARGINED results in a margin call by broker to investor who may 3 deposit cash or securities into the account 3 pay off pay off part of the loan 3 sell some securities

MARGIN ACCOUNTS n OVERMARGINED: if the price of the securities rises above the maintenance margin

MARGIN ACCOUNTS n OVERMARGINED: investor may withdraw some funds

SHORT SALES n WHAT IS A SHORT SALE? a sale which involves the investor borrowing stock from his/her broker to sell at a higher price and repurchase at a later time at a lower price

SHORT SALES n RULES FOR SHORT SALES: The Up-tick Rule Delivery Term of the Loan

SHORT SALES n SHORT-SALE MARGINS Initial margin

SHORT SALES n SHORT-SALE MARGINS Actual margin = (Short Sales Proceeds + Initial Margin) - Loan Loan

SHORT SALES n SHORT-SALE MARGINS Maintenance margin 3 equal to the current dollar value of the loan.

END OF CHAPTER 2