CHAPTER

TWO

BUYING AND SELLING SECURITIES

THE SECURITIES MARKET

BROKERS
DEFINITION: act as agents for investors and compensated by commissions.

THE SECURITIES MARKET

Types of Brokerage Firms:
Retail Regional Discount

Commission

Stock Order
Order Specification - Stock name - Order buy or sell - Order size - Maximum time order to be left outstanding - Order type to be used
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ORDERING
Order Size
Round lots Odd lots

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

ORDERING
Time Limits to Orders
some typical time limits:
Day order good-till-canceled (GTC) fill-or-kill (FOK) discretionary

ORDERING
Types of Orders:
Market order the broker is instructed to buy or sell a stated number of shares immediately

ORDERING
Types of Orders:
Limit order a limit price is specified by the investor when the order is placed

ORDERING
Types of Orders:
Stop order (Stop-loss) - a trading order that specifies a stop price

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ORDERING
Types of Orders:
Stop limit trading order specifies both a stop price and a limit price

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

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

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

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MARGIN ACCOUNTS
MARGIN PURCHASES:
- Purchase of securities financed by borrowing a portion of the purchase price from a brokerage Initial Margin Requirement minimum % of a margin purchase price that must come from the investors own fund Actual Margin:
= Market Value Loan Market Value
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Question
Kimone Mesquita purchases on margin 200 shares of Dwayne Blidgens Enterprise stock at $75 per share. The initial margin requirement is 55%. Prepare Kimone Mesquitas balance sheet for this investment at the time of pruchase.

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Answer
Assets Securities $75/shr 200 shrs = $15,000 Liabilities & Net Worth Liabilties Margin Loan (1-.55) $75/shr 200 shrs = $6,750 Net Worth $15,000 - $6,750 = $8,250

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Questions
Nordia Richards opened a margin account at Capital & Credit Securities Limited. Richards initial investment was to purchase 200 shares of Melanine Facey Corporation on margin at $40 per share. Richards borrowed $3,000.00 from a broker to complete the purchase. A) At the time of the purchase, what was the collateral in Richards account? B) If Facey stock subsequently rises in price to $60 per share, what is the collateral in Richards account? C) If Facey stock subsequently falls in price to $35 per share, what is the collateral in Richards account?
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Answer
An investors actual collateral is simply the market value of the investors assets in the margin account. Thus for Richards: a. 200 shrs $40/shr = $8,000 b. 200 shrs $60/shr = $12,000 c. 200 shrs $35/shr = $7,000

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

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MARGIN ACCOUNTS
UNDERMARGINED
the investors account value has fallen below the maintenance level

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MARGIN ACCOUNTS
Formula for determining the minimal amount of collateral that the investor must keep in his or her account is calculated as follows:
__________Loan_______________ 1 Maintenance margin requirement The above formula is used to determined if the account is undermargined

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

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MARGIN ACCOUNTS
OVERMARGINED:
if the price of the securities rises above the maintenance margin The following formula is used to determine if the account is over restricted: Loan/1- Initial margin requirement.

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MARGIN ACCOUNTS
OVERMARGINED:
investor may withdraw some funds

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

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SHORT SALES
SHORT-SALE MARGINS
Initial margin

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

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

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