Chapter 4

1. What conditions result in account being restricted? What prompts a margin call?
***In case the equity level of the investor falls due to a decrease in the price of marginable
securities, the account is said to be restricted. This implies that the investor would not be
allowed to make further transactions on margin. A margin call is due when the equity of the
investor falls below the maintenance margin requirements.
2. How can an investor sell a security that is not currently owned?
*** An investor can sell a security that is not currently owned by selling it short. In case of
short selling, the broker borrows the security from one investor and sells it short in the name
of another investor. The investor, in whose name the short sale has been made, would close
his short position by buying the security at a price lower than the one at which the security
has been sold short in order to earn a profit. However, if the price rises, the investor sustains
a loss.

3. What conditions must be met for an investor to sell short?

*** Short sellers must have a margin account to sell short and must put up margin if their
short position goes long. Short sales a permitted only on rising prices like a short seller can
sell short at the last trade price only if that price exceeds the last price before it. Even if the
order has been placed, it will not be executed unless an up-tick occurs. There is no time limit
on a short sale. Short sellers can remain short indefinitely until the lenders of the securities
sold short want them back. In such cases brokers borrow from elsewhere, but for tightly held
or thinly capitalized stock, it may not be possible to arrange the stocks from anywhere and
the investor would have to pay in cash to close his short position. The net proceeds from the
short sale, plus the required margins are held by the brokers, thus the short seller receives no
immediate funds. If the price of the stock rises instead of falling, the investor is likely to
receive a margin call.

 WHAT HAVE I LEARNED IN THIS CHAPTER?

***In this chapter, I learned on how to trade securities, what consists the brokerage firms,
from where does full-service stockbrokers earn their incomes, the difference between the
cash brokerage account and the margin account, the attributes of the asset management
accounts and the wrap accounts, I learned also about brokerage commissions, on how to
invest without a broker, and as to why are investors interested in having margin accounts. I
learned several more about some related topics to the above-mentioned.