In simpler sense, made to order
IN-TEXT ACTIVITY
The decision to invest unto securities, such as
stocks, bonds, money market or other financial
instrument, one should have a general information on
how the entities are working and handling the
transactions.
Primarily, if one has sufficient money to invest
but have limited knowledge on handling investments
should find people that will help them manage or grow
it- find a person as financial advisor, wealth managers or
simply broker.
Brokers or brokerage company, in finance, is a
person or entity who buys and sells goods or assets for
others. Brokers are traditionally classified either as full-
service brokers, discount brokers or dee-discount
brokers.
Types of Broker Description
Full-service Is a licensed financial broker-dealer
broker firm that provides its clients with a
wide range of financial services,
research, and advice. And include
portfolio analysis and construction,
estate planning, tax advice, access
to IPO shares, access to foreign
markets, and so on.
In simpler sense, it is a total
package payable at a high price or
commission.
Discount broker A discount broker is a stockbroker
who carries out buy and sell orders
at a reduced commission rate.
However, a discount broker does
not provide investment advice or
perform analysis on a client's
behalf, unlike a full-service broker.
They do not offer personal
consultations, advice, research, tax
planning, and estate planning
services for customers.
In simpler sense, it is a limited
package that offers less
commission expenses.
Deep-discount provides fewer services to clients
broker than standard brokers; such
brokers typically provide little more
than the fulfillment of stock and
option trades, charging a flat fee for
each.
firms or brokers that offer less
services than discount broker.
Because of advancement in technology and to internet
there is vast increase in the number of companies under
discount broker and deep-discount broker category.
Broker-Customer Relations:
The broker-client relationship is of agent and principal.
The broker as the agent who acts in the orders of the
client-principal. Your broker has a legal duty to act in
your best interest.
Broker can advise you the relevant information on your
portfolio or investment to be done, because of their
specialization, but at the same time they do not have a
duty to provide you with guaranteed purchase and sale
recommendations. The minimum expectation, to a
broker is their duty to exercise reasonable care in
formulating recommendations. The broker relies on
commissions generated from your account.
Brokerage Accounts.
A cash account is the arrangement where securities can
be purchased to the extent that sufficient cash is
available in the account. Simpler, it is purchase on a
cash basis and availability.
Margin Accounts is a brokerage account in which,
subject to limits of its terms and conditions, securities
can be bought and sold on credit or loan.
For example:
Assume that you held this account in a Brokerage firm:
Assets Liabilities and Account
Equity
1,000 240,000 Margin 60,000
The
shares of Loan
JFC
Account 180,000
Equity
Total 240,000 Total 240,000
table above show:
 That you held 1,000 shares of JFC with a value
of P240,000
 The stocks were purchased using partly margin
loan and your investment
o Margin loan (60,000 )is treated as your
liability in the brokerage firm, because
 the firm allows you to purchase the
shares in credit then it is entitled to
collect from you cost of money for
borrowing is termed as the broker’s call
money rate. This call money rate varies
per company.
o The account equity (180.000) is the
actual amount of money you give to
the broker.
o The margin is the portion of the
investment that is not borrowed, at the
case it is at 75% of the value of stock
(180,000 / 240.000).
 The minimum margin that must be supplied on
a securities purchase is called initial margin. For
example, 50% must be the initial margin for a
purchase of a stock.
 Maintenance margin, on the other hand, is the
minimum amount required to be maintained in
the account regardless of the transactions. As
similar with bank maintaining balance.
Example, 25% of the account must be
maintained. The percentage or the value of this
margin is set by the brokerage companies.
 In simpler sense, the account presented above,
showed that the securities (shares of JFC) had
been purchase by your money and a loan from
the brokerage company.
 IF you failed to maintain the maintenance
Proceed from sale
margin, the brokerage firm may demand Initial Margin Deposit
for more to add to your account, pay off Total
part of the loan or sell enough securities to
bring your margin back to an acceptable level.
This process is called margin call. For example,
your margin on the previous account was
brought to 20% due to changes in the price,
with a 25% margin maintenance requirement,
the brokerage firm will send you a margin call.
 Margin agreement can be also termed as
hypothecation agreement. The hypothecation
is pledging securities as collateral against loan.
This process protects the interest of the broke
because securities can be sold by the broker if
the client is unable or unwilling to meet a
margin call.
Long Position and Short Position.
In finance, long position means an investor has bought
and owns shares of stock. By contrast, if the investor
has short positions, the investor owes those stocks to
someone, but does not actually own them yet.
Long Position Short Position
You purchased and You sold 500 shares of
owned 500 SMC shares GLO (Globe Telecom)
and as of today you did
not own such shares
In layman’s term the long position is buying and owning
of stocks while short position is selling of stocks.
You may enter unto a short sale of securities.
Technically, you borrow the shares of stock from your
broker and then you sell them. At some future date, you
will buy the same number of shares that you originally
borrowed and return them, thereby eliminating the
short position. Eliminating the short position is often
called covering the position or curing the short
For example:
Assuming, you want to short 200 shares of Manila
Electric (MER) when the price is at 200. This means that
you will borrow shares of stocks worth P40,000 (200
shares X 200). Assume further, that the broker requires
that you must deposit at least half of the security sold
short. The balance sheet of the account is presented
Asset Liabilities and Account Equity
40,000 Short Position 40,000
20,000 Account Equity 20,000
60,000 Total 60,000
below.
The following items are presented on the balance sheet:
1. Proceed from sale. The 40,000 is the amount
you received in selling the account
2. Margin deposit. Is equivalent to the deposit
required by the broker to facilitate the
borrowing of stocks.
3. Short Position Because you must eventually buy
back the stock and return it, you have a liability
of 40,000
 4. Account Equity. The amount is the difference Horizon- is the planned life of the investment,
between the total account value and the total or the holding period requirement. For example, your
liabilities. saving for retirement, where the horizon is depending
on your age, can be very long. You plan to save for a trip
Subsequently, (1) the stock price falls to P180 per share,
to Boracay in the near future is relative short horizon.
and (2) the stock price rises to P230.
Liquidity- refers to the length of time an asset is
IF the stock price will fall to P180 you will still be
converted unto cash. As investor, one has to consider
liable for 200 shares and of total of 36,000. The
this as particularly important because of the necessity
decrease in your liability of P4,000 can be treated as
to use the funds if ever converted and the possibility of
your gain for the position and credited to the account
significant price changes affects the investment.
equity. The assets account will not change.
Taxes. Because different types of investments
Asset Liabilities and Account
Equity are taxed differently, and taxes is burdensome.
Proceed from 40,000 Short Position 36,000
sale
As countermeasures and in response with the
Initial Margin 20,000 Account Equity 24,000 constraints enumerated above, investors must
Deposit formulate strategies to effectively achieve their
Total 60,000 Total 60,000 objectives. In formulation of the strategies, the
following items must be considered:
However, if the price of the stocks would The need for investment management requires
increase, you will still owe 100 shares of MER with value investors’ decision to who will manage their
of P230 each share. Then the total amount of the short investments primarily to increase their wealth in
position will rise to 46,000. exchange of the professional money managers fee. The
Asset Liabilities and Account investment in this course is the buying and selling of
Equity instruments.
Proceed from 40,000 Short Position 46,000
sale Then consider the market timing. A decision
Initial Margin 20,000 Account 14,000 whether you will try to buy or sell in anticipation of the
Deposit Equity future direction of the overall market. For example, you
Total 60,000 Total 60,000
might move money into the stock market when you thin
Again, the total assets account is not affected, only the
stock prices will rise, or you might move money out if
liabilities and equity were changed. Your liabilities will
the stock market when you think stock prices will fall.
increase by P6,000 and such amount is the loss for the
increase in the value of your short sale. The equity Asset Allocation is of similar importance with
account will always be the residue of the total assets above mentioned strategies, this is the distribution of
less the liabilities. investment funds among broad classes of assets.
Considering this process, one must decide what
Investors Constraints:
percentage of money will be place in each of the broad
Resources – because all of we have scarce resources, categories.
one cannot invest at all if they have no money. But
Then the security selection, requires the
currently, several financial institutions offer investment
choosing of specific securities within a particular class.
facilities in just 5,000 pesos. But again, different
For example, you want 40% of your money in small
financial instrument offers different return and holding
stocks (asset allocation), then next is to identify which
period requirements. Such factor shall affect your
small stocks to buy. In considering which specific stock
strategy.
is active or passive to be kept in the account.
SESSION SUMMARY
Investing in securities requires an ample knowledge to
account for the gains or losses one will received during
the existence of contract with the broker.
The long position and short position are universal in investing. Brokers has the process of recording and
transactions of securities and brokers can facilitate and keeping the clients account, to which a client must be
allow an individuals or group of persons to go into aware of.