Csc3 Inv Products Ch 9
- 1. CSI Global Education Inc. Investment Products CHAPTER 9: Equity Securities: Equity Transactions
- 2. Chapter Highlights There are a variety of ways in which you can buy and sell equities. You can buy the security outright through a cash account or go long or short through a margin account. There are also many types of orders to consider when buying and selling securities.
- 3. Speculative Trading Practices Buying on Margin Long Predicting prices will rise Short Selling on Margin Short Predicting prices will fall Advantages & disadvantages of each? Which position is riskier? Why?
- 4. Margin Example – Long Position An investor believes that a stock will increase from $25 to $30. The investor has $2,500 to invest ($2,500 is usually the minimum required investment for margins, and stock margin accounts are generally based on a 50% margin). Cash Account The investor purchases 100 shares and the stock moves as predicted. The investor’s rate of return would be:
- 5. Margin Example Margin Account – Advantage of Leverage The investor opens a margin account and purchases 200 shares. The broker puts up $2,500 and the investor puts up the other $2,500. The share price goes to $30 per share. The investor’s rate of return would be:
- 6. Margin – Long Position On listed securities selling: Maximum Loan Value: Securities Eligible for Reduced Margin ____________________ at $2.00 and over ____________________ at $1.75 to $1.99 ____________________ at $1.50 to $1.74 ____________________ under $1.50 ___________________
- 7. Margin On listed selling: Maximum Securities Loan Value: Securities Eligible for Reduced Margin 70% of market at $2.00 and over 50% of market value at $1.75 to $1.99 40% of market at $1.50 to $1.74 20% of market under $1.50 No loan value
- 8. Margin Exercise a) Assume an investor goes long 5,000 shares of ABC Co. on margin when it sells for $2.25 per share (not eligible for reduced margin). How much would the investor have to put up as margin? Total cost to buy ABC shares $ 11,250 Less: Dealer’s maximum loan (50% of $2.25 x 5,000) $ 5,625 Equals: Margin which is put up by the client $ 5,625 Or 50% x $11,250 = $5,625
- 9. Margin Exercise b) Assume the price of ABC’s shares decline to $1.85. Will the investor get a margin call? If so how much? Original cost of ABC shares (from above) $ 11,250 Less: Dealer’s revised maximum loan (40% of $1.85 x 5,000) $ 3,700 Equals: Gross margin requirement $ 7,550 Less: Client’s original margin deposit (2 above) $ 5,625 Equals: Net margin deficiency (for which a margin call is issued to the client) $ 1,925
- 10. Margin Exercise c) Assume in this case the price of ABC’s shares – instead of declining to $1.85 – had increased from $2.25 to $2.75. What amount must be added to, or can be withdrawn from the account? Original cost of ABC shares (1 above) $ 11,250 Less: Dealer’s revised maximum loan (50% of $2.75 x 5,000) $ 6,875 Equals: Gross margin requirement $ 4,375 Less: Client’s orig. margin deposit (2 above) $ 5,625 Equals: Excess margin in account $ 1,250 The $1,250 can be used as margin toward the purchase of another security, or withdrawn from the account.
- 11. Short Sales on Margin On listed Minimum Credit securities selling: Balance in the Account: Securities Eligible for Reduced Margin ____________________ at $2.00 and over ____________________ at $1.50 to $1.99 ____________________ at $0.25 to $1.49 ____________________ under $0.25 ____________________
- 12. Short Sales On listed Minimum Credit securities selling: Balance in the Account: Securities Eligible for Reduced Margin 130% of market at $2.00 and over 150% of market at $1.50 to $1.99 $3.00 per share at $0.25 to $1.49 200% of market under $0.25 100% of market plus $0.25 per share
- 13. Short Selling a) Assume that an investor sells short 500 shares of FED Company Ltd. (eligible for reduced margin) at its current market price of $15. How much must the investor put up as margin? Minimum account balance required 130% of $15 x 500 shares $ 9,750 Less: Proceeds from short sale 500 x $15 $ 7,500 Equals: Minimum margin required $ 2,250
- 14. Short Selling b) Assume that, later on, the price of FED’s shares declines to $12. Will the client have to put up more margin? How much must be added to or could be withdrawn from the account? Minimum account balance required 130% of $12 x 500 shares $ 7,800 Less: Proceeds from short sale 500 x $15 $ 7,500 Equals: Minimum margin required $ 300
- 15. Short Selling Since the client has already deposited margin of $2,250, the account now has excess margin of $1,950 ($2,250 – $300). This amount may be withdrawn, or used to purchase more securities, or left in the account to cover possible margin calls should FED’s price begin to rise.
- 16. Short Selling c) If the price of FED’s shares advanced to $18 instead of declining, would the client receive a margin call? If so, for how much? Minimum account balance required (based on current price) 130% of $18 x 500 shares $ 11,700 Less: Proceeds from short sale (based on original price) (500 x $15.00) $ 7,500 Equals: Minimum margin required $ 4,200 Less: Amount already deposited $ 2,250 Equals: Margin deficiency (for which a margin call is issued to the client) $ 1,950
- 17. Types of Orders Market Order (“At the Market”) Limit Order Day Order GTC AON Any Part Stop loss/buy Pro / N-C
- 18. Types of Orders Market Order (“At the Market”) An order to buy or sell a specific number of securities at the best price. Limit Order An order to buy or sell at a specific price or better. Day Order An order to buy or sell that is valid only for the day it is given. All orders are considered day orders unless otherwise stated.
- 19. Types of Orders Good Till Cancelled (GTC) Order An order that remains outstanding until executed or cancelled. All or None Order An order whereby the broker must execute the total number of securities specified before the client will accept a fill. Any Part Order An order in which the client will accept all stock in odd, broken or board lots up to the full amount of his order.
- 20. Types of Orders Stop Loss An order to sell that becomes effective when the price of a board lot declines to a specified level. Becomes a market order when the stop price is reached. Stop Buy Order An order to protect a short sale. It instructs the broker to purchase shares when they reach a specified price. Becomes a market order when the stop price is reached.
- 21. Types of Orders The Pro or N-C Order Orders from members (partners, directors, IAs etc.) are stamped “Pro” (Professional) N-C (Non-Client) or EMP (employee), to deal with the preferential trading rule. The Preferential Trading Rule A trading regulation that means that the client’s order always has priority over a member’s order.