Cash and Margin Accounts Quiz

Cash Accounts and Margin Accounts

• A cash account requires full payment for securities by the settlement date: same day for Canadian Treasury bills and one business day for other securities.
• In a margin account, clients can buy or sell securities on credit, paying only a portion of the purchase with the dealer lending the remainder at interest.
• Clients in cash accounts cannot borrow funds; they must pay in full on the settlement date.
• Margin accounts allow for borrowing against the market value of securities held.

Long Positions and Short Positions

• A long position indicates ownership of a security; an investor buys shares and pays for them by the settlement date.
• A short position occurs when selling a security not owned, with the anticipation of buying it back at a lower price later.

Margin Call Example

• If the price of a security drops, the amount the dealer will lend decreases, raising the margin requirement.
• Example scenario: If ABC shares' price falls to $22, the new margin requirement might exceed the client’s original margin deposit, triggering a margin call.

Short Selling Process

• Short selling involves selling borrowed securities with the expectation to repurchase them at a lower price.
• The seller must deposit margin alongside the sale proceeds to meet account balance requirements.
• Clients monitor position closely as stock prices can rise or fall, impacting potential losses or gains.

Profit and Loss in Short Selling

• Example Scenario 1: Selling short 100 shares of FED at $5.00; if the price drops to $1.60, the profit when covering the short sale is calculated based on the difference in sale and repurchase prices.
• Example Scenario 2: If price rises to $6.00, the client incurs a loss, calculated as the higher cost to repurchase compared to the initial sale price.

Buy and Sell Orders

• Selecting the appropriate order type for clients is crucial as it can significantly influence share prices.
• Orders must be marked PRO for employee trades, ensuring client orders are filled first.

Summary of Equity Transactions

• Margin accounts permit partial financing of securities through borrowing, allowing for both long and short positions, unlike cash accounts that can only accommodate long positions.
• Profits emerge in long positions when the stock price increases and in short positions when the selling price exceeds buying costs upon re-purchase.

Test your knowledge on cash accounts, margin accounts, and the differences between long and short positions in trading. This quiz covers key concepts such as ownership, borrowing, and margin calls, essential for understanding trading practices in finance.