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.