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Questions and Answers
What distinguishes a cash account from a margin account?
What distinguishes a cash account from a margin account?
Which statement correctly describes the establishment of margin positions?
Which statement correctly describes the establishment of margin positions?
What is the effect of a price increase on a long margin position?
What is the effect of a price increase on a long margin position?
Which of the following is true regarding trading and settlement procedures for equity transactions?
Which of the following is true regarding trading and settlement procedures for equity transactions?
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How do limit orders differ from market orders in equity trading?
How do limit orders differ from market orders in equity trading?
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Which scenario illustrates short selling in equity transactions?
Which scenario illustrates short selling in equity transactions?
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What is the margin requirement for a client who buys 1,000 shares of ABC Company at $25 per share with a loan rate of 50%?
What is the margin requirement for a client who buys 1,000 shares of ABC Company at $25 per share with a loan rate of 50%?
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If the price of ABC stock increases to $29, what happens to the client's margin?
If the price of ABC stock increases to $29, what happens to the client's margin?
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In Scenario 1, if the price of ABC stock declines to $22, what will be the new value of the client's investment?
In Scenario 1, if the price of ABC stock declines to $22, what will be the new value of the client's investment?
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What is the maximum loan amount the firm provides for the purchase of 1,000 shares of ABC at $25 per share?
What is the maximum loan amount the firm provides for the purchase of 1,000 shares of ABC at $25 per share?
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If a client puts up $12,500 as their margin for buying ABC shares, what percentage of the total investment does this represent?
If a client puts up $12,500 as their margin for buying ABC shares, what percentage of the total investment does this represent?
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What would the client's total investment value be if they bought shares at $25, then the price dropped to $22?
What would the client's total investment value be if they bought shares at $25, then the price dropped to $22?
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In margin trading, what does the term 'margin' primarily refer to?
In margin trading, what does the term 'margin' primarily refer to?
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If the loan percentage decreases to 30%, how much would the firm lend to the client for ABC shares priced at $25?
If the loan percentage decreases to 30%, how much would the firm lend to the client for ABC shares priced at $25?
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An investor who puts up $12,500 to buy ABC shares at a loan rate of 50% has what type of account?
An investor who puts up $12,500 to buy ABC shares at a loan rate of 50% has what type of account?
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What would result from a decrease in ABC stock price if the client has not met the margin call?
What would result from a decrease in ABC stock price if the client has not met the margin call?
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What is the minimum account balance required for a client to sell short 100 shares of FED Company Ltd. at a market price of $5.00?
What is the minimum account balance required for a client to sell short 100 shares of FED Company Ltd. at a market price of $5.00?
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If the price of FED's shares declines to $4.00, how much excess margin does the client have in their account?
If the price of FED's shares declines to $4.00, how much excess margin does the client have in their account?
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What happens to the minimum margin required if FED's share price decreases to $1.60?
What happens to the minimum margin required if FED's share price decreases to $1.60?
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What percentage of the market value must a client provide as margin when selling short?
What percentage of the market value must a client provide as margin when selling short?
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When a client's account has excess margin, what can they choose to do with that amount?
When a client's account has excess margin, what can they choose to do with that amount?
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How is the required minimum account balance calculated when selling short?
How is the required minimum account balance calculated when selling short?
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What is a potential consequence of regulators banning short selling for certain stocks?
What is a potential consequence of regulators banning short selling for certain stocks?
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During which financial event did the SEC first implement a ban on short sales of banks and financial institutions?
During which financial event did the SEC first implement a ban on short sales of banks and financial institutions?
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In a trading scenario, if a stock is experiencing a price spike due to short seller coverage, what is likely happening?
In a trading scenario, if a stock is experiencing a price spike due to short seller coverage, what is likely happening?
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What role might an investment dealer play in a traditional equity transaction?
What role might an investment dealer play in a traditional equity transaction?
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What is a primary feature of trading on margin compared to selling short?
What is a primary feature of trading on margin compared to selling short?
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What type of risk is specifically associated with regulatory actions affecting market positions?
What type of risk is specifically associated with regulatory actions affecting market positions?
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Which of the following statements is true regarding short selling during a regulatory ban?
Which of the following statements is true regarding short selling during a regulatory ban?
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How do trading and settlement procedures typically operate in equity transactions?
How do trading and settlement procedures typically operate in equity transactions?
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Study Notes
Equity Transactions Overview
- Key concepts include cash accounts, margin accounts, long positions, and short positions.
- Understanding margin account transactions and short selling rules is pivotal.
- Importance of recognizing the associated risks with margin trading and short selling.
Cash and Margin Accounts
- Cash accounts require full payment for securities upon purchase.
- Margin accounts allow investors to borrow funds to purchase securities, leveraging their investment.
- Margin requirements dictate the minimum equity an investor must maintain in their margin account.
Long and Short Positions
- Long position involves buying securities with the expectation their price will rise.
- Short position entails selling borrowed securities with the expectation their price will decline.
Margin Account Transactions
- Margin allows for increased purchasing power but introduces additional risk.
- Price changes in securities directly affect margin requirements:
- If the price of a long position security falls, the margin requirement increases, risking a margin call.
- Conversely, if the price rises, the margin requirement may decrease, resulting in excess margin that can be utilized for other transactions.
Trading and Settlement Procedures
- Trading typically involves investment dealers acting as agents or principals in transactions.
- Equity transactions must adhere to processes for trade confirmation, settlement date, and delivery obligations.
Order Types in Securities Transactions
- Various orders include market orders, limit orders, and stop orders.
- Each order type serves distinct purposes and executes differently based on market conditions.
Regulatory Risks in Short Selling
- Regulatory risks may arise if authorities, such as the SEC, ban short selling on certain stocks during market turmoil, compelling short sellers to cover positions at potential losses.
Example Calculations in Margin Accounts
- In a scenario with ABC Company shares priced at $25, purchasing 1,000 shares on a 50% margin requires $12,500 equity from the investor.
- Changes in stock prices illustrate implications for margin requirements:
- If ABC’s price drops to $22, margin increases (risking a margin call).
- If the price rises to $29, the investor’s equity also increases.
Short Selling Margin Requirements
- For selling short 100 shares at $5.00, the minimum account balance is 150% of the market value, necessitating a $750 margin (includes proceeds from the sale).
- Scenarios during short selling reveal impacts on required margin:
- A price drop to $4.00 improves margin sufficiency, while a further drop to $1.60 may lead to increased margin needs.
Yield to Maturity (YTM) in Bond Transactions
- YTM is a crucial indicator of the average return expected on a bond held to maturity.
- Essential elements affecting YTM calculations include coupon rate, purchase price, maturity value, and reinvestment assumptions.
Differences in Yield Metrics
- Current yield, approximate YTM, and YTM differ based on calculation methods and assumptions regarding reinvestment of coupon payments.
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Description
This quiz covers the essential concepts of equity transactions, including cash vs margin accounts and long vs short positions. You will also explore margin account transactions, short selling rules, techniques, and associated risks. Get ready to deepen your understanding of equity securities.
