Equity Securities Chapter Overview

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following best defines a margin account?

An account exclusively for short selling securities.

An account that requires full payment at the time of purchase.

An account that allows borrowing against the value of securities. (correct)

An account that does not involve any form of leverage.

What is a key advantage of using a margin account over a cash account?

Margin accounts are less risky than cash accounts.

Margin accounts do not have any fees associated.

Investors can leverage their investments with borrowed funds. (correct)

Cash accounts allow for greater capital gains.

What is one of the critical risks associated with short selling?

The inability to execute trades in a volatile market.

The necessity to pay dividends on the borrowed shares. (correct)

Unlimited potential losses if the price of the security decreases.

Limited potential losses if the price of the security increases.

Which type of order guarantees the execution of a trade but not the price?

Market order Signup and view all the answers

What is the significance of the long margin requirement?

It specifies the minimum amount of equity needed for the investor to hold a long position. Signup and view all the answers

What does a stop order do in trading?

Automatically sells a stock when it reaches a certain price. Signup and view all the answers

In which scenario would an investor ideally choose a cash account over a margin account?

When they prefer to avoid paying interest on borrowed funds. Signup and view all the answers

What factor primarily affects the margin requirements of a short position?

The price volatility of the security. Signup and view all the answers

What does the shape of the yield curve represent?

The changing relationship between short-term and long-term bond yields Signup and view all the answers

According to the expectations theory, what do current long-term interest rates indicate?

Future short-term interest rates Signup and view all the answers

In a normal yield curve, how do long-term bond yields typically compare to short-term bond yields?

Long-term bond yields are usually higher Signup and view all the answers

What is the purpose of plotting the yield curve?

To visualize the relationship between maturities and bond yields Signup and view all the answers

Which theory posits that investors expect the same return from a single long-term bond as from multiple short-term bonds?

Expectations theory Signup and view all the answers

What is the primary characteristic of a limit order?

It is executed only at a specified price or better. Signup and view all the answers

What happens to a limit order if the specified price is never reached?

It is automatically canceled at the end of the trading day. Signup and view all the answers

When placing a market order to sell 1,000 shares of ABC, what price does the seller receive?

$19.90 Signup and view all the answers

In what type of market scenario would a limit order be particularly advantageous?

A less liquid market with a wide bid/ask spread. Signup and view all the answers

What is the potential downside of using a limit order?

It may not be executed if the market does not reach the specified price. Signup and view all the answers

With a day order, what happens if the order is not executed by the end of the trading day?

It is canceled. Signup and view all the answers

If a buyer places a limit order to buy ABC at $20 or less, what is true when the current ask price is $20.10?

The order will remain unfilled until the price drops. Signup and view all the answers

What is the total amount that the client needs to ensure is in the account to meet the new margin requirement?

$14,000 Signup and view all the answers

What does the ask price represent in a market order scenario?

The price sellers are willing to accept. Signup and view all the answers

How much is the client's original margin deposit compared to the new margin requirement?

It falls short of the new margin requirement by $1,500. Signup and view all the answers

What does a margin call indicate for the client?

The client must deposit additional funds to cover a shortfall. Signup and view all the answers

Which action will occur if a sell limit order at $20 or more is placed while the highest bid is $19.90?

The order cannot be executed at this time. Signup and view all the answers

What is generally the primary reason traders choose market orders over limit orders?

Market orders prioritize quick execution over price. Signup and view all the answers

What is the reason for the increase in margin requirement in this scenario?

The value of the shares has decreased, affecting the lender's willingness to lend. Signup and view all the answers

What is the percentage of the market price that the dealer is willing to lend?

50% Signup and view all the answers

If the client wants to avoid a margin call, how much additional money should they deposit?

$1,500 Signup and view all the answers

What would the total loan amount be if the shares were priced at $30 instead of $22?

$15,000 Signup and view all the answers

Which factor primarily results in a margin call being issued?

Depreciation of the asset value leading to insufficient margin. Signup and view all the answers

How does the original purchase price of the shares relate to the margin requirements?

It provides a reference for the maximum loan amount. Signup and view all the answers

What does the term 'net margin deficiency' refer to in this context?

The shortfall between the margin requirement and the actual margin deposit. Signup and view all the answers

What is the minimum margin requirement for a long position in equity securities priced at $1.70?

80% of market value Signup and view all the answers

Which statement about the margin requirements set by dealer members is accurate?

Dealer members may set more stringent requirements and frequently do so for low-priced stocks. Signup and view all the answers

Which equity security would require a 100% margin according to CIRO regulations?

A security priced at $1.40 Signup and view all the answers

How does CIRO ensure compliance with margin requirements among dealer members?

Spot checks and field examinations of firms Signup and view all the answers

What percentage of market value is required for securities eligible for reduced margin?

30% Signup and view all the answers

What document must be obtained from clients before a dealer member can engage in margin trading?

Authorized Margin Account Agreement Form Signup and view all the answers

What is the minimum margin requirement for long positions in securities priced at $1.90?

60% of market value Signup and view all the answers

What is the main regulatory organization responsible for setting margin requirements in Canada?

Canadian Investment Regulatory Organization Signup and view all the answers

Which of the following would most likely have a margin loan value?

A stock priced at $3.50 Signup and view all the answers

For a long position in equity securities priced at $3.00, what is the minimum margin required?

50% of market value Signup and view all the answers

Study Notes

Cash and Margin Accounts

Cash accounts involve the full payment for securities at the time of purchase, while margin accounts allow borrowing a portion of the purchase price.
A Margin Account Agreement Form must be obtained before transactions in margin accounts.
Margin account regulations are enforced by the Canadian Investment Regulatory Organization (CIRO).

Long Margin Accounts

Dealer members may extend credit for security purchases under strict CIRO regulations.
Minimum margin requirements for long positions depend on the market value of the securities:
- $2.00 and over: 50% of market value
- $1.75 to $1.99: 60%
- $1.50 to $1.74: 80%
- Under $1.50: 100% (no loan value)
- Securities eligible for reduced margin: 30%

Margin Call Example

A falling stock price can trigger a margin call if the margin requirement exceeds the deposit.
In a scenario where ABC shares fall to $22, the new margin requirement increases, leading to a $1,500 shortfall for the client.

Trading and Settlement Procedures

Trades in securities can be executed through different types of orders, influencing the price and timing of trades.

Types of Orders

Market Order: Executes at current market prices (e.g., buy at ask price, sell at bid price).
Limit Order: Executes only at a specified price or better, useful in less liquid markets. May not be filled if the market does not reach the limit price.
Day Order: Expires at the end of the trading day if not executed.

Yield Curve

Represents the relationship between short-term and long-term bond yields, typically upward-sloping in a normal environment.
Short-term Government of Canada bonds yield around 1%, while long-term bonds yield approximately 4% on the yield curve.
Three theories explaining yield curve shapes:
- Expectations Theory: Suggests long-term interest rates reflect future short-term rates.
- Liquidity Preference Theory: Investors require higher yields for longer maturities due to increased risk.
- Market Segmentation Theory: Markets for different maturities are separate, with unique supply and demand dynamics.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers the key concepts in equity transactions, including the distinctions between cash and margin accounts, as well as long and short positions. You will explore margin account transactions, short selling regulations, techniques, and risks. Enhance your understanding of these critical finance concepts.

Equity Securities Chapter Overview

Podcast Beta

Questions and Answers

Which of the following best defines a margin account?

What is a key advantage of using a margin account over a cash account?

What is one of the critical risks associated with short selling?

Which type of order guarantees the execution of a trade but not the price?

What is the significance of the long margin requirement?

What does a stop order do in trading?

In which scenario would an investor ideally choose a cash account over a margin account?

What factor primarily affects the margin requirements of a short position?

What does the shape of the yield curve represent?

According to the expectations theory, what do current long-term interest rates indicate?

In a normal yield curve, how do long-term bond yields typically compare to short-term bond yields?

What is the purpose of plotting the yield curve?

Which theory posits that investors expect the same return from a single long-term bond as from multiple short-term bonds?

What is the primary characteristic of a limit order?

What happens to a limit order if the specified price is never reached?

When placing a market order to sell 1,000 shares of ABC, what price does the seller receive?

In what type of market scenario would a limit order be particularly advantageous?

What is the potential downside of using a limit order?

With a day order, what happens if the order is not executed by the end of the trading day?

If a buyer places a limit order to buy ABC at $20 or less, what is true when the current ask price is $20.10?

What is the total amount that the client needs to ensure is in the account to meet the new margin requirement?

What does the ask price represent in a market order scenario?

How much is the client's original margin deposit compared to the new margin requirement?

What does a margin call indicate for the client?

Which action will occur if a sell limit order at $20 or more is placed while the highest bid is $19.90?

What is generally the primary reason traders choose market orders over limit orders?

What is the reason for the increase in margin requirement in this scenario?

What is the percentage of the market price that the dealer is willing to lend?

If the client wants to avoid a margin call, how much additional money should they deposit?

What would the total loan amount be if the shares were priced at $30 instead of $22?

Which factor primarily results in a margin call being issued?

How does the original purchase price of the shares relate to the margin requirements?

What does the term 'net margin deficiency' refer to in this context?

What is the minimum margin requirement for a long position in equity securities priced at $1.70?

Which statement about the margin requirements set by dealer members is accurate?

Which equity security would require a 100% margin according to CIRO regulations?

How does CIRO ensure compliance with margin requirements among dealer members?

What percentage of market value is required for securities eligible for reduced margin?

What document must be obtained from clients before a dealer member can engage in margin trading?

What is the minimum margin requirement for long positions in securities priced at $1.90?

What is the main regulatory organization responsible for setting margin requirements in Canada?

Which of the following would most likely have a margin loan value?

For a long position in equity securities priced at $3.00, what is the minimum margin required?

Study Notes

Cash and Margin Accounts

Long Margin Accounts

Margin Call Example

Trading and Settlement Procedures

Types of Orders

Yield Curve

Studying That Suits You

Related Documents

Description

More Quizzes Like This

Financing Transactions Quiz

Equity Transactions and Margin Accounts

Equity Transactions: Cash and Margin Accounts

Equity Securities Chapter Overview