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Questions and Answers
Which of the following best defines a margin account?
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?
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?
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?
Which type of order guarantees the execution of a trade but not the price?
What is the significance of the long margin requirement?
What is the significance of the long margin requirement?
What does a stop order do in trading?
What does a stop order do in trading?
In which scenario would an investor ideally choose a cash account over a margin account?
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 factor primarily affects the margin requirements of a short position?
What does the shape of the yield curve represent?
What does the shape of the yield curve represent?
According to the expectations theory, what do current long-term interest rates indicate?
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?
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?
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?
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 is the primary characteristic of a limit order?
What happens to a limit order if the specified price is never reached?
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?
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?
In what type of market scenario would a limit order be particularly advantageous?
What is the potential downside of using a limit order?
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?
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?
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 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?
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?
How much is the client's original margin deposit compared to the new margin requirement?
What does a margin call indicate for the client?
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?
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 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 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?
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?
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?
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?
Which factor primarily results in a margin call being issued?
How does the original purchase price of the shares relate to the margin requirements?
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 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?
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 statement about the margin requirements set by dealer members is accurate?
Which equity security would require a 100% margin according to CIRO regulations?
Which equity security would require a 100% margin according to CIRO regulations?
How does CIRO ensure compliance with margin requirements among dealer members?
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 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 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 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?
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?
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?
For a long position in equity securities priced at $3.00, what is the minimum margin required?
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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.
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