Podcast
Questions and Answers
What is the minimum margin requirement for shorting a listed equity priced at $1.50?
What is the minimum margin requirement for shorting a listed equity priced at $1.50?
- 100% of market value
- 80% of market value (correct)
- 60% of market value
- 50% of market value
When shorting shares priced at $2.00 or more, what percentage of the market value must the investor deposit?
When shorting shares priced at $2.00 or more, what percentage of the market value must the investor deposit?
- 100%
- 50% (correct)
- 150%
- 30%
If an investor wants to short shares costing $0.20 each, what is the required margin?
If an investor wants to short shares costing $0.20 each, what is the required margin?
- $0.30 per share
- $0.25 per share (correct)
- $0.20 per share
- $0.10 per share
How much must an investor have in their account when shorting shares worth $1.75 each?
How much must an investor have in their account when shorting shares worth $1.75 each?
What is the margin requirement for securities that are eligible for reduced margin?
What is the margin requirement for securities that are eligible for reduced margin?
Which of the following conditions applies when an investor attempts a short sale?
Which of the following conditions applies when an investor attempts a short sale?
To short shares valued at $5.00 each, what total amount must the investor maintain in their account?
To short shares valued at $5.00 each, what total amount must the investor maintain in their account?
If a client is shorting common shares at a price of $3.00, what is the minimum margin percentage they must deposit?
If a client is shorting common shares at a price of $3.00, what is the minimum margin percentage they must deposit?
What happens if an investor shorts shares priced at $1.49?
What happens if an investor shorts shares priced at $1.49?
What is the primary difference between margin accounts and cash accounts?
What is the primary difference between margin accounts and cash accounts?
What must be marked on an order placed by an employee of the dealer member?
What must be marked on an order placed by an employee of the dealer member?
What happens to outstanding client orders to sell ABC at $20 when an employee places an order?
What happens to outstanding client orders to sell ABC at $20 when an employee places an order?
Under what condition does an investor earn a profit from a long margin position?
Under what condition does an investor earn a profit from a long margin position?
What is the formula for calculating the minimum margin required in a transaction?
What is the formula for calculating the minimum margin required in a transaction?
What is the profit mechanism for an investor using a short margin position?
What is the profit mechanism for an investor using a short margin position?
What is the main distinction between cash accounts and margin accounts?
What is the main distinction between cash accounts and margin accounts?
Which statement accurately describes the requirements for establishing a short position in a margin account?
Which statement accurately describes the requirements for establishing a short position in a margin account?
What is the primary risk associated with short selling?
What is the primary risk associated with short selling?
What specific impact do price changes have on margin requirements for a long position?
What specific impact do price changes have on margin requirements for a long position?
How are equity transactions typically settled?
How are equity transactions typically settled?
Which type of order allows an investor to buy or sell a security at a specified price or better?
Which type of order allows an investor to buy or sell a security at a specified price or better?
What distinguishes a stop order from a limit order?
What distinguishes a stop order from a limit order?
What is the least favorable outcome for an investor when trading in a margin account?
What is the least favorable outcome for an investor when trading in a margin account?
When is a trader most likely to use a short position?
When is a trader most likely to use a short position?
What is one major consequence of regulators banning short selling on certain stocks?
What is one major consequence of regulators banning short selling on certain stocks?
During the credit crisis, which organization is noted for banning short sales of banks and financial institutions?
During the credit crisis, which organization is noted for banning short sales of banks and financial institutions?
What does the practice of trading on margin entail?
What does the practice of trading on margin entail?
What is the result for short sellers when a ban is imposed on short selling?
What is the result for short sellers when a ban is imposed on short selling?
In equity transactions, what role may an investment dealer NOT play?
In equity transactions, what role may an investment dealer NOT play?
What can be a direct impact of short sellers covering their positions during a ban?
What can be a direct impact of short sellers covering their positions during a ban?
Which of the following best describes selling short?
Which of the following best describes selling short?
In a simplified securities transaction, which statement is true regarding the roles of investment dealers?
In a simplified securities transaction, which statement is true regarding the roles of investment dealers?
What aspect of trading might a learning activity focus on when discussing margin strategies?
What aspect of trading might a learning activity focus on when discussing margin strategies?
Why might investing dealers work primarily as agents in equity transactions?
Why might investing dealers work primarily as agents in equity transactions?
What price does the buyer learn is the lowest available for XYZ stock?
What price does the buyer learn is the lowest available for XYZ stock?
What action do both clients take after learning the price quotations?
What action do both clients take after learning the price quotations?
What do the investment advisors utilize to determine the current price quotation of XYZ stock?
What do the investment advisors utilize to determine the current price quotation of XYZ stock?
What do the trade details relayed to the dealers include?
What do the trade details relayed to the dealers include?
What type of order are the clients using to acquire the current market price for XYZ stock?
What type of order are the clients using to acquire the current market price for XYZ stock?
What is the role of the investment advisors in this trading process?
What is the role of the investment advisors in this trading process?
How is the trade information communicated to the stock exchange?
How is the trade information communicated to the stock exchange?
What happens after the execution of the trade at the exchange?
What happens after the execution of the trade at the exchange?
What indicates that a sale is possible between the buyer and seller?
What indicates that a sale is possible between the buyer and seller?
What are the current bid and asked prices for XYZ common stock?
What are the current bid and asked prices for XYZ common stock?
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Study Notes
Cash and Margin Accounts
- Cash accounts require clients to pay for transactions in full upon execution, while margin accounts allow buying or selling securities on credit.
- Margin accounts can hold both long and short positions; cash accounts can only hold long positions.
Margin Account Transactions
- Long margin position: Investors finance part of their purchase through borrowing from the dealer. Minimum margin equals the initial transaction cost minus the loan.
- Short margin position: Investors sell borrowed securities, profiting when the repurchase cost is lower than the sale price.
- Different minimum margin requirements based on the price of the stocks sold short:
- Stocks priced at $2.00 and over: 50% margin
- Stocks priced between $1.75 - $1.99: 60% margin
- Stocks priced between $1.50 - $1.74: 80% margin
- Stocks priced between $0.25 - $1.49: 100% margin
- Stocks priced under $0.25: $0.25 per share
Trading and Settlement Procedures
- Equity transactions involve investment dealers acting either as agents or principals.
- A typical transaction in a retail setting involves buyers and sellers communicating via investment advisors for price quotes.
- Orders can be relayed as market orders to achieve the best current price.
Trading Execution Example
- For a transaction involving 100 shares of XYZ stock priced at $10.50 bid and $10.75 asked, buyers must be willing to meet the seller's asking price to complete the trade.
- Once the trade executes, details are reported through the exchange’s data system to confirm to both advisors and clients.
Buy and Sell Orders
- Selecting the appropriate order type impacts share pricing significantly. Investment advisors must assess clients’ needs to determine optimal order types.
Key Terms and Concepts
- Regulatory risk pertains to potential bans on short selling by regulators, which can force short sellers to cover positions at a loss, potentially spiking prices.
- The chapter emphasizes understanding the mechanics of margin trading and equity transactions, including their risks and regulatory aspects.
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