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Questions and Answers
What is the primary distinction between cash accounts and margin accounts?
What is the primary distinction between cash accounts and margin accounts?
- Cash accounts allow for borrowing funds while margin accounts do not.
- Margin accounts enable the purchase of additional securities on credit, while cash accounts require full payment. (correct)
- Cash accounts utilize borrowed securities, while margin accounts do not.
- Margin accounts require a minimum balance, while cash accounts do not.
Which of the following accurately describes a long margin position?
Which of the following accurately describes a long margin position?
- The investor must cover a short selling obligation with cash.
- The investor sells borrowed securities to profit from a decrease in price.
- The investor buys securities with borrowed funds, expecting the price to increase. (correct)
- The investor holds a stock without using any leverage.
How do price changes affect margin requirements for long positions?
How do price changes affect margin requirements for long positions?
- Price fluctuations have no impact on margin requirements.
- Increased prices lower the margin requirement.
- Decreased prices increase the margin requirement. (correct)
- Both increased and decreased prices have the same effect on the margin requirement.
What is typically involved in the process of settling trades for equity transactions?
What is typically involved in the process of settling trades for equity transactions?
Which type of order allows an investor to set a specific price to buy a security?
Which type of order allows an investor to set a specific price to buy a security?
What is the primary risk associated with short selling?
What is the primary risk associated with short selling?
What is a key characteristic of a cash account?
What is a key characteristic of a cash account?
Which of the following statements accurately describes margin accounts?
Which of the following statements accurately describes margin accounts?
What happens when an investor initiates a long position?
What happens when an investor initiates a long position?
What defines a short position in trading?
What defines a short position in trading?
On which day is settlement generally expected for the purchase of government orders in securities?
On which day is settlement generally expected for the purchase of government orders in securities?
What is a fundamental difference between cash accounts and margin accounts?
What is a fundamental difference between cash accounts and margin accounts?
What is a requirement for closing a long position?
What is a requirement for closing a long position?
Why might an investor choose to use a margin account?
Why might an investor choose to use a margin account?
What triggers an on-stop buy order in the context of equity transactions?
What triggers an on-stop buy order in the context of equity transactions?
What is the primary purpose of entering an on-stop buy order when shorting a stock?
What is the primary purpose of entering an on-stop buy order when shorting a stock?
Under the professional (PRO) order rules, which statement is true regarding order prioritization?
Under the professional (PRO) order rules, which statement is true regarding order prioritization?
What does the regulatory requirement specify regarding tickets for professional orders?
What does the regulatory requirement specify regarding tickets for professional orders?
In the example given, what price does the client set for the stop price when shorting ABC stock?
In the example given, what price does the client set for the stop price when shorting ABC stock?
Which scenario would NOT activate the on-stop buy order placed at $35?
Which scenario would NOT activate the on-stop buy order placed at $35?
What must happen for a short position to remain open over time?
What must happen for a short position to remain open over time?
What is the primary consequence when an investment dealer cannot borrow sufficient shares?
What is the primary consequence when an investment dealer cannot borrow sufficient shares?
Which of the following is required when executing a short sale order?
Which of the following is required when executing a short sale order?
What type of securities do short sellers typically prefer?
What type of securities do short sellers typically prefer?
Under what condition would a short seller need to cover their position?
Under what condition would a short seller need to cover their position?
What determines the time limit on maintaining a short sale position?
What determines the time limit on maintaining a short sale position?
Which of the following situations can complicate maintaining a short position?
Which of the following situations can complicate maintaining a short position?
What must be confirmed by dealer members when accepting an order for a sale of a security?
What must be confirmed by dealer members when accepting an order for a sale of a security?
What happens to a short seller's position if the stock becomes worthless?
What happens to a short seller's position if the stock becomes worthless?
Which condition allows a short sale position to be maintained without time constraints?
Which condition allows a short sale position to be maintained without time constraints?
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Study Notes
Equity Securities Overview
- Equity transactions include understanding cash and margin accounts, long and short positions, margin transactions, and order types.
- Key learning objectives encompass defining accounts, establishing positions, interpreting price impacts, trading procedures, and differentiating order types.
Cash Accounts and Margin Accounts
- Cash accounts require full payment for purchases on or before the settlement date.
- Settlement dates:
- Government of Canada Treasury bills: same day.
- Other securities: one business day after.
- Margin accounts allow clients to purchase securities on credit, covering only a portion of the purchase price.
- Credit in a margin account is based on the market value of the securities held.
Long Positions and Short Positions
- A long position indicates ownership of a security, while a short position arises from selling a security not owned.
- Closing a long position requires selling the stock by the settlement date.
- No time limit exists for maintaining a short position, provided the stock remains borrowable and adequate margin is held.
Covering a Short Position
- Short sellers must buy shares to cover their short sale if they cannot borrow enough stock.
- It's challenging to maintain short positions on thinly traded stocks due to low availability.
Declaring a Short Sale
- Dealer members confirm whether a sale is short or long upon accepting an order.
- Sell-order tickets for short sales must be marked clearly for processing.
Order Types Example
- An on-stop buy order triggers a purchase only when the stock reaches a specified price, protecting against losses if the stock price rises.
Professional (PRO) Orders
- Client orders receive priority over non-client and professional orders when competing at the same price.
- Orders for accounts with employee interests must be labeled as PRO, N-C (non-client), or EMP.
Yield Curve Theories
- Expectations theory suggests that the upward slope of the yield curve indicates anticipated rising interest rates, while a downward slope indicates expected declines.
- Liquidity preference theory states investors prefer short-term bonds for their lower risk and higher liquidity, only opting for long-term bonds with adequate compensation.
- Market segmentation theory posits that institutional investors focus on specific term sectors, influencing bond market dynamics.
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