Equity Securities Chapter Overview
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Questions and Answers

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?

  • 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?

  • 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?

    <p>A period for ensuring the accuracy of transactions and transfer of ownership.</p> Signup and view all the answers

    Which type of order allows an investor to set a specific price to buy a security?

    <p>Limit order</p> Signup and view all the answers

    What is the primary risk associated with short selling?

    <p>Potentially unlimited losses if the security price rises.</p> Signup and view all the answers

    What is a key characteristic of a cash account?

    <p>Requires full payment for securities by the settlement date</p> Signup and view all the answers

    Which of the following statements accurately describes margin accounts?

    <p>They allow investors to borrow money to fund their purchases</p> Signup and view all the answers

    What happens when an investor initiates a long position?

    <p>They gain actual ownership of the security</p> Signup and view all the answers

    What defines a short position in trading?

    <p>Selling securities that one does not own</p> Signup and view all the answers

    On which day is settlement generally expected for the purchase of government orders in securities?

    <p>On the day of the transaction</p> Signup and view all the answers

    What is a fundamental difference between cash accounts and margin accounts?

    <p>Margin accounts allow for credit based on market value</p> Signup and view all the answers

    What is a requirement for closing a long position?

    <p>Selling the stock in the market</p> Signup and view all the answers

    Why might an investor choose to use a margin account?

    <p>To leverage their investments by borrowing funds</p> Signup and view all the answers

    What triggers an on-stop buy order in the context of equity transactions?

    <p>The stock must trade at $35 or above.</p> Signup and view all the answers

    What is the primary purpose of entering an on-stop buy order when shorting a stock?

    <p>It serves to limit potential losses from the short position.</p> Signup and view all the answers

    Under the professional (PRO) order rules, which statement is true regarding order prioritization?

    <p>Client orders receive priority when competing with non-client orders at the same price.</p> Signup and view all the answers

    What does the regulatory requirement specify regarding tickets for professional orders?

    <p>They should be labeled as N-C or PRO to identify their nature.</p> Signup and view all the answers

    In the example given, what price does the client set for the stop price when shorting ABC stock?

    <p>$35</p> Signup and view all the answers

    Which scenario would NOT activate the on-stop buy order placed at $35?

    <p>ABC stock trades consistently below $35.</p> Signup and view all the answers

    What must happen for a short position to remain open over time?

    <p>Adequate margin is maintained in the short account.</p> Signup and view all the answers

    What is the primary consequence when an investment dealer cannot borrow sufficient shares?

    <p>The short seller must cover the position by buying necessary shares.</p> Signup and view all the answers

    Which of the following is required when executing a short sale order?

    <p>The order must be marked clearly as a short sale on the sell-order ticket.</p> Signup and view all the answers

    What type of securities do short sellers typically prefer?

    <p>Securities with large outstanding shares and wide marketability.</p> Signup and view all the answers

    Under what condition would a short seller need to cover their position?

    <p>The investment dealer cannot borrow enough shares.</p> Signup and view all the answers

    What determines the time limit on maintaining a short sale position?

    <p>The ability to maintain borrowing of equivalent amounts and margin.</p> Signup and view all the answers

    Which of the following situations can complicate maintaining a short position?

    <p>The shares are thinly traded.</p> Signup and view all the answers

    What must be confirmed by dealer members when accepting an order for a sale of a security?

    <p>The nature of the sale as either short or long.</p> Signup and view all the answers

    What happens to a short seller's position if the stock becomes worthless?

    <p>The position must be closed immediately.</p> Signup and view all the answers

    Which condition allows a short sale position to be maintained without time constraints?

    <p>The stock remains listed and can be borrowed equivalent amounts.</p> Signup and view all the answers

    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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    Related Documents

    Equity Securities: Equity Transactions (CSC Volume 1 Section 3) PDF

    Description

    This quiz covers the key concepts of equity transactions, including the differences between cash and margin accounts, long and short positions, and the details of margin account transactions. It also explores short selling rules, techniques, and the associated risks. Prepare to enhance your understanding of crucial equity concepts.

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