Podcast
Questions and Answers
What defines the bid-ask spread in securities trading?
What defines the bid-ask spread in securities trading?
- The difference between the ask price and bid price of a security. (correct)
- The difference between the highest and lowest prices a security has traded at.
- The average price at which a security trades over a day.
- The commission charged by brokerages for executing a trade.
In what scenarios are market orders considered most effective?
In what scenarios are market orders considered most effective?
- In a liquid market where the bid/ask spread is tight. (correct)
- When a specific price target must be reached for execution.
- When trading in thinly traded securities with high liquidity risk.
- When the market is volatile and prices fluctuate often.
What is the primary risk associated with placing a market order?
What is the primary risk associated with placing a market order?
- Market orders can take longer to execute than limit orders.
- Sellers may back out of transactions initiated by market orders.
- The buyer may not be able to purchase stocks at the market price.
- The execution price may not be favorable due to market fluctuations. (correct)
Which type of order explicitly indicates the price at which a buyer will purchase securities?
Which type of order explicitly indicates the price at which a buyer will purchase securities?
How does the bid price in securities trading relate to the ask price?
How does the bid price in securities trading relate to the ask price?
What is a defining characteristic of a margin account compared to a cash account?
What is a defining characteristic of a margin account compared to a cash account?
Which of the following is NOT a characteristic of a market order?
Which of the following is NOT a characteristic of a market order?
Which of the following best describes the implications of holding a long margin position?
Which of the following best describes the implications of holding a long margin position?
What is the primary risk associated with short selling in margin accounts?
What is the primary risk associated with short selling in margin accounts?
Which order type allows an investor to set a maximum price for buying a security?
Which order type allows an investor to set a maximum price for buying a security?
In margin account transactions, what typically happens during a margin call?
In margin account transactions, what typically happens during a margin call?
What is the effect of price changes on long margin requirements?
What is the effect of price changes on long margin requirements?
Which of the following is NOT a method for executing trades in equity transactions?
Which of the following is NOT a method for executing trades in equity transactions?
What distinguishes a sell order from a buy order?
What distinguishes a sell order from a buy order?
Which statement correctly defines short positions in margin trading?
Which statement correctly defines short positions in margin trading?
What is the maximum loan amount a dealer can provide when shares trade at $1.85 per share?
What is the maximum loan amount a dealer can provide when shares trade at $1.85 per share?
If an investor purchases shares at $1.55 per share, what is the investor's required margin?
If an investor purchases shares at $1.55 per share, what is the investor's required margin?
What does the term 'margin' refer to in a long position?
What does the term 'margin' refer to in a long position?
What happens when the price of a security falls after establishing a long position?
What happens when the price of a security falls after establishing a long position?
What is required after a price drop that leads to a margin call?
What is required after a price drop that leads to a margin call?
What does 'excess margin' refer to?
What does 'excess margin' refer to?
What is the consequence of a security's price rising after purchasing on margin?
What is the consequence of a security's price rising after purchasing on margin?
What percentage of the market value can a dealer loan for a security eligible for reduced margin?
What percentage of the market value can a dealer loan for a security eligible for reduced margin?
How is the minimum margin required calculated?
How is the minimum margin required calculated?
What criteria does CIRO use to determine eligibility for reduced margin?
What criteria does CIRO use to determine eligibility for reduced margin?
What is the minimum margin requirement for short sales of securities priced at $1.65?
What is the minimum margin requirement for short sales of securities priced at $1.65?
If an investor shorts shares priced at $0.10, what margin must be deposited per share?
If an investor shorts shares priced at $0.10, what margin must be deposited per share?
How much total value must an investor have in their account when shorting shares at $2.50?
How much total value must an investor have in their account when shorting shares at $2.50?
When shorting shares at a price of $1.10, what is the required margin percentage?
When shorting shares at a price of $1.10, what is the required margin percentage?
An investor shorts shares priced at $1.80. How much margin must they deposit?
An investor shorts shares priced at $1.80. How much margin must they deposit?
If an investor wishes to short securities that are eligible for reduced margin, what is the margin percentage they need to deposit?
If an investor wishes to short securities that are eligible for reduced margin, what is the margin percentage they need to deposit?
When shorting a stock at $1.45, what percent margin is needed?
When shorting a stock at $1.45, what percent margin is needed?
An investor shorts shares priced at $5.25. How much total account value must they maintain?
An investor shorts shares priced at $5.25. How much total account value must they maintain?
For shares priced at $0.50, what is the required margin percentage?
For shares priced at $0.50, what is the required margin percentage?
When shorting a stock at a market price of $0.20, what is the required deposit per share?
When shorting a stock at a market price of $0.20, what is the required deposit per share?
What is the new margin requirement after the price increase of the security?
What is the new margin requirement after the price increase of the security?
How much excess margin does the client have in their account after the calculations?
How much excess margin does the client have in their account after the calculations?
If the client withdraws the $2,000 excess margin from the account, what will happen to the amount they owe?
If the client withdraws the $2,000 excess margin from the account, what will happen to the amount they owe?
What impact does the increase in collateral value have on the dealer's willingness to lend?
What impact does the increase in collateral value have on the dealer's willingness to lend?
How is the client's original margin deposit factored into the calculations?
How is the client's original margin deposit factored into the calculations?
What happens to the borrowed amount if the client retains the excess margin in the account?
What happens to the borrowed amount if the client retains the excess margin in the account?
What can the client do with the excess margin of $2,000?
What can the client do with the excess margin of $2,000?
How is the amount the firm is willing to lend calculated?
How is the amount the firm is willing to lend calculated?
What is the original cost of the ABC shares considered in this scenario?
What is the original cost of the ABC shares considered in this scenario?
What condition applies when the excess margin is available in the client's account?
What condition applies when the excess margin is available in the client's account?
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Study Notes
Equity Transactions Overview
- Equity transactions involve understanding cash accounts, margin accounts, long and short positions.
- Margin account transactions and short selling have specific rules, techniques, and inherent risks.
- Settlement processes and various order types for buying and selling securities are key components.
Cash and Margin Accounts
- Cash Account: Involves purchasing securities outright without borrowing funds.
- Margin Account: Allows purchasing securities using borrowed money; investors must maintain a minimum margin.
Margin Account Transactions
- Margin reflects the client's equity in the account, determined by initial cost minus the loan amount.
- Margin Call: Occurs when the security price drops, requiring clients to add funds to cover the deficit.
- Excess Margin: Arises when the security value increases, allowing clients to withdraw or use additional available funds.
Short Selling Requirements
- Clients borrow stocks for short selling but are not loaned money; they must deposit additional funds.
- Minimum margin requirements vary based on the price of the listed equity:
- $2.00 and above: 50% of market value
- $1.75 to $1.99: 60% of market value
- $1.50 to $1.74: 80% of market value
- $0.25 to $1.49: 100% of market value
- Below $0.25: $0.25 per share
Price Dynamics
- Bid Price: Highest price a buyer is willing to pay for a stock.
- Ask Price: Lowest price a seller will accept.
- Bid-Ask Spread: The difference between bid and ask prices, affecting transaction costs.
Types of Orders
- Market Order: Executes a buy/sell at the current market price; ensures execution but not price certainty.
- Limit Order: Sets a specific price for buying/selling, not executed until that price is met.
- Day Order: Remains valid for a single trading day.
- Good 'Til Canceled: Remains effective until executed or canceled by the investor.
- Stop Orders: Trigger execution when the market price breaches a set limit.
Trading and Settlement Procedures
- Trades involve negotiation between buyers and sellers using various order types to reach desired prices.
- Settlement procedures specify how and when securities and payments are exchanged after a trade.
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