Podcast
Questions and Answers
What happens to the amount the dealer is willing to lend when the security price falls to $22?
What happens to the amount the dealer is willing to lend when the security price falls to $22?
What is the new margin requirement after the price of ABC shares falls to $22?
What is the new margin requirement after the price of ABC shares falls to $22?
How much original margin deposit did the client make initially?
How much original margin deposit did the client make initially?
What is the net margin deficiency that leads to the margin call?
What is the net margin deficiency that leads to the margin call?
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Why must the original purchase price remain in the account at all times?
Why must the original purchase price remain in the account at all times?
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What action does a margin call require from the client?
What action does a margin call require from the client?
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Which order type allows an investor to buy shares at a specific price rather than the current market price?
Which order type allows an investor to buy shares at a specific price rather than the current market price?
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What is the term for selling a stock that the seller does not own?
What is the term for selling a stock that the seller does not own?
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Which order type will remain valid until fulfilled or explicitly canceled?
Which order type will remain valid until fulfilled or explicitly canceled?
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What is required for a trader to execute trades beyond their own capital in a margin account?
What is required for a trader to execute trades beyond their own capital in a margin account?
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Which of the following orders automatically sells a security when it drops to a certain price?
Which of the following orders automatically sells a security when it drops to a certain price?
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In trading, what does having a long position refer to?
In trading, what does having a long position refer to?
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Which term describes a transaction that involves borrowing money to purchase securities?
Which term describes a transaction that involves borrowing money to purchase securities?
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What type of order is executed at the best available price in the market at the moment it is placed?
What type of order is executed at the best available price in the market at the moment it is placed?
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What occurs when the value of an investor's margin account falls below the required amount?
What occurs when the value of an investor's margin account falls below the required amount?
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Which of the following orders is executed only if the market reaches a specified price that aligns with the trader's strategy?
Which of the following orders is executed only if the market reaches a specified price that aligns with the trader's strategy?
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What is the minimum margin required when a client purchases shares on credit at $1.85 per share, if the dealer loans 40% of the market value?
What is the minimum margin required when a client purchases shares on credit at $1.85 per share, if the dealer loans 40% of the market value?
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Which percentage of margin is required when purchasing shares that trade at $1.55 per share if the dealer loans 20% of the market value?
Which percentage of margin is required when purchasing shares that trade at $1.55 per share if the dealer loans 20% of the market value?
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What does the term 'excess margin' refer to in the context of a margin account?
What does the term 'excess margin' refer to in the context of a margin account?
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What triggers a margin call for a client who has bought shares on margin?
What triggers a margin call for a client who has bought shares on margin?
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Which criteria must securities meet to be eligible for reduced margin according to CIRO?
Which criteria must securities meet to be eligible for reduced margin according to CIRO?
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If an investor's margin is 60% when shares trade at $1.85, what is the corresponding loan amount from the dealer?
If an investor's margin is 60% when shares trade at $1.85, what is the corresponding loan amount from the dealer?
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What must the sum of margin and loan equal in a margin transaction?
What must the sum of margin and loan equal in a margin transaction?
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When establishing a long position on margin, which of the following is NOT required?
When establishing a long position on margin, which of the following is NOT required?
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What happens to the loan amount if the price of a security rises?
What happens to the loan amount if the price of a security rises?
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What is the margin requirement when the client buys shares at a stock price of $25 per share with a loan rate of 50%?
What is the margin requirement when the client buys shares at a stock price of $25 per share with a loan rate of 50%?
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If the price of ABC stock declines from $25 to $22, what impact does it have on the client's margin account?
If the price of ABC stock declines from $25 to $22, what impact does it have on the client's margin account?
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What is the total cost to buy 1,000 shares of ABC Company at $25 per share?
What is the total cost to buy 1,000 shares of ABC Company at $25 per share?
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What is the maximum loan amount provided by the firm for buying ABC shares at a 50% loan rate?
What is the maximum loan amount provided by the firm for buying ABC shares at a 50% loan rate?
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In Scenario 2, if the price of ABC stock increases to $29, what is the new total value of the client’s shares?
In Scenario 2, if the price of ABC stock increases to $29, what is the new total value of the client’s shares?
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Why are commissions excluded from margin calculations in the provided examples?
Why are commissions excluded from margin calculations in the provided examples?
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If a client initially puts up $12,500 and the stock price drops, what happens to their equity in the margin account?
If a client initially puts up $12,500 and the stock price drops, what happens to their equity in the margin account?
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How is the margin put up by the client calculated in the examples provided?
How is the margin put up by the client calculated in the examples provided?
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Considering Scenario 1, what is the loss incurred by the client if the stock price falls to $22?
Considering Scenario 1, what is the loss incurred by the client if the stock price falls to $22?
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What concept does the margin requirement illustrate in relation to loan agreements?
What concept does the margin requirement illustrate in relation to loan agreements?
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What is a major risk involved with short selling related to margin requirements?
What is a major risk involved with short selling related to margin requirements?
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What is a liability that short sellers face during the period they maintain a short position?
What is a liability that short sellers face during the period they maintain a short position?
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Which situation represents a scenario where a short seller could face immediate risk?
Which situation represents a scenario where a short seller could face immediate risk?
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What challenge do short sellers face in obtaining information for their trading decisions?
What challenge do short sellers face in obtaining information for their trading decisions?
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What phenomenon can occur when multiple short sellers try to cover their positions simultaneously?
What phenomenon can occur when multiple short sellers try to cover their positions simultaneously?
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What is one of the main factors contributing to the unlimited risk associated with short selling?
What is one of the main factors contributing to the unlimited risk associated with short selling?
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Which of the following best describes a requirement of investment dealers in the context of short selling?
Which of the following best describes a requirement of investment dealers in the context of short selling?
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What does the term 'buy-in requirements' refer to in short selling?
What does the term 'buy-in requirements' refer to in short selling?
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What complication arises from the market's pricing behavior in relation to short selling?
What complication arises from the market's pricing behavior in relation to short selling?
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Study Notes
Short Selling Risks
- Borrowing Shares: Difficulty in borrowing necessary quantities of securities for short sales.
- Adequate Margin: Short sellers must maintain sufficient margin as security prices fluctuate.
- Liability for Dividends: Short sellers are responsible for dividends or benefits on borrowed shares.
- Buy-in Requirements: If margin is inadequate, dealers may buy back stock to close the position, potentially leading to forced purchases.
- Insufficient Information: Lack of real-time data on total short sales, as exchanges report bi-monthly and do not cover unlisted sales.
- Price Action Volatility: High volatility can occur when multiple short sellers try to liquidate positions simultaneously, sparking a buying rush.
- Unlimited Risk: Short selling carries the risk of unlimited losses if stock prices rise significantly, unlike typical investments where losses are capped.
Trading Mechanisms Overview
- Types of Orders: Investors can use various order types such as market, limit, stop-buy, and stop-sell to execute trades.
- Buying on Margin: Investors can purchase shares on credit through margin accounts, which requires maintaining a minimum margin percentage of the total investment.
Margin Mechanics
- Example Margin Calculation: For shares trading at $1.85, the dealer may loan 40% of the value, requiring investors to provide a 60% margin.
- Margin Call: If the stock price falls, the investor must maintain the original purchase price in the account, leading to possible additional cash requirements.
Margin Account Scenarios
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Initial Investment Example:
- Purchase of 1,000 shares at $25/share results in a total cost of $25,000.
- If the loan rate is 50%, the maximum loan is $12,500, requiring a $12,500 margin.
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Scenario Analysis:
- Scenario 1 (Price Drops to $22): Margin requirement increases due to a fall in share price, resulting in a $1,500 margin call.
- Scenario 2 (Price Rises to $29): Loan increases and allows access to excess margin, providing more funds in the account.
Conclusion
- Understanding margin accounts and the implications of price fluctuations is essential for managing risk and making informed trading decisions.
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Description
This quiz covers the risks associated with short selling in the context of the Toronto Stock Exchange and the TSX Venture Exchange. Learn about the challenges and requirements of maintaining short positions through a series of questions.
