Stock Short Selling and Margin Basics

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What is the formula to calculate profit from a stock purchase?

Ending price + Dividend
Initial price + Ending price
Initial price - (Ending price + Dividend)
(Ending price + Dividend) - Initial price (correct)

The Sarbanes-Oxley Act requires independent financial experts to serve on audit committees.

True (A)

What is the initial cash flow when borrowing a share for a short sale?

+Initial price

In a margin call procedure, to restore 50% initial margin, you would need a cash inflow of $________.

1,384.50 Signup and view all the answers

Match the following actions with their corresponding cash flow in short selling:

Borrow share; sell it = +Initial price Repay dividend and buy share to replace = −(Ending price + Dividend) Signup and view all the answers

What is the required initial margin for a short sale typically set at?

50% (C) Signup and view all the answers

A margin call occurs when the equity is greater than or equal to 30% of the market value.

False (B) Signup and view all the answers

What does the term 'covering' refer to in the context of a short sale?

Buying stock to return to the original lender Signup and view all the answers

A short seller is liable for any _____ flows that occur during the period of borrowing shares.

cash Signup and view all the answers

Match the following terms with their definitions:

Initial Margin = The percentage of the purchase price that an investor must pay for a new position Maintenance Margin = The minimum account balance required to keep a trading position open Equity = The difference between the total margin account and the market value Margin Call = A demand by a broker for additional funds to cover potential losses Signup and view all the answers

If an investor sells 100 short shares of stock at $60 per share, how much must they pledge to their broker?

$6,000 (C) Signup and view all the answers

A 30% increase in stock price leads to a positive investor's rate of return when buying stock on margin.

True (A) Signup and view all the answers

What happens if the market value is equal to the total margin account divided by (1 + MMR)?

A margin call occurs. Signup and view all the answers

What is the minimum maintenance margin requirement (MMR) set by exchanges?

25% (B) Signup and view all the answers

A margin call occurs when the equity divided by market value is greater than the maintenance margin requirement.

False (B) Signup and view all the answers

How much equity is needed to restore the initial margin requirement when the stock price falls to $60 per share?

$29,167 Signup and view all the answers

A stock price of $70 with 1,000 shares gives an initial position value of ______.

$70,000 Signup and view all the answers

Match the following components of buying on margin with their definitions:

Equity = The value of the investor's own funds in the investment Maintenance Margin Requirement = Minimum value before additional funds must be added Margin Call = Notification from broker that additional funds are required Initial Margin = The percentage of the purchase price that must be covered by the investor's own cash Signup and view all the answers

Buying Stock on Margin

Buying stock by borrowing part of the purchase price from a broker.

Margin Account

A brokerage account that allows investors to borrow money to buy securities.

Short Sale

Selling borrowed securities, with the expectation of buying them back at a lower price to return them and generate profit.

Maintenance Margin

The minimum amount of equity required in a margin account to avoid a margin call; a percentage of the market value of securities held.