Stock Short Selling and Margin Basics
18 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

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

    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 $________.

    <p>1,384.50</p> Signup and view all the answers

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

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

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

    <p>50%</p> Signup and view all the answers

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

    <p>False</p> Signup and view all the answers

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

    <p>Buying stock to return to the original lender</p> Signup and view all the answers

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

    <p>cash</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>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</p> 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?

    <p>$6,000</p> 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.

    <p>True</p> Signup and view all the answers

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

    <p>A margin call occurs.</p> Signup and view all the answers

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

    <p>25%</p> Signup and view all the answers

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

    <p>False</p> 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?

    <p>$29,167</p> Signup and view all the answers

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

    <p>$70,000</p> Signup and view all the answers

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

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

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser