Stock Trading Basics
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Questions and Answers

What is the margin requirement for a short sale valued at $2000?

  • $2500
  • $3000 (correct)
  • $2000
  • $1500

    • How is the margin requirement satisfied in short selling?

  • Through profits generated from long positions.
  • Through an initial deposit and the proceeds of the short sale. (correct)
  • Only through the proceeds of the short sale.
  • By borrowing additional funds.

    • What happens to an investor who shorts a stock and the price subsequently rises?

  • They will be able to sell the stock at the increased price.
  • They will incur a loss exceeding the initial investment. (correct)
  • They will receive additional funds to compensate for the loss.
  • They are likely to profit from the investment.

    • If a stock price drops to $10 after a short sale, what should the investor do to close the position assuming they shorted 100 shares?

    <p>Buy 100 shares at $10 each for $1000.</p> Signup and view all the answers

    What is a significant risk associated with short selling?

    <p>Uncertainty in future stock price movements.</p> Signup and view all the answers

    What is a major limitation of analyst recommendations in stock trading?

    <p>Frequent trading based on recommendations incurs higher commissions.</p> Signup and view all the answers

    Why might brokers and analysts be reluctant to recommend selling stocks?

    <p>They have a personal financial interest in the stocks.</p> Signup and view all the answers

    How should investors assess the performance of analyst recommendations?

    <p>They should compare recommendations to the overall market performance.</p> Signup and view all the answers

    What role does personal broker skills and personality play in selecting a brokerage firm?

    <p>They can heavily influence a client's choice of firm.</p> Signup and view all the answers

    What type of brokerage firm typically does not provide personal investment advice?

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

    What can lead analysts to provide overly optimistic recommendations?

    <p>Pressure from the companies needing favorable reports.</p> Signup and view all the answers

    What must analysts disclose when recommending stocks?

    <p>How much stock they have in the company.</p> Signup and view all the answers

    Why is it important for investors to scrutinize the recommendations of brokers and analysts?

    <p>They might not offer superior performance compared to the market.</p> Signup and view all the answers

    What is the main characteristic that distinguishes a full-service brokerage firm from a discount brokerage firm?

    <p>Full-service firms provide investment advice in addition to executing transactions.</p> Signup and view all the answers

    When placing an order to buy or sell stocks, what must be specified as part of the order?

    <p>The ticker symbol and class of the stock</p> Signup and view all the answers

    What is a disadvantage of a market order?

    <p>The stock price may change significantly before the order is filled.</p> Signup and view all the answers

    What defines an odd-lot transaction?

    <p>Buying or selling less than the standard board lot size.</p> Signup and view all the answers

    In a limit order, what does the maximum price specify?

    <p>The highest price you are willing to pay for a stock.</p> Signup and view all the answers

    What is a buy-stop order intended to accomplish?

    <p>To purchase a stock once it reaches a specified higher price.</p> Signup and view all the answers

    Which of the following describes a key feature of an on-stop order?

    <p>It turns into a market order when the specified price level is reached.</p> Signup and view all the answers

    Why might investors prefer online brokerage services over traditional brokerage firms?

    <p>They charge lower commissions for transactions.</p> Signup and view all the answers

    What happens if a limit order is not executed within the specified time frame?

    <p>The order is canceled, and the investor is notified.</p> Signup and view all the answers

    What is the main risk associated with placing a limit order?

    <p>The likelihood of missing a desirable transaction.</p> Signup and view all the answers

    What is typically included when you specify the 'number of shares' in a stock transaction?

    <p>Whether the shares are part of a board lot or odd lot.</p> Signup and view all the answers

    What does a commission fee of a full-service brokerage firm usually compare to that of a discount brokerage firm?

    <p>$100 for full-service firms vs. $8-$30 for discount brokers.</p> Signup and view all the answers

    How does an investor benefit from placing a stop order?

    <p>It protects against losses by selling stock at a predefined price.</p> Signup and view all the answers

    What factor primarily influences the choice between using a market order versus a limit order?

    <p>Potential for price changes and speed of execution.</p> Signup and view all the answers

    What is the primary function of money market funds in online brokerage accounts?

    <p>To hold cash until it is used for transactions.</p> Signup and view all the answers

    What does the term 'margin' refer to in stock purchases?

    <p>The portion of the purchase price paid by the investor's own cash.</p> Signup and view all the answers

    What happens when the value of investments purchased on margin declines?

    <p>A margin call is issued by the brokerage firm.</p> Signup and view all the answers

    If an investor sells a stock they do not own, what is this process called?

    <p>Short selling.</p> Signup and view all the answers

    What does the IIROC limit concerning margin accounts protect against?

    <p>Excessive risk due to margin trading.</p> Signup and view all the answers

    How does buying stocks on margin magnify gains?

    <p>By borrowing money to buy additional stocks.</p> Signup and view all the answers

    What is the maximum loan value when purchasing stock on margin?

    <p>The amount borrowed after the margin requirement is met.</p> Signup and view all the answers

    How does short selling differ from traditional investing?

    <p>It involves selling before purchasing.</p> Signup and view all the answers

    Under which circumstance can the maximum loan value from a broker be lower?

    <p>When dealing with stocks under $2 per share.</p> Signup and view all the answers

    What is a potential downside of using margin trading for investments?

    <p>Losses are magnified if investments decline.</p> Signup and view all the answers

    Why might an investor receive blank cheques from their brokerage?

    <p>To write cheques against their money market account.</p> Signup and view all the answers

    What defines the margin requirement for stocks with a price between $1.75 and $1.99?

    <p>60% of the market value.</p> Signup and view all the answers

    What typically happens when investors experience high returns from margin trading?

    <p>They engage in riskier investments.</p> Signup and view all the answers

    Study Notes

    Executing Stock Trades

    • Broker Selection: Consider analyst recommendations, but remember limitations. Recommendations may be overly optimistic, with limited experience, and potential conflicts of interest (e.g., analyst stock ownership). Assess broker expertise and personality. Full-service brokers offer advice, while discount brokers only execute trades. Commission fees vary significantly between types.

    Placing Stock Orders

    • Order Components: Specify stock name/class, buy/sell, number of shares, and order type (market or limit). Use ticker symbols (e.g., WJA for WestJet, SU for Suncor) rather than full names for quicker identification. Include stock class to reduce errors in selecting equities within a firm.

    • Buy/Sell Orders: Indicate whether buying or selling (and if the asset is owned or is borrowed). Specify number of shares. Board lots are typically multiples of 100, while odd lots are fewer than 100. Higher-priced stocks may have larger board lots.

    • Market Orders: Execute at the prevailing market price, assures quick execution but may result in unwanted price changes.

    • Limit Orders: Specify maximum buy price or minimum sell price. Can be 'good for the day' or 'good until cancelled' (often canceled after six months if not executed). Specify if you are willing to accept a partial transaction or if you desire all or none of your specified shares.

    • Stop Orders: Execute a transaction when a specified price level is reached (buy-stop or sell-stop). May not be executed at the exact price and often the most cost effective for experienced investors.

    • Online Brokerage: Many investors use online brokerage services offering low commissions and real-time stock quotes.

    Buying Stock on Margin

    • Margin: Allows investors to borrow funds from a brokerage to purchase stocks. Margin is the percentage of the purchase value; the brokerage lends the remaining amount (maximum loan value). A margin requirement, set by regulators, is the minimum percentage of the purchase value that must come from your own funds.

    • Margin Calls: Occur if the value of investments purchased on margin declines requiring you to add money to your account. Margin requirements exist to protect investors and brokerage firms.

    • Magnified Returns/Losses: Buying on margin magnifies returns with price increases but also magnifies losses with price drops. If you borrow money to purchase stock and the stock falls in value, your losses are greater than if you only used your own funds.

    Short Selling Stocks

    • Short Selling: Selling a stock you don't own, speculating on a price decrease. You borrow the stock from a brokerage firm or another investor and return it. If the price declines, you buy the shares at the lower price and return them. Profits are realized based on the difference between purchase and sale price

    • Short Selling Margin: Requires a higher margin percentage than buying stock (often 150% of short sale value), similar to buying stock on margin.

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    Description

    Explore the essential components of executing stock trades, including broker selection and order details. Understand the distinctions between full-service and discount brokers, and learn how to effectively place buy/sell orders with accurate specifications.

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