CHAPTER 2

BUYING AND SELLING

SECURITIES

THE SECURITIES MARKET

BROKERS•DEFINITION: act as agents for

investors and compensated by commissions.

THE SECURITIES MARKET

Types of Firms:•Retail

•Regional

•Discount

ORDERING

Order Size•Round lots

•Odd lots

ORDERING

Time Limits to Orders•the investor must specify a time limit

when ordering from a broker

ORDERING

Time Limits to Orders•some typical time limits:

daygood-til-canceled (GTC)fill-or-kill

ORDERING

Types of Orders:•Market order

ORDERING

Types of Orders: •Limit order

ORDERING

Types of Orders:•Stop order

ORDERING

Types of Orders:•Stop limit

MARGIN ACCOUNTS

THE PURPOSE OF MARGIN ACCOUNTS:•these accounts act as a line of credit

for more money than is in the investor’s cash account.

MARGIN ACCOUNTS

SOME FEATURES OF MARGIN ACCOUNTS:•a hypothecation agreement:

allows pledging and lending

MARGIN ACCOUNTS

SOME FEATURES OF MARGIN ACCOUNTS:•a street name:

facilitates pledging/lending

MARGIN ACCOUNTS

MARGIN PURCHASES:•Initial Margins are required

•Actual Margin:= Market Value - Loan

Market Value

MARGIN ACCOUNTS

MAINTENANCE MARGINS:•Purpose:

to prevent default by the investorto be maintained at the level or aboveto restore when undermargined

MARGIN ACCOUNTS

UNDERMARGINED•the investor’s account value has

fallen below the maintenance level

MARGIN ACCOUNTS

UNDERMARGINED•results in a margin call by broker to

investor who maydeposit cash or securities into the

accountpay off pay off part of the loansell some securities

MARGIN ACCOUNTS

OVERMARGINED:•if the price of the securities rises

above the maintenance margin

MARGIN ACCOUNTS

OVERMARGINED:•investor may withdraw some funds

SHORT SALES

WHAT IS A SHORT SALE?•a sale which involves the investor

borrowing stock from his/her broker to sell at a higher price and

repurchase at a later time at a lower price

SHORT SALES

RULES FOR SHORT SALES:•The Up-tick Rule

•Delivery

•Term of the Loan

SHORT SALES

SHORT-SALE MARGINS•Initial margin

SHORT SALES

SHORT-SALE MARGINS•Actual margin

= (Short Sales Proceeds + Initial Margin) - Loan

Loan

SHORT SALES

SHORT-SALE MARGINS•Maintenance margin

equal to the current dollar value of the loan.

END OF CHAPTER 2