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CHAPTER TWO

BUYING AND SELLING SECURITIES

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THE SECURITIES MARKET

• BROKERS– DEFINITION: act as agents for investors and

compensated by commissions.

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THE SECURITIES MARKET

• Types of Firms:– Retail– Regional– Discount

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ORDERING

• Order Size– Round lots– Odd lots

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ORDERING

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

ordering from a broker

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ORDERING

• Time Limits to Orders– some typical time limits:

• day

• good-til-canceled (GTC)

• fill-or-kill

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ORDERING

• Types of Orders:– Market order

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ORDERING

• Types of Orders: – Limit order

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ORDERING

• Types of Orders:– Stop order

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ORDERING

• Types of Orders:– Stop limit

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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.

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MARGIN ACCOUNTS

• SOME FEATURES OF MARGIN ACCOUNTS:– a hypothecation agreement:

• allows pledging and lending

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MARGIN ACCOUNTS

• SOME FEATURES OF MARGIN ACCOUNTS:– a street name:

• facilitates pledging/lending

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MARGIN ACCOUNTS

• MARGIN PURCHASES:– Initial Margins are required– Actual Margin:

= Market Value – Loan

Market Value

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MARGIN ACCOUNTS

• MAINTENANCE MARGINS:– Purpose:

• to prevent default by the investor

• to be maintained at the level or above

• to restore when undermargined

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MARGIN ACCOUNTS

• UNDERMARGINED– the investor’s account value has fallen below

the maintenance level

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MARGIN ACCOUNTS

• UNDERMARGINED– results in a margin call by broker to investor

who may• deposit cash or securities into the account

• pay off part of the loan

• sell some securities

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MARGIN ACCOUNTS

• OVERMARGINED:– if the price of the securities rises above the

maintenance margin

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MARGIN ACCOUNTS

• OVERMARGINED:– investor may withdraw some funds

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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

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SHORT SALES

• RULES FOR SHORT SALES:– The Up-tick Rule– Delivery– Term of the Loan

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SHORT SALES

• SHORT-SALE MARGINS– Initial margin

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SHORT SALES

• SHORT-SALE MARGINSActual margin

= (Short Sales Proceeds + Initial Margin) - Loan

Loan

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SHORT SALES

• SHORT-SALE MARGINS– Maintenance margin

• equal to the current dollar value of the loan.