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CHAPTER 2

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.

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CHAPTER 2

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  1. CHAPTER 2 BUYING AND SELLING SECURITIES

  2. THE SECURITIES MARKET • BROKERS • DEFINITION: act as agents for investors and compensated by commissions.

  3. THE SECURITIES MARKET • Types of Firms: • Retail • Regional • Discount

  4. ORDERING • Order Size • Round lots • Odd lots

  5. ORDERING • Time Limits to Orders • the investor must specify a time limit when ordering from a broker

  6. ORDERING • Time Limits to Orders • some typical time limits: • day • good-til-canceled (GTC) • fill-or-kill

  7. ORDERING • Types of Orders: • Market order

  8. ORDERING • Types of Orders: • Limit order

  9. ORDERING • Types of Orders: • Stop order

  10. ORDERING • Types of Orders: • Stop limit

  11. 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.

  12. MARGIN ACCOUNTS • SOME FEATURES OF MARGIN ACCOUNTS: • a hypothecation agreement: • allows pledging and lending

  13. MARGIN ACCOUNTS • SOME FEATURES OF MARGIN ACCOUNTS: • a street name: • facilitates pledging/lending

  14. MARGIN ACCOUNTS • MARGIN PURCHASES: • Initial Margins are required • Actual Margin: = Market Value - Loan Market Value

  15. MARGIN ACCOUNTS • MAINTENANCE MARGINS: • Purpose: • to prevent default by the investor • to be maintained at the level or above • to restore when undermargined

  16. MARGIN ACCOUNTS • UNDERMARGINED • the investor’s account value has fallen below the maintenance level

  17. MARGIN ACCOUNTS • UNDERMARGINED • results in a margin call by broker to investor who may • deposit cash or securities into the account • pay off pay off part of the loan • sell some securities

  18. MARGIN ACCOUNTS • OVERMARGINED: • if the price of the securities rises above the maintenance margin

  19. MARGIN ACCOUNTS • OVERMARGINED: • investor may withdraw some funds

  20. 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

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

  22. SHORT SALES • SHORT-SALE MARGINS • Initial margin

  23. SHORT SALES • SHORT-SALE MARGINS • Actual margin = (Short Sales Proceeds + Initial Margin) - Loan Loan

  24. SHORT SALES • SHORT-SALE MARGINS • Maintenance margin • equal to the current dollar value of the loan.

  25. END OF CHAPTER 2

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