CHAPTER TWO BUYING AND SELLING SECURITIES 1 THE

CHAPTER TWO BUYING AND SELLING SECURITIES 1

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

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

ORDERING • Order Size – Round lots – Odd lots 4

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

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

ORDERING • Types of Orders: – Market order 7

ORDERING • Types of Orders: – Limit order 8

ORDERING • Types of Orders: – Stop order 9

ORDERING • Types of Orders: – Stop limit 10

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. 11

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

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

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

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

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

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 17

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

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

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 20