Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 9: Equity Securities: Equity transactions - Coggle Diagram
Chapter 9: Equity Securities: Equity transactions
Cash account and margin account
cash account: clients are expected to pay full payment for purchases or full delivery for sales on or before settlement day
Canada Treasury bill: settle on the same day
margin: clients buy or sell securities on partial credit; pay only a portion of the purchase price ; the investment dealer lends the balance and charge interest on the loan
long positions: represent actual ownership in a security
short position: is created when an investor sells a security that the investor does not own
Margin account transactions
dealers must obtain an authorized Margin Account Agreement from the client before
Long margin accounts
regulated and enforced by IIROC
at $2.00 and over, 50% of market value;
at $1.75 to $1.99, 40% of market value;
at $1.5 to $1.74, 20% of market value
securities eligible for reduced margin, 70% of market value (not examable)
margining long positions
margin call: the price of the security falls, the value of the loan drops accordingly. need to deposit additional money to cover the shortfall up to the original purchase price
excess margin: the security price rises, the loan amount rises accordingly, and the client has access to additional funds in the account immediately
margin risks
margin increases market risk
loan and interest
pay interest during the period that the security is margined, repay the loan at the end
margin calls must be paid without delay
represents actual ownership in a security
Short margin accounts
Definition: the sale of securities that the seller does not own
margining short positions
Minimum credit balance requirement (not examable)
“On Listed Equities Selling Minimum Credit Balance
At $2.00 and over 150% of market value
At $1.50 to $1.99 $3.00 per share
At $0.25 to $1.49 200% of market value
Under $0.25 100% of market plus $0.25 per share
Securities eligible for reduced margin 130% of market value”
profit or loss on short sales
the price of share declines, and the client is able to purchase the shares at a lower price
the price of the share rises, there is a loss; the purchase would be higher than the price of the sale
time limit on short sales
no time limit for short sale position
as long as adequate margin is maintained in the short account
covering a short position
buy the necessary shares to cover the short sale
short selling shares that are thinly traded, “Short sellers generally look for shares of companies that have a large number of shares outstanding and that are widely held by many shareholders.”
declaring a short sale
investment advisors entering an order for a short sale of security must mark the sell-order ticket short (S)
TSX and TSX venture publicly report total short positions in applicable securities twice per month
risk of short selling
borrowing shares
adequate margin
liability
“The short seller is liable for any dividends or other benefits paid during the period that the account is short.”
buy-in requirements
the dealer must buy back the stock to close the short sale when the adequate margin cannot be maintained
insufficient information
the exchanges do not report short positions daily; no data on unlisted short sales
price action
price may volatile when short sellers try to cover their short sales at the same time
unlimited risk
no maximum loss, no no limit to how high the price of a stock
unique to short selling
regulatory risk
“The risk that the regulators may ban short selling for certain types of stocks.”
Trading and settlement procedures
securities transaction:
buyer and seller know the bid and ask price, then ask their investment advisor to get the best possible price;
the orders are relayed to the stock trading departments;
exchange's data transmission system reports the trade details to investment advisors;
the advisors phone their clients to confirm the transaction
each dealer mails a written confirmation to its client
settlement procedures
the buyer and seller receive a confirmation about the amount payable, or to be received, including commission
stock and bond certificates are held electronically by a clearing company
How securities are bought and sold
characteristics: duration, price restrictions, special instructions, other
Types of orders
Market order
buy or sell a specified number of securities at the prevailing market price (not bearing a specific price)
benefit: is certain that it will be executed
cons: the price is not certain
used in liquid market (bid/ ask spread is tight)
Limit order
buy and sell at a specific price or better
e.g. buy 1000 shares of ABC at $20 or less
down side: no certainty the order will be filled
is used when a market is less than liquid (wide bid/ ask spread)
Day order
buy/ sell that expires at the end of the day
e.g. buy 1000 shares of ABC at $20 or less
Good through order
buy/ sell that is good for a specified number of days
e.g. buy 1000 shares of ABC at $20 or more on or before March 30
On-stop sell order (stop loss order)
a sell order where the limit price is below the existing market price
pros: reduce the amount of loss
e.g. sell 200 shares of ABC if the price drops to $24.5 or below
on-stop buy order (stop buy order)
an order to buy a stock at or above a certain price
used for 2 reasons: 1.
protect a short position when the stock's price is rising
; 2. to ensure that a stock is purchased while its price is rising
Professional (PRO) order
accounts of partners, directors, officers, investment advisors, and specified employees must be labelled PRO, N-C( Non-client) or EMP (employee)
executed after clients' orders