equities dividends, margin, & short positions. chapter 8: buying and selling equities ©...

Equities

Dividends, Margin, & Short Positions

Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012

Orders

A trade order is an instruction conveyed to a broker who then executes or fills the order.

A broker needs clear instructions on how and when to trade


Orders: Market

Buy 100 DVC Buy 100 DVC at the lowest market price

Sell 100 DVC Sell 100 DVC at the highest market price


Orders: Limit

Buy 100 DVC limit $52 Buy 100 DVC at the lowest market price but do not

pay more than $52

Sell 100 DVC limit $48 Sell 100 DVC at the highest market price but do not

take less than $48


Orders: Stop

A stop order becomes a market order as soon as the market price of a board lot reaches a specified level.


Orders: Stop

Sell 100 DVC stop $40 I bought Discovery Café and now the price is going

down. If it decreases to $40 sell me out before I lose even more money.

Buy 100 DVC stop $60 I short sold Discovery Cafe and now the price is going

up. If it increases to $60, cover my short position before I lose even more money.


Orders: Stop Limit

A stop order becomes a limit order as soon as the market price of a board lot reaches a specified level.


Orders: Stop Limit

Sell 100 DVC stop $40 limit $35 I bought Discovery Café and now the price is going

down. If it decreases to $40 sell me out but don’t take less than $35.

Buy 100 DVC stop $60 limit $65 I short sold Discovery Cafe and now the price is going

up. If it increases to $60, cover my short position but don’t pay more than $65


Equities

Dividends & Splits Margin Short Positions


Dividends

Company Board of Directors Declaration Date

Record Date

Pay Date

Primary Exchange Ex-date


Dividends

Declaration Date Pay DateRecord Date

Ex Date

The dividend is attached to the

share.

The dividend is detached from the share.

T + 3


Dividends: DVC

Declaration Date$1/share

Pay DateRecord Date

Ex Date

John buys DVC at $51

Mary buys DVC from John at $50.

John receives a dividend of $1.


Dividends

www.dividend.comMust buy by 8/14 to get the dividend of

record 8/17


Splits

Declaration Date Pay Date Ex Date

The shares trades at the pre-split price.

The shares trade at the post-split price

T-1

Number of shares adjusted for split

after all trades are executed.


DVC splits 2:1

Declaration Date Pay Date Ex Date

John buys 1000 DVC @ $100 for a total value of $100,000

The shares trade at the post-split price so John now has 2000 DVC @ $50 for a total value of $100,000UISES credits

John’s portfolio with 1000 shares

@ $0


Equities

Dividends & Splits Buying on Margin Short Positions


Buying on Margin

Buying Stock with borrowed money Margin:

percentage you pay for yourself . Leverage:

amplification of return and risk.

Leverage = 1 .Margin


DVC @ $50 1000 DVC @$50 on

50% margin$50,000

Brokers Loan $25,000

50% Margin $25,000


Leverage

DVC$70

© Oltheten & Waspi 2012

$25,000 $25,000

$70,000

$50,000

1 .= 2 50%


Not a partnership

Similar to the CAPM exercisewith β = 2


$25,000

$35,000

$35,000

$70,000

$50,000

$25,000

Equity:50%

+40%

+40%


Leverage

DVC$70


$25,00050%

$25,00035.7%

$70,000

$50,000

1 . = 2 50%


Leverage

DVC $40


$25,000 $25,000

$40,000

$50,000

1 . = 2 50%


Margin Call Margin Call of $5,000

$20,000$25,000

$40,000 $40,000


1929

Margin requirements of 10% Leverage = 1/.10 =10 Small decrease in price triggered

a cascade

$1,000

$9,000

$10,000


1929


1929Dow Jones Industrial Average

October 1928 to December 1934

358.77

386.1

195.35

40.560

50

100

150

200

250

300

350

400

450

Oct

1928

Apr

1929

Oct

1929

Apr

1930

Oct

1930

Apr

1931

Oct

1931

Apr

1932

Oct

1932

Apr

1933

Oct

1933

Apr

1934

Oct

1934

- 89.5%


Regulation T

The account must have at least $2000 in cash or securities.

Initial margin of 50% maintenance margin of 25%.

Most brokers have margin requirements stricter than Regulation T


Equities

Dividends & Splits Buying on Margin Short Positions


Long Position

Microsoft (MSFT)

-

10

20

30

40

50

60

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Buy Low

Sell High


Short PositionMicrosoft (MSFT)

-

10

20

30

40

50

60

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Buy Low

Sell High


Short SellMay 12 Project a price decline on Discovery Cafe

Borrow 100 DVC: Borrowing fee

Sell 100 DVC @ $100

150% Margin (regulation T)

June 12 Borrowing fee

June 30 Cover: Buy 100 DVC @ $80

Margin returned

Net




Sell 100 DVC @ $100



July 1 DVC declares $3 dividend

July 12 Borrowing Fee

July 30 DVC dividend equivalent

July 31 Cover: Buy 100 DVC @ $90

Margin returned

Net




Sell 100 DVC @ $100



July 1 DVC declares $3 dividend

July 12 Borrowing Fee

July 30 DVC dividend equivalent

July 31 Cover: Buy 100 DVC @ $110

Margin returned

Net


Short Sales

Regulation T initial margin of 150% Maintenance margin of 130%

Tick Rules To prevent destabilization in down markets

Eliminated July 6, 2007 Numerous calls for restoration of the tick rules


Short Position

By the end of the first month The portfolio must be 50% invested.

This means that the value of purchases and sales must be at least 50% of the initial cash balance

The portfolio must have at least one short position.

All transactions must be in US Dollars.


Short Interest

Short Interest: 900,000 short . = 0.10 = 10%9,000,000 shares outstanding

Days to Cover: 900,000 short . = 9 days to cover100,000 shares/day


Graphical Representation

Equities

equities dividends, margin, & short positions. chapter 8: buying and selling equities ©...

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