jm5e chap 02
DESCRIPTION
JM5e Chap 02TRANSCRIPT
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2Buying and Selling Securities
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Brokerage Types
Broker TypeService LevelCommissionsFull ServiceHighHighDiscountMediumMediumDeep DiscountLowLow
Online e-brokerVaries; unbundledLow/varies
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Broker-Customer RelationsAdvice not guaranteed
SIPC insuredYour broker = your agent Legal duty to act in your best interestBest ExecutionBrokerage firms profit from commissionsDisputes settled by final and binding arbitration
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Securities Investor Protection CorporationSecurities Investor Protection Corporation (SIPC): Insurance fund covering investors brokerage accounts when member firms go bankrupt or experience financial difficulties.
Most brokerage firms belong to the SIPC, which insures each account for up to $500,000 in cash and securities, with a $100,000 cash maximum.
Important: The SIPC does not guarantee the value of any security (unlike FDIC coverage).
Rather, SIPC protects whatever amount of cash and securities that were in your account, in the event of fraud or other failure.
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Brokerage AccountsCash account = a brokerage account in which securities are paid for in full
Margin account = a brokerage account in which, subject to limits, securities can be bought and sold short on credit.
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Margin AccountsMargin = the portion of the value of an investment that is not borrowed
Borrowed portion incurs interest Call money rateRate brokers pay to borrow money to lend to customers in their margin accounts
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Example: Margin Accounts,The Balance Sheet
You buy 1,000 Pfizer (PFE) at $24 per share. You put up $18,000 and borrow the rest. Amount borrowed = $24,000 $18,000 = $6,000 Margin = $18,000 / $24,000 = 75%
EX 2.1
AssetsLiabilities and Account Equity1,000 Shares, PFE$ 24,000 Margin Loan$ 6,000 Account Equity$ 18,000Total$ 24,000 Total$ 24,000
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Margin AccountsInitial Margin = the minimum margin that must be supplied in a margin purchaseMinimum = 50% set by Federal ReserveBroker can require moreMaintenance margin = amount that must be present at all times in a margin account.Margin Call = broker demands more funds to bring margin amount back up to the maintenance margin.
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Example: The Workings of a Margin Account, I
Initial margin = 50%Maintenance margin = 30%
Miller Moore Equine Enterprises (WHOA) is selling for $50.With $20,000 you can buy $20,000 / 0.5 = $40,000 worth of WHOA or 800 shares
AssetsLiabilities and Account Equity800 Shares of WHOA @ $50/share$ 40,000 Margin Loan$ 20,000 Account Equity$ 20,000Total$ 40,000 Total$ 40,000
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Example: The Workings of a Margin Account, II
After your purchase, shares of WHOA fall to $35.
New margin = $8,000 / $28,000 = 28.6% < 30%
You are subject to a margin call.
AssetsLiabilities and Account Equity800 Shares of WHOA @ $35/share$ 28,000 Margin Loan$ 20,000 Account Equity$ 8,000Total$ 28,000 Total$ 28,000
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Margin and LeverageSuppose you buy 1,000 shares of Coca-Cola (KO) at$50 per share. You put up 60% initial margin and borrowed the remainder at 6% per year (call money rate plus the spread).
If a year later, KO is trading at $60 per share: What is your return on this investment?What would be your return if you had not invested on margin?What if KO is trading at $40 per share?
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Margin & Leverage: Sell at $60
BS
AssetsLiabilities & Account Equity
1,000 shares of Microsoft30,000Margin Loan12,000
Account equity18,000
TOTAL30,000TOTAL30,000
Init Margin
Initial Margin %Maximum Order
50%$10,000
60%$8,333
70%$7,143
80%$6,250
90%$5,556
100%$5,000
BS (2)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft35,000Margin Loan12,000
Account equity23,000
TOTAL35,000TOTAL35,000
BS (3)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft22,000Margin Loan12,000
Account equity10,000
TOTAL22,000TOTAL22,000
BS (4)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft16,500Margin Loan12,000
Account equity4,500
TOTAL16,500TOTAL16,500
0.2727272727
IBM-jm4e
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 1,000 shares @ $60$60,000
Borrow $20,000 @ 6%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$38,800
Rate of return on margined investment =($38,800 - $30,000) / $30,000 =29.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $60$60,000
Buy 100 shares @ $100-$50,000
$0$60,000
Rate of return on unmargined investment =($60,000-$50,000) / $50,000 =20.00%
IBM (2)
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 100 shares @ $40$40,000
Borrow $20,000 @ 8%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$18,800
Rate of return on margined investment =($18.800 - $30,000) / $30,000 =-37.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $40$40,000
Buy 1,000 shares @ $50-$50,000
$0$40,000
Rate of return on unmargined investment =($40000 - $50,000)/ $50,000 =-20.00%
IBM 3
Rate of Return
Price @ t=1MarginedNot Margined
$6029.3%20.0%
$40-37.3%-20.0%
IBM MC
IBM
AssetsLiabilities & Account Equity
100 shares of IBM$10,000Margin Loan$4,000
Account Equity$6,000
$10,000$10,000
IBM ann
IBM
t = 0t = + 4 months
60% of 100 shares @ $100$6,000Sell 100 shares @ $110$11,000
Borrow $4,000 @ 8%$4,000Repay loan with interest-$4,103
Buy 100 shares @ $100-$10,000
$0$6,897
Holding Period Return($6,897 - $6,000) / $6,000 =14.95%
Annualized Return(1.1495)^3 - 151.90%
GE 1
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position3,200
Initial margin deposit$ 1,600Account equity1,600
TOTAL4,800TOTAL4,800
GE 2
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position2,500
Initial margin deposit$ 1,600Account equity2,300
TOTAL4,800TOTAL4,800
GE 3
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position4,000
Initial margin deposit$ 1,600Account equity800
TOTAL4,800TOTAL4,800
GE MC
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position1,231
Initial margin deposit$ 1,600Account equity3,569
TOTAL4,800TOTAL4,800
Margin =
Sheet3
Sheet2
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Margin & Leverage: Sell at $40
BS
AssetsLiabilities & Account Equity
1,000 shares of Microsoft30,000Margin Loan12,000
Account equity18,000
TOTAL30,000TOTAL30,000
Init Margin
Initial Margin %Maximum Order
50%$10,000
60%$8,333
70%$7,143
80%$6,250
90%$5,556
100%$5,000
BS (2)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft35,000Margin Loan12,000
Account equity23,000
TOTAL35,000TOTAL35,000
BS (3)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft22,000Margin Loan12,000
Account equity10,000
TOTAL22,000TOTAL22,000
BS (4)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft16,500Margin Loan12,000
Account equity4,500
TOTAL16,500TOTAL16,500
0.2727272727
IBM-jm4e
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 1,000 shares @ $60$60,000
Borrow $20,000 @ 6%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$38,800
Rate of return on margined investment =($38,800 - $30,000) / $30,000 =29.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $60$60,000
Buy 100 shares @ $100-$50,000
$0$60,000
Rate of return on unmargined investment =($60,000-$50,000) / $50,000 =20.00%
IBM (2)
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 100 shares @ $40$40,000
Borrow $20,000 @ 8%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$18,800
Rate of return on margined investment =($18.800 - $30,000) / $30,000 =-37.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $40$40,000
Buy 1,000 shares @ $50-$50,000
$0$40,000
Rate of return on unmargined investment =($40000 - $50,000)/ $50,000 =-20.00%
IBM 3
Rate of Return
Price @ t=1MarginedNot Margined
$6029.3%20.0%
$40-37.3%-20.0%
IBM MC
IBM
AssetsLiabilities & Account Equity
100 shares of IBM$10,000Margin Loan$4,000
Account Equity$6,000
$10,000$10,000
IBM ann
IBM
t = 0t = + 4 months
60% of 100 shares @ $100$6,000Sell 100 shares @ $110$11,000
Borrow $4,000 @ 8%$4,000Repay loan with interest-$4,103
Buy 100 shares @ $100-$10,000
$0$6,897
Holding Period Return($6,897 - $6,000) / $6,000 =14.95%
Annualized Return(1.1495)^3 - 151.90%
GE 1
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position3,200
Initial margin deposit$ 1,600Account equity1,600
TOTAL4,800TOTAL4,800
GE 2
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position2,500
Initial margin deposit$ 1,600Account equity2,300
TOTAL4,800TOTAL4,800
GE 3
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position4,000
Initial margin deposit$ 1,600Account equity800
TOTAL4,800TOTAL4,800
GE MC
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position1,231
Initial margin deposit$ 1,600Account equity3,569
TOTAL4,800TOTAL4,800
Margin =
Sheet3
Sheet2
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Margin & LeverageMargin provides leverage which magnifies profits and losses
BS
AssetsLiabilities & Account Equity
1,000 shares of Microsoft30,000Margin Loan12,000
Account equity18,000
TOTAL30,000TOTAL30,000
Init Margin
Initial Margin %Maximum Order
50%$10,000
60%$8,333
70%$7,143
80%$6,250
90%$5,556
100%$5,000
BS (2)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft35,000Margin Loan12,000
Account equity23,000
TOTAL35,000TOTAL35,000
BS (3)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft22,000Margin Loan12,000
Account equity10,000
TOTAL22,000TOTAL22,000
BS (4)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft16,500Margin Loan12,000
Account equity4,500
TOTAL16,500TOTAL16,500
0.2727272727
IBM-jm4e
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 1,000 shares @ $60$60,000
Borrow $20,000 @ 6%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$38,800
Rate of return on margined investment =($38,800 - $30,000) / $30,000 =29.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $60$60,000
Buy 100 shares @ $100-$50,000
$0$60,000
Rate of return on unmargined investment =($60,000-$50,000) / $50,000 =20.00%
IBM (2)
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 100 shares @ $40$40,000
Borrow $20,000 @ 8%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$18,800
Rate of return on margined investment =($18.800 - $30,000) / $30,000 =-37.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $40$40,000
Buy 1,000 shares @ $50-$50,000
$0$40,000
Rate of return on unmargined investment =($40000 - $50,000)/ $50,000 =-20.00%
IBM 3
Rate of Return
Price @ t=1MarginedNot Margined
$6029.3%20.0%
$40-37.3%-20.0%
IBM MC
IBM
AssetsLiabilities & Account Equity
100 shares of IBM$10,000Margin Loan$4,000
Account Equity$6,000
$10,000$10,000
IBM ann
IBM
t = 0t = + 4 months
60% of 100 shares @ $100$6,000Sell 100 shares @ $110$11,000
Borrow $4,000 @ 8%$4,000Repay loan with interest-$4,103
Buy 100 shares @ $100-$10,000
$0$6,897
Holding Period Return($6,897 - $6,000) / $6,000 =14.95%
Annualized Return(1.1495)^3 - 151.90%
GE 1
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position3,200
Initial margin deposit$ 1,600Account equity1,600
TOTAL4,800TOTAL4,800
GE 2
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position2,500
Initial margin deposit$ 1,600Account equity2,300
TOTAL4,800TOTAL4,800
GE 3
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position4,000
Initial margin deposit$ 1,600Account equity800
TOTAL4,800TOTAL4,800
GE MC
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position1,231
Initial margin deposit$ 1,600Account equity3,569
TOTAL4,800TOTAL4,800
Margin =
Sheet3
Sheet2
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Example: How Low Can it Go?Suppose you want to buy 300 shares of Pepsico, Inc. (PEP) at $55 per share.Total cost: $16,500You have only $9,900so you must borrow $6,600.
Your initial margin is $9,900/$16,500 = 60%.
Suppose your maintenance margin is 40%. At what price will you receive a margin call?
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Margin CallLet P* be the critical margin call price:Amount borrowed = B$6,600Number of shares= N300Value of stock = V55 x P* Account equity = AE55 x P* - $6,600Maintenance margin = MM40%2.1
BS
AssetsLiabilities & Account Equity
1,000 shares of Microsoft30,000Margin Loan12,000
Account equity18,000
TOTAL30,000TOTAL30,000
Init Margin
Initial Margin %Maximum Order
50%$10,000
60%$8,333
70%$7,143
80%$6,250
90%$5,556
100%$5,000
BS (2)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft35,000Margin Loan12,000
Account equity23,000
TOTAL35,000TOTAL35,000
BS (3)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft22,000Margin Loan12,000
Account equity10,000
TOTAL22,000TOTAL22,000
BS (4)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft16,500Margin Loan12,000
Account equity4,500
TOTAL16,500TOTAL16,500
0.2727272727
IBM-jm4e
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 1,000 shares @ $60$60,000
Borrow $20,000 @ 6%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$38,800
Rate of return on margined investment =($38,800 - $30,000) / $30,000 =29.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $60$60,000
Buy 100 shares @ $100-$50,000
$0$60,000
Rate of return on unmargined investment =($60,000-$50,000) / $50,000 =20.00%
IBM (2)
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 100 shares @ $40$40,000
Borrow $20,000 @ 8%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$18,800
Rate of return on margined investment =($18.800 - $30,000) / $30,000 =-37.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $40$40,000
Buy 1,000 shares @ $50-$50,000
$0$40,000
Rate of return on unmargined investment =($40000 - $50,000)/ $50,000 =-20.00%
IBM 3
Rate of Return
Price @ t=1MarginedNot Margined
$6029.3%20.0%
$40-37.3%-20.0%
IBM MC
IBM
AssetsLiabilities & Account Equity
300 shares at $55$16,500Margin Loan$6,600
Account Equity$9,900
$16,500$16,500
IBM ann
IBM
t = 0t = + 4 months
60% of 100 shares @ $100$6,000Sell 100 shares @ $110$11,000
Borrow $4,000 @ 8%$4,000Repay loan with interest-$4,103
Buy 100 shares @ $100-$10,000
$0$6,897
Holding Period Return($6,897 - $6,000) / $6,000 =14.95%
Annualized Return(1.1495)^3 - 151.90%
GE 1
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position3,200
Initial margin deposit$ 1,600Account equity1,600
TOTAL4,800TOTAL4,800
GE 2
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position2,500
Initial margin deposit$ 1,600Account equity2,300
TOTAL4,800TOTAL4,800
GE 3
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position4,000
Initial margin deposit$ 1,600Account equity800
TOTAL4,800TOTAL4,800
GE MC
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position1,231
Initial margin deposit$ 1,600Account equity3,569
TOTAL4,800TOTAL4,800
Margin =
Sheet3
Sheet2
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Margin Call Price
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Annualized ReturnsEffective Annual Rate (EAR)Where:HPR = Holding Period ReturnM = Number of Holding Periods per year
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Annualizing Returns on a Margin PurchaseYou buy 1,000 shares of Costco at $60 per share You put up 50% initial margin and borrowed the remainder at 11% per year (call money rate of 9% plus a 2% spread)Three months later, Costco is selling for $63 per share and you decide to close out your positionWhat is your annualized return?
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Annualized ReturnLoan with interest = $30,000 x (1.11).25 3 months = 1/4 of a year = 0.25Annualized Return = (1+HPR)4 -1 There are 4 HPs in a year
BS
AssetsLiabilities & Account Equity
1,000 shares of Microsoft30,000Margin Loan12,000
Account equity18,000
TOTAL30,000TOTAL30,000
Init Margin
Initial Margin %Maximum Order
50%$10,000
60%$8,333
70%$7,143
80%$6,250
90%$5,556
100%$5,000
BS (2)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft35,000Margin Loan12,000
Account equity23,000
TOTAL35,000TOTAL35,000
BS (3)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft22,000Margin Loan12,000
Account equity10,000
TOTAL22,000TOTAL22,000
BS (4)
AssetsLiabilities & Account Equity
1,000 shares of Microsoft16,500Margin Loan12,000
Account equity4,500
TOTAL16,500TOTAL16,500
0.2727272727
IBM-jm4e
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 1,000 shares @ $60$60,000
Borrow $20,000 @ 6%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$38,800
Rate of return on margined investment =($38,800 - $30,000) / $30,000 =29.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $60$60,000
Buy 100 shares @ $100-$50,000
$0$60,000
Rate of return on unmargined investment =($60,000-$50,000) / $50,000 =20.00%
IBM (2)
IBM
Margined
t = 0t = 1
60% of 1,000 shares @ $50$30,000Sell 100 shares @ $40$40,000
Borrow $20,000 @ 8%$20,000Repay loan with interest-$21,200
Buy 1,000 shares @ $50-$50,000
$0$18,800
Rate of return on margined investment =($18.800 - $30,000) / $30,000 =-37.33%
Not Margined
t = 0t = 1
Put up 100%$50,000Sell 100 shares @ $40$40,000
Buy 1,000 shares @ $50-$50,000
$0$40,000
Rate of return on unmargined investment =($40000 - $50,000)/ $50,000 =-20.00%
IBM 3
Rate of Return
Price @ t=1MarginedNot Margined
$6029.3%20.0%
$40-37.3%-20.0%
IBM MC
IBM
AssetsLiabilities & Account Equity
100 shares at $100$10,000Margin Loan$4,000
Account Equity$6,000
$10,000$10,000
IBM ann
IBM
t = 0t = + 3 months
50% of 1000 shares @ $60$30,000Sell 1000 shares @ $63$63,000
Borrow $30,000 @ 11%$30,000Repay loan with interest-$30,793
Buy 1000 shares @ $60-$60,000
$0$32,207
Holding Period Return($32,207- $30,000) / $30,000 =7.36%
Annualized Return(1.0736)^4 - 132.85%
GE 1
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position3,200
Initial margin deposit$ 1,600Account equity1,600
TOTAL4,800TOTAL4,800
GE 2
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position2,500
Initial margin deposit$ 1,600Account equity2,300
TOTAL4,800TOTAL4,800
GE 3
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position4,000
Initial margin deposit$ 1,600Account equity800
TOTAL4,800TOTAL4,800
GE MC
AssetsLiabilities & Account Equity
Proceeds from sale3,200Short position1,231
Initial margin deposit$ 1,600Account equity3,569
TOTAL4,800TOTAL4,800
Margin =
Sheet3
Sheet2
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Hypothecation and Street Name RegistrationHypothecation:Pledging securities as collateral against a loanSecurities can be sold by the broker if the customer fails to meet a margin call.
Street name registration:Broker = registered owner of a securityAccount holder = beneficial owner.
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Trading Account ManagementAdvisory accountYou pay someone else to make buy and sell decisions on your behalf.
Wrap account All the account expenses are wrapped into a single fee.
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Trading Account ManagementDiscretionary account You authorize your broker to trade for you.
Asset management account Provides complete money management, including check-writing privileges, credit cards, and margin loans.
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Short Sales
Short Sale = a sale in which the seller does not actually own the security that is sold.
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Long PositionsWhen an investor buys and owns shares of stock, he holds a Long Position.A long position benefits from price increases.You buy today at $34, and sell later at $57, you profit!Buy low, sell high
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Short PositionsWhen an investor sells shares that he does not own, he holds a Short Position.Shorting the stockA short position benefits from price decreases.You sell today at $83, and buy later at $27, you profit.Sell high, buy low Buy low, sell high in reverse
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Example: Short SalesYou short 100 shares of TI at $30 per share.Your broker has a 50% initial margin and a 40% maintenance margin on short sales.
AssetsLiabilities and Account Equity Sale Proceeds $ 3,000 Short Position $ 3,000 Initial Margin Deposit$ 1,500 Account Equity $ 1,500 Total$ 4,500 Total $ 4,500
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Example: Short SalesTI stock falls to $20 per share.Shorted at $30, value today is $20, so you are "ahead" by $10 per share, or $1,000.New margin: $2,500 / $2,000 = 125%
AssetsLiabilities and Account EquitySale Proceeds $ 3,000 Short Position $ 2,000Initial Margin Deposit $ 1,500 Account Equity $ 2,500 Total$ 4,500 Total $ 4,500
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Example: Short SalesTI stock price rises to $40 per share.You sold short at $30, stock price is now $40, you are "behind" by $10 per share, or $1,000. New margin = $500 / $4,000 = 12.5% < 40% Therefore, you are subject to a margin call.
AssetsLiabilities and Account EquitySale Proceeds $ 3,000 Short Position $ 4,000Initial Margin Deposit$ 1,500 Account Equity $ 500Total$ 4,500 Total $ 4,500
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More on Short SalesShort interest is the amount of common stock held in short positions.
A bearish indicator
With a short position, No theoretical limit to how high the stock price may riseNo limit to potential losses
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Investment ObjectivesBasic Question: Why invest at all?Invest today to have more tomorrowDeferred consumptionChoose to wait to have more to spend later
Individual risk-return trade-off:How much risk can you handle?
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Investment Strategies and PoliciesInvestment management: Should you manage your investments yourself?
Market timing: Should you try to buy and sell in anticipation of the future direction of the market?
Asset allocation: How should you distribute your investment funds across the different classes of assets?
Security selection: Within each class, which specific securities should you buy?
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Investor ConstraintsResources: What is the minimum sum needed? What are the associated costs?
Horizon: When do you need the money?
Liquidity: Will you need to sell the asset quickly?
Taxes: Which tax bracket are you in?
Special circumstances
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Useful Internet Siteswww.finra.org (a reference for dispute resolution)
www.bearmarketcentral.com (a reference for short selling)www.nasdaq.com (a reference for short interest)www.moneycentral.msn.com (a reference for building a portfoliosearch the site for Build your first stock portfolio)www.sharebuilder.com (a reference for opening a brokerage account) www.buyandhold.com (another reference for opening a brokerage account)www.individual.ml.com (a risk tolerance questionnaire from Merrill Lynch)www.money-rates.com (a reference for current broker call money rate)finance.yahoo.com (a reference for short sales on particular stocks)
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2Buying and Selling SecuritiesChapter End