Trading of Stocks

Question 1

What is a Long Position?

Answer 1

Buy and Hold

*Refer to graph in notes

Question 2

What is Contra Trading?

3

Answer 2

1) Buying a security and selling it before settlement.
2) No cash outlay: Only pay loss or receive profit
3) On par with major markets such as US, UK, Canada, Japan, Hong Kong

Question 3

What is Margin Trading?

Answer 3

Borrow cash to buy securities and use the securities as collateral

Question 4

What is Short Selling?

4

Answer 4

Selling without owning.

1) When price falls, buy back and takes profit
2) Involve borrowing the shares (with a charge)
> Need to borrow the share first before short-selling
3) Proceed from short sales is not paid to short sellers but kept as collateral (Usually they are non-interest earning)
4) Short sellers have to pay dividends

Question 5

What is Initial Margin?

Answer 5

50%

- The proportion of market value that investor must pay as an equity share

Question 6

What is Margin maintenance

Answer 6

The minimum proportion of equity (relative to market value) in the investor’s margin account below which the investor will receive a margin call.

Question 7

Why is Short selling risky?

Answer 7

Limited upside potential and unlimited downside risk

• In the past, there were restricitons on short selling
  > Uptick
  > Zero-plus tick
• But they were subsequently lifted
• As a result of the current crisis, several markets have re-implemented various restrictions