Chapter 18- (2Qs) Trading Securities

Question 1

Cash accounts

Answer 1

Must pay full for all securities purchases

Include:
Retirement accounts
Corporate retirement accounts
Custodial accounts such as UTMAs

Question 2

Margin Accounts

Answer 2

May be used to purchase securities for 50% cash or 100% of value in securities

May also loan on the account

Must have a margin agreement signed by customer promptly after first transaction

Credit Agreement
Hypothecation agreement
Loan Consent (Optional) that allows securities bought to be used to cover short sales

FINRA also requires a risk disclosure agreement be signed before the initial trade

Question 3

Margin call

Answer 3

If a customer’s purchases equity with margin, they will be required to provide 50% in cash or 100% in securities

Question 4

Minimum maitenance

Answer 4

If a customers equity falls below 25% for a long position or 30% for a short position then they will have to submit an immediate deposit

Question 5

How to determine equity in an account

Answer 5

CMV long - Debit= Long
Credit - CMV Short= Short equity

To find net equity, you add CMV and Credit and subtract Debit and CMV SHort

50-20=30 and 40-25=15

Question 6

Primary vs Secondary Market

Answer 6

Primary= IPOs, proceeds to the issuer

Secondary- Proceeds to owner of securities

Trading of Listed Securities either over web or on market floors

Operate as auction market

Question 7

Designated Market Maker (Specialist)

Answer 7

Fills limit and market orders for the public and trades for his own account to stabilize of facilitate trading

Function is to eliminate price disparities to opening

Question 8

OTC Market

Answer 8

Facilitates trades of unlisted securities

No Central market place

Negotiated Market place where market makers compete to post best bid and ask

Market Makers are broker-dealers making bid-ask offers of 100 shares

Government, Municipal and unlisted corporate stocks and bonds trade OTC

Question 9

Brokers

Answer 9

Acting in Agency Capacity

Charge a commission to match customer’s buy and sell orders

Do not buy shares for inventory

Question 10

Dealers

Answer 10

Acting as principal in a trade

Acting for their own account

Charge a mark up or mark down to customers

Cannot act as both a broker and a dealer in the same trade

Question 11

Bid/offer

Answer 11

Bid=buy
Offer=Sell

Difference between the two is the spread

Written 43.25-.50
Offer-Bid

Question 12

Market
Limit
Stop
Stop Limit

Answer 12

1. Executed immediately at market price, has priority over other orders
2. Limits Amount paid or received for securities, executed at price or better, left with specialist if it cannot be executed right away.

If any part of order can be filled, it is

3. Stop Loss order- Becomes market order if stock reaches or goes through a stop price. Entered to protect a profit or limit a loss. Also left with specialist.

Becomes a market order upon hitting the price

Takes two trades for a stop order to be completed

4. Stop Limit- Changes to a limit order if price hits or goes through trigger Price

Buy Stops, Sell Limits
Current Price
Buy Limits Sell Stops

Question 13

Block Trade

Answer 13

10,000 shares or $200,000

Question 14

high Frequency Trading

Answer 14

Orchestrated by high speed computers

Nearly 60% of tradin in US

Reduces arbitrage

Lends to market manipulation

Hurts smaller investors

Has the ability to snowball

Question 15

Dark pools

Answer 15

Institutional trading and trading desks that are made away from the market

Allows for trades to be submitted anonymously and is about 17% of trade volumes

Trade, volume or prices are not communicated to market