Volume 1- Chapter 9 Flashcards
(61 cards)
Define cash accounts.
Clients with regular cash accounts are expected to make full payment for purchases or full delivery for sales on or before the settlement date.
Define margin accounts.
Margin accounts are used by clients who wish to buy or sell securities on partial credit, paying only a portion of the purchase price with the dealer lending the balance.
What is a long position?
A long position represents actual ownership in a security.
What is a short position?
A short position is created when an investor sells a security that the investor does not own.
What is required to close a long position?
To close a long position, the investor sells the stock in the market.
What must a client do to close a short position?
The investor buys back the stock from the market.
What is the initial deposit in a margin account?
The client must make an initial deposit of a specified portion of the value of the securities.
What does the term ‘margin’ refer to?
The margin refers to the amount of funds the investor must personally provide.
What are the two types of margin positions?
- Long margin position
- Short margin position
What is the role of the Canadian Investment Regulatory Organization (CIRO) regarding margin accounts?
CIRO regulates and enforces the amount of credit that a dealer member may extend to clients for the purchase of securities.
What are the minimum margin requirements for long positions in equity securities listed on a recognized exchange in Canada?
- At $2.00 and over: 50% of market value
- At $1.75 to $1.99: 60% of market value
- At $1.50 to $1.74: 80% of market value
- Under $1.50: 100% of market value (i.e., no loan value)
What happens if the price of a security falls in a long margin account?
The client must provide additional funds in the account to cover the shortfall up to the original purchase price, known as a margin call.
What occurs if the price of a security rises in a long margin account?
The client has access to additional funds in the account, termed excess margin.
What are the risks associated with using a margin account?
- Margin increases market risk
- Loan and interest must be repaid
- Margin calls must be paid without delay
What is short selling?
Short selling is defined as the sale of securities that the seller does not own and can only be done in a margin account.
What is the order of transactions in short selling?
The investor sells the security first, then waits to buy it back at a lower price.
What happens if the price rises after a short sale?
The investor may incur a loss if they have to buy back the security at a higher price.
What is the theoretical risk associated with short selling?
Short selling has unlimited risk because the security sold short could potentially rise to infinity.
Fill in the blank: The proceeds of a short sale are deposited in the client’s _______.
account.
True or False: Not every dealer member allows margin accounts.
True.
Describe the process of establishing a long margin position.
Sufficient funds or securities with excess loan value must be in the account to cover the purchase, and the dealer lends some of these funds.
What is a margin call?
A margin call is a request for the client to deposit additional funds when the security price falls and the margin requirement increases.
What is the first step in the short selling process?
Your client calls you and instructs you to sell 10,000 shares of ABC short.
What does the investment dealer gain by lending securities for short selling?
The investment dealer is free to use the money put up by the short seller in the firm’s business or in interest-earning activities.
