Trading securities


Terms in this set (...)

Cash account
Customers pay the full purchase price of securities by the transaction settlement date.
Personal retirement accounts, such as IRAs, Keoghs, and TSAs.
Corporate retirement accounts.
Custodial accounts, such as Uniform Transfer to Minors Act accounts(UTMAs).
Demand deposit accounts
Checking or savings account.
Short-term with low return.
Margin account
Customers may borrow part of a security's purchase price from the broker-dealer.
Loan consent agreement
Allows the firm to loan out the customer's margin securities.
Hypothecation Agreement
Gives the firm permission to pledge (hypothecate) securities held on margin; a mandatory part of a margin agreement.
Credit Agreement
Discloses the terms of the credit extended by the broker-dealer, including the method of interest computation and situations under which interest rates may change.
Authorizes the broker-dealer to use the value of the account as collateral for the margin loan.
Example of a margin call (focus on the equity portion).
With the margin requirements of regulation T of 50%, a purchase of $12,000 of stock will result in a margin call of $6000. The broker-dealer lends the client the other $6000 creating a debit balance in the account. The equity in the account is 50%, and the client's debt is the other 50%.
Minimum maintenance
Set by the SROs.
This is the minimum equity that must be maintained in a margin account.
Should the equity fall below the minimum required, a maintenance call will go out demanding an immediate deposit of the equity to bring the account above the required level.
Currently, the minimum maintenance level for long positions is 25%
House maintenance
Set by the individual broker-dealer.
Exchange market
Composed of the NYSE and other exchanges on which listed securities are traded.
Each stock exchange requires corporations to meet certain criteria before it will allow their stock to be listed for trading on that exchange.
Prices determined by auction.
Exchange specialist
A member of the NYSE who executes orders for other members and who also act as a market maker charged with the responsibility of keeping an orderly market in designated stocks.
Market maker
Stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market.
Over-the-counter (OTC) market
This market functions as an inter-dealer market in which unlisted securities trade.
In this market, securities dealers across the country are connected by computer and telephone.
Prices determined by negotiation.
Government and the municipal bonds and unlisted corporate stocks and bonds trade in this market.
In this agency capacity, the firm represents clients who wish to buy a security by finding a seller, or finding a buyer for those clients with a security to sell.
For this service, they charge a commission.
This entity does not buy shares for inventory but facilitates trade between buyers and sellers.
Not a market maker.
Adds a markup to the ask/offer price when selling a security to a public customer.
These entities buy and sell securities for their own account.
When they receive a customer order to buy a security, they sell that security out of their inventory.
When they receive a custom order to sell, these entities buy that security for their inventory.
These entities charge the buying (selling) customers a markup (mark down) rather than a commission.
Market order
Executed immediately at the market price with no restrictions.
Market order to buy is executed at the lowest price available.
Market order to sell is executed at the highest price available.
Limit order
Limits the amount paid for securities.
This order can only be executed at the specified price or better. Better means lower in a buy order and higher in a sell order.
Stop order (stop loss order)
Becomes a market order if the stock reaches or goal through the stock price.

Buy stop orders - protect against loss in a short stock position; protect a gain from a short stock position; establish a long position when a breakout occurs above the line of resistance. This would most likely add fuel to a bullish stock market.

Sell stop orders - protect against loss in a long stock position; protect a gain from a long stock position; establish a short position when a breakout occurs below the line of support
Stop limit order
Entered as a stock order and changed to a limit order if the stock goes through the trigger price.
Why are short sales risky?
Because if the stock price rises instead of falls, an investor still must buy the shares to replace the borrowed stock - and the stock's price can rise without limit. Therefore, the position has unlimited risk.
Mixed margin account
One that contains both long and short positions.
Bid price
This is what the dealer will pay a customer to purchase a security.
Offer price
This is the dealer's selling price.
Market timing risk
The uncertainty that an investor will be buying at the market top or selling at the market bottom. In other words, at the wrong time.
Buy Stop order
placed above the market and as prices increase, the stops are hit creating additional buying.