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Understanding the Securities Market: Brokers, Order Types, and Margin Accounts

This guide provides a comprehensive overview of the securities market, focusing on the role of brokers as agents for investors compensated by commissions. It explores various types of firms in the market, including retail and discount brokers, and delves into ordering mechanics such as order size, time limits, and different order types (market, limit, stop, stop-limit). Additionally, it discusses margin accounts, their purpose, features, initial and maintenance margins, and the implications of being undermargined or overmargined. Insights into short sales, including rules and margin requirements, are also covered.

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Understanding the Securities Market: Brokers, Order Types, and Margin Accounts

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  1. CHAPTERTWO BUYING AND SELLING SECURITIES

  2. THE SECURITIES MARKET • BROKERS • DEFINITION: act as agents for investors and compensated by commissions.

  3. THE SECURITIES MARKET • Types of Firms: • Retail • Regional • Discount

  4. ORDERING • Order Size • Round lots • Odd lots

  5. ORDERING • Time Limits to Orders • the investor must specify a time limit when ordering from a broker

  6. ORDERING • Time Limits to Orders • some typical time limits: • day • good-til-canceled (GTC) • fill-or-kill

  7. ORDERING • Types of Orders: • Market order

  8. ORDERING • Types of Orders: • Limit order

  9. ORDERING • Types of Orders: • Stop order

  10. ORDERING • Types of Orders: • Stop limit

  11. MARGIN ACCOUNTS • THE PURPOSE OF MARGIN ACCOUNTS: • these accounts act as a line of credit for more money than is in the investor’s cash account.

  12. MARGIN ACCOUNTS • SOME FEATURES OF MARGIN ACCOUNTS: • a hypothecation agreement: • allows pledging and lending

  13. MARGIN ACCOUNTS • SOME FEATURES OF MARGIN ACCOUNTS: • a street name: • facilitates pledging/lending

  14. MARGIN ACCOUNTS • MARGIN PURCHASES: • Initial Margins are required • Actual Margin: = Market Value – Loan Market Value

  15. MARGIN ACCOUNTS • MAINTENANCE MARGINS: • Purpose: • to prevent default by the investor • to be maintained at the level or above • to restore when undermargined

  16. MARGIN ACCOUNTS • UNDERMARGINED • the investor’s account value has fallen below the maintenance level

  17. MARGIN ACCOUNTS • UNDERMARGINED • results in a margin call by broker to investor who may • deposit cash or securities into the account • pay off part of the loan • sell some securities

  18. MARGIN ACCOUNTS • OVERMARGINED: • if the price of the securities rises above the maintenance margin

  19. MARGIN ACCOUNTS • OVERMARGINED: • investor may withdraw some funds

  20. SHORT SALES • WHAT IS A SHORT SALE? • a sale which involves the investor borrowing stock from his/her broker to sell at a higher price and repurchase at a later time at a lower price

  21. SHORT SALES • RULES FOR SHORT SALES: • The Up-tick Rule • Delivery • Term of the Loan

  22. SHORT SALES • SHORT-SALE MARGINS • Initial margin

  23. SHORT SALES • SHORT-SALE MARGINS Actual margin = (Short Sales Proceeds + Initial Margin) - Loan Loan

  24. SHORT SALES • SHORT-SALE MARGINS • Maintenance margin • equal to the current dollar value of the loan.

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