How Securities Are Traded

Brokerage Firms

An investor selects a broker or brokerage

house by personal contact, referral,
reputation.

Full Service Broker

A brokerage firm offering a full range of

services, including information and
advice.

Brokerage

Transactions

Discount Broker

A brokerage firm offering execution

services
at
prices
typically
significantly
less
than
full-line
brokerage firms.

On-Line Discount Brokers

Types Of Brokerage
Accounts

Cash Account

The most common type of brokerage

account in which a customer may
make only cash transactions.

Margin Account

An account that permits margin

trading.

Types of Orders

Market Order

Limit Order

An order to buy and sell at the best

price when the order reaches the trading
floor.
An order to buy or sell at a specified or
better price.

Stop Order

An order specifying a certain price at

which a market order takes effect.

Margin

That part of a transactions value

that a customer has as equity to
the transaction.
Initial Margin
That part of a transactions value the
customer must pay to initiate the
transaction, with the other part being
borrowed from the broker.
Initial Margin = Amount Investor Puts Up
Value of the Transaction

Margin (Continued)

Q: If the initial margin requirement

is 50 percent on a $10,000
transaction (100 shares at $100
per share), what is the initial
margin?

Margin (Continued)

Maintenance Margin

The percentage of a securitys value

that must be on hand as equity.

Q: The maintenance margin is 30

percent, with a initial margin of 50
percent, and that the price of the
stock declines from $100 to $90 per
share. Calculate the actual margin?

Margin (Continued)

Actual Margin

Current value of securities - Amount borrowed

Current value of securities

Margin Call

A demand from the broker for

additional cash or securities as a result
of the actual margin declining below
the maintenance margin.

Margin (Continued)

Q: Assume that the maintenance margin is 30

percent. If the price of the stock drops to 1.
$80, 2. $66.66, check in which case investor
gets a margin call from the broker.

The price at which a margin call (MC) will

be issued can be calculated as:
Margin Call (MC) price=
Amount borrowed
Number of Shares (1 Maintenance margin
percentage)

Margin (Continued)

Short Sale

The sale of a stock not owned but

borrowed in order to take advantage
of the expected decline in the price of
the stock.