1 Margin is collateral for the brokers loan a Cash securities 2 Rules a Must have a margin account with a broker Leverage i 2000 equity or 100 of purchase power ii Let s you borrow from brokerage for investments iii Securities kept by broker until loan is repaid iv Let s brokerage safeguard the money it gave to you b Minimum Margin requirement set by the FED i depends on securities risk 1 50 for stocks 2 30 for bonds ii Can vary with brokerage form iii OTC stocks can t be margined No collateral value Minimum equity investor must have in his account time of purchase Min equity investor margin must have in account all times Notice that equity is below maintenance margin and must either 3 4 Maintenance margin 5 Margin Call Initial Margin a Return to maintenance margin lever by adding equity b Sell account holdings to bring margin up 6 Restricted Margin Account are unable to make purchases but have not yet reached the margin call 7 Noteworthy Items Equity is below initial margin required but about maintenance margin so you a Trading on margin has no impact on stock price direction b Amount of margin moves w stock price c More shares amplified returns d Smaller portion of investor funds used greater the rate of return 8 Short Selling vs Long Purchase a Selling stock that you borrow today with the intention to repurchase in the future at a lower price i Betting against the stock price Expecting price to go down ii Maximum Gain is finite Stock price can only go down to zero and you receive the total loss X of shares purchased b Long Purchase is purchasing stock today with the intention to sell in the future at a higher price i Betting on the stock price Expecting price to increase ii Maximum gain is infinite as stock price can go up forever 9 Market Average vs Indexes a Group of preselected securities chosen for some shared characteristic b Practical Uses i General Market Movement ii Forecasting using past to predict future iii Benchmarks using market as comparison market c How to use i Appropriate indexes ii Use same time frame iii Compare percent change 1 Computer companies vs index of computer companies 1 Can determine how successful and individual firm is doing in relations to the entire d Divisor maintains comparative relationship over time e Multiple Dow Jones Averages i DJ Industrial DJIA 30 different companies total market value ii DJ Transportation Average DJT Transportation companies f S and P 500 i 500 firms broader than DJIA all US firms that trade globally but almost 50 of their business comes from overseas g Value weighted closing price X of shares 10 Indexes a Continually revised throughout the day b Standard cite for indexes is the closing price c d Nasdaq composite index 3000 US and international firms The market is up is referencing previous close i High concentration of technical and growth firms e The Market either DJIA or S and P 5000 i Generally move together but could have mixed market Stock Brokers 1 Principal Goal execute clients buy low and sell high orders at the best possible price 2 Order of trade a Place Order Stock Broker Transmits Order Brokerage Firm Investor order Exchange Money Market Alternative trading system Transmits 3 Paid through commissions Just want to trade multiple times a Buy or sell they get paid b Churning i Allowing stock broker to buy or sell the stock 4 Licensed a SEC b Exchanges mostly electronic 5 Street Name Brokerages have a lot of stock of large companies in their name a This makes faster trading and short selling possible b Because they hold the shares in volume they can trade other peoples physical shares like the banks trades your physical dollars c This allows people to sell their shares faster withdraw money short sell sell other peoples shares on loan and insure their shares with the SIPC Investing Tips she wrote these so I know they are obvious but they were in her slides 1 Not everything online is true 2 Double check the ticker symbol Don t want to buy the wrong stock i e AAPL vs APL 3 More frequently that you trade less likely you will be to beat the market commissions add up w frequent trading a Pay for something once a day in a year 365 times vs once a year each year 1 time 4 People trade on emotions you shouldn t a Fear Sell your stocks when you shouldn t b Greed You don t sell your stocks when you should 5 Even with data correctly forecasting is very hard Ways to buy stocks Market orders Limit Orders and Stop Orders Trade offs Price certainly vs execution certainty 1 Market Orders Immediate buy sell Immediate transaction to buy sell your stock a b Simply tell your broker to sell and the 1st price they are offered they will sell for c Advantages i Certain order execution Fastest d Disadvantages i Price uncertainty risk 2 Limit Orders Buy Sell only if price is limit or better a Get the best possible price within a trading range b Set limit to buy stock specific price i EX 40 This means that you believe the stock to be undervalued at this price and since the price is currently at 42 when it drops to 40 your account will issue a market order automatically and will buy it BUYS LOW c Can also set limit to sell stock a a certain price i EX Sell 50 This means that you believe the stock price to be overvalued at this price and since the price is currently 42 when it drops to 40 your account will issue a market order and automatically will sell it SELLS HIGH 3 Stop Orders Minimize loss by dumping stock a Used in order to minimize losses buy setting a minimum sell price in order to sell before the stock price drops to low b For example if you buy stock at 45 and can handle at most a 5 loss you issue a stop order at c 40 to minimize losses in case the stock drops to 39 or more If you are waiting for good news to break on a 30 stock you can issue a stop order to buy at 32 therefore if bad news breaks then the stock price has a little room to wiggle up prior to dropping but if good news breaks then that slight wiggle room you gave yourself will quickly be surpassed and you will buy just above the low and profit as the stock continues to climb d Advantage i Fast and Certain e Disadvantage i Uncertain price 4 REMEMBER a What does the order do b Why would such an order type be placed c Risk associated w type of order 5 Precedence in orders a Market orders take all precedence i If order is placed at 40 and your limit order is at 40 the market order will execute the trade first even though the limit order turns …
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