Equities Dividends, Margin, & Short Positions. Chapter 8: Buying and Selling Equities © Oltheten &...
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Transcript of Equities Dividends, Margin, & Short Positions. Chapter 8: Buying and Selling Equities © Oltheten &...
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders
A trade order is an instruction conveyed to a broker who then executes or fills the order.
A broker needs clear instructions on how and when to trade
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Market
Buy 100 DVC Buy 100 DVC at the lowest market price
Sell 100 DVC Sell 100 DVC at the highest market price
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Limit
Buy 100 DVC limit $52 Buy 100 DVC at the lowest market price but do not
pay more than $52
Sell 100 DVC limit $48 Sell 100 DVC at the highest market price but do not
take less than $48
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Stop
A stop order becomes a market order as soon as the market price of a board lot reaches a specified level.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Stop
Sell 100 DVC stop $40 I bought Discovery Café and now the price is going
down. If it decreases to $40 sell me out before I lose even more money.
Buy 100 DVC stop $60 I short sold Discovery Cafe and now the price is going
up. If it increases to $60, cover my short position before I lose even more money.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Stop Limit
A stop order becomes a limit order as soon as the market price of a board lot reaches a specified level.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Orders: Stop Limit
Sell 100 DVC stop $40 limit $35 I bought Discovery Café and now the price is going
down. If it decreases to $40 sell me out but don’t take less than $35.
Buy 100 DVC stop $60 limit $65 I short sold Discovery Cafe and now the price is going
up. If it increases to $60, cover my short position but don’t pay more than $65
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Equities
Dividends & Splits Margin Short Positions
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Dividends
Company Board of Directors Declaration Date
Record Date
Pay Date
Primary Exchange Ex-date
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Dividends
Declaration Date Pay DateRecord Date
Ex Date
The dividend is attached to the
share.
The dividend is detached from the share.
T + 3
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Dividends: DVC
Declaration Date$1/share
Pay DateRecord Date
Ex Date
John buys DVC at $51
Mary buys DVC from John at $50.
John receives a dividend of $1.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Dividends
www.dividend.comMust buy by 8/14 to get the dividend of
record 8/17
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Splits
Declaration Date Pay Date Ex Date
The shares trades at the pre-split price.
The shares trade at the post-split price
T-1
Number of shares adjusted for split
after all trades are executed.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
DVC splits 2:1
Declaration Date Pay Date Ex Date
John buys 1000 DVC @ $100 for a total value of $100,000
The shares trade at the post-split price so John now has 2000 DVC @ $50 for a total value of $100,000UISES credits
John’s portfolio with 1000 shares
@ $0
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Equities
Dividends & Splits Buying on Margin Short Positions
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Buying on Margin
Buying Stock with borrowed money Margin:
percentage you pay for yourself . Leverage:
amplification of return and risk.
Leverage = 1 .Margin
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
DVC @ $50 1000 DVC @$50 on
50% margin$50,000
Brokers Loan $25,000
50% Margin $25,000
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Leverage
DVC$70
© Oltheten & Waspi 2012
$25,000 $25,000
$70,000
$50,000
1 .= 2 50%
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Not a partnership
Similar to the CAPM exercisewith β = 2
© Oltheten & Waspi 2012
$25,000
$35,000
$35,000
$70,000
$50,000
$25,000
Equity:50%
+40%
+40%
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Leverage
DVC$70
© Oltheten & Waspi 2012
$25,00050%
$25,00035.7%
$70,000
$50,000
1 . = 2 50%
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Leverage
DVC $40
© Oltheten & Waspi 2012
$25,000 $25,000
$40,000
$50,000
1 . = 2 50%
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Margin Call Margin Call of $5,000
$20,000$25,000
$40,000 $40,000
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
1929
Margin requirements of 10% Leverage = 1/.10 =10 Small decrease in price triggered
a cascade
$1,000
$9,000
$10,000
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
1929Dow Jones Industrial Average
October 1928 to December 1934
358.77
386.1
195.35
40.560
50
100
150
200
250
300
350
400
450
Oct
1928
Apr
1929
Oct
1929
Apr
1930
Oct
1930
Apr
1931
Oct
1931
Apr
1932
Oct
1932
Apr
1933
Oct
1933
Apr
1934
Oct
1934
- 89.5%
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Regulation T
The account must have at least $2000 in cash or securities.
Initial margin of 50% maintenance margin of 25%.
Most brokers have margin requirements stricter than Regulation T
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Equities
Dividends & Splits Buying on Margin Short Positions
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Long Position
Microsoft (MSFT)
-
10
20
30
40
50
60
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00
Buy Low
Sell High
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short PositionMicrosoft (MSFT)
-
10
20
30
40
50
60
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
Buy Low
Sell High
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short SellMay 12 Project a price decline on Discovery Cafe
Borrow 100 DVC: Borrowing fee
Sell 100 DVC @ $100
150% Margin (regulation T)
June 12 Borrowing fee
June 30 Cover: Buy 100 DVC @ $80
Margin returned
Net
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short SellMay 12 Project a price decline on Discovery Cafe
Borrow 100 DVC: Borrowing fee
Sell 100 DVC @ $100
150% Margin (regulation T)
June 12 Borrowing fee
July 1 DVC declares $3 dividend
July 12 Borrowing Fee
July 30 DVC dividend equivalent
July 31 Cover: Buy 100 DVC @ $90
Margin returned
Net
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short SellMay 12 Project a price decline on Discovery Cafe
Borrow 100 DVC: Borrowing fee
Sell 100 DVC @ $100
150% Margin (regulation T)
June 12 Borrowing fee
July 1 DVC declares $3 dividend
July 12 Borrowing Fee
July 30 DVC dividend equivalent
July 31 Cover: Buy 100 DVC @ $110
Margin returned
Net
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short Sales
Regulation T initial margin of 150% Maintenance margin of 130%
Tick Rules To prevent destabilization in down markets
Eliminated July 6, 2007 Numerous calls for restoration of the tick rules
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short Position
By the end of the first month The portfolio must be 50% invested.
This means that the value of purchases and sales must be at least 50% of the initial cash balance
The portfolio must have at least one short position.
All transactions must be in US Dollars.
Chapter 8: Buying and Selling Equities © Oltheten & Waspi 2012
Short Interest
Short Interest: 900,000 short . = 0.10 = 10%9,000,000 shares outstanding
Days to Cover: 900,000 short . = 9 days to cover100,000 shares/day