V. STOCKS(PART 2)

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

1. Stock Purchase Basicsa. Broker – Buys and sells securities for

individuals and institutions in return for a commission or a set fee

b. Dealer – Buys and sells securities for themselves and/or their firms

c. Broker – Dealer – SEC licensed to buy and sell securities for both their firms and their clients

d. Traders – Buy and sell securities exclusively for their own portfolios

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

2. Types of Investorsa. Retail Investors – Can be any size, but generally

individualsb. Mini Institutional – Generally purchase or sell stock

in 1,000 to 9,999 share blocks, can be small pension and health funds (corporate), trust funds, etc.

c. Institutional – 10,000 or more shares per transaction, includes financial institutions, large trust funds, and mutual funds (http://nystrs.org/main/library/AnnualReport/Investments.pdf)

d. Managed Account – Paid money manager, can be discretionary (can conduct trades without client approval) or non-discretionary (all trades must be approved by the client)

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

3. Types of Brokerage Firmsa. Full Service – Provide information on investments

along with brokerage services – most expensiveb. Discount Brokers – Carry out transactions, but

generally offer limited research and services or research and services on a fee basis only

c. Online Brokerage – Trades initiated online, clients may have limited or no contact at all with a broker, and limited or fee based advice - cheapest

In all instances, cost of trading = commission (to broker and to firm) + fees (to the firm) + taxes

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

4. Types of Ordersa. Market Order – Purchase or sale of stock

at whatever the current market price isb. Stop Order – The trade occurs once the

stock hits a specified price – once the price is hit, it converts to a market order – stock price at purchase or sale can be higher or lower than stop order price depending upon when execution of the trade occurs

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

c. Limit Order – Purchase or sale of a security occurs only at the specified price

d. Stop Limit Order – Purchase or sale occurs when the stop price is reached, however, the trade may only be executed at more than the limit price for a sale or less than the limit price for a purchase

e. Good Till Cancelled (GTC) – The order remains open until filled

f. Day Order – Only remains open until the close of business on the day placed

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

5. Buying on Margin

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

5. Buying on Margina. Leverage – Borrowing money to make an

investment – can multiply both gains and losses

b. Types of Margini. Initial Margin – Must have at least 50% of the

purchase price of the securities in cash or securities to purchase on margin

ii. Maintenance Margin – Once purchased, cash and securities must have a market value of at least 25% (by regulation) or 30% (per most brokerage firms) of the total value of the account

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

c. Margin Call – When the price of securities falls, the customer must either “pay up” additional cash and securities until the 25% (30%) minimum is met

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

• Examples

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

6. Selling Short – When an investor sells a stock that he or she does not own, anticipating a profit when the stock price falls

a. Covering the Short – Purchasing stock to replace the stock that you did not own but sold

b. Squeeze Play – When a heavily shorted stock rises in price, forcing a high volume of purchasers to cover their open short sale positions

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

c. Short Ratio = Number of Shares Sold Short

Average Daily Share TransactionsAn indicator of whether share transactions are

purchases, sales, or sales by traders and others who believe that the stock will go down in price.

d. Short as a Percentage of Float = Number of Shares Short Total Number of Shares

OutstandingIndicates how much of the total stock available is “tied

up” in short sales.

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

M. Long and Short Purchases and Sales,Margin Purchases, and Leverage

• Examples