The document discusses how securities are traded through brokerage firms and the types of brokerage accounts and orders that can be used. It also explains the concepts of margin, including initial margin, maintenance margin, actual margin, and margin calls. The document provides examples to illustrate how to calculate margins and the price at which a margin call would be issued.

1. How Securities Are Traded

2. Brokerage
Transactions
 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.

3.  Discount Broker
 A brokerage firm offering execution
services at prices typically significantly less
than full-line brokerage firms.
 On-Line Discount Brokers

4. 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.

5. Types of Orders
 Market Order
 An order to buy and sell at the best price
when the order reaches the trading floor.
 Limit Order
 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.

6. Margin
 That part of a transaction’s value that a
customer has as equity to the
transaction.
 Initial Margin
 That part of a transaction’s 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

7. 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?

8. Margin (Continued)
 Maintenance Margin
 The percentage of a security’s 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?

9. 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.

10. 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)

11. 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.