Assigned questions from Ch 6 1-5, 7, 9, 11-14

Problems: 1-7

Next week: Chapter 18

Quiz on Ch. 6 on Monday March 10

Exams will be returned on Friday

Buying on margin

Margin = equity

If you do not borrow at all you have 100% margin

Invest $1,000 in xyz

A) I purchase 100 shares of xyz at $10 per share (Cash)

Broker is willing to lend up to 50% of the value of stock

B) I can buy 200 shares of xyz and have a loan of $1000 outstanding

(buying on margin)

Sc 1: Stock is up $1

A)$1100 ($100 gain)

B)$2200 – 1000 = 1200 ($200 gain)

Leverage makes the ror larger

Sc 2: Stock is down $1

A)$900 ($100 loss)

B)$1800 – 1000 = 800 ($200 loss)

Leverage is a double edged sword

Margin requirements art regulated. SEC has delegated the authority

to Federal Reserve.

Initial margin (50%)

Maintenance margin (25%)

Qn. How big a price drop will trigger a margin call?

Min margin = 25%

Loan to Stock value = 75%

Stock price = $6.67

Short sales

Borrow shares and sell

On a later date, buy (back) and repay loan

While the loan is outstanding, you owe shares

Own shares ----- long position

Owe shares ------short position

Own / Owe
Long / Short
Gain if prices move up / Gain if prices move down
Lose if prices move down / Lose if prices move up
Receive dividends / Pay dividends
Losses limited / Losses unlimited
Up tick requirement

I short sell 100 share of xyz at $10 each

Proceeds from sale + 50% margin stays as a deposit against the short position

Margin call if stock price rises and my deposit falls below 125% of what is

needed to close the short position.

Types of orders

Market order – sell or buy as soon as possible at the going price

Limit order – specifies min/max acceptable price

( buy at $10 or lower/sell at $12 or higher)

Stop order – specifies a trigger. When the trigger is reached,

order becomes a market order

(Sell as soon as price reaches $12)