Things

FNCE 2132 Midterm Review

Market Essentials/ Trading

Quotes show the bid (or price someone is willing to buy at) and ask (price someone is willing to sell at)

Buy orders

market buy order – means you will buy at the current ask price

limit order – means you place a price which is the highest you are willing to buy but may be filled at lower price

stop-buy order – an order which is executed as a market order once the buy-stop price has been passed

Sell Orders

Market sell order – means you will sell at the current bid price

Limit order – you place a price which is the lowest that you will sell although the order may be filled at a higher price

Stop-loss or stop-sell order – an order where you specify a price and the order becomes a market order once your price has been passed

Short selling – where you borrow and sell a stock, then at some future date you buy the stock and repay the borrowed position. There are margin requirements needed on short selling positions. When you sell the stock you will have the sales proceeds deposited to your trading account. You must have excess funds in the account (as much as 1 ½ times the current value of the short position) in order to protect from an adverse stock price move (ie the stock goes up). A short squeeze is when you are short a position and the market price rises rapidly, your margin requirements increase and you are not able to buy back the stock at a reasonable price. For example, you sell short 1000 shares at $5.00:

Proceeds in account 1000 x $5 $5000

Additional margin required .5 x $5000 $2500

Total in account $7500

If the market price of the stock goes up to $6, then you require 1.5 times the market value of buying back the position in your account or $9000. You have a total of $7500 in your account. You will get a margin call from the broker and your choice is to deposit $1500 in your account by the end of the day or buy back the stock at a loss of $1000.

Margin requirements for...