4504c5 - How Securities Are Traded Brokerage Firms Types:...

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How Securities Are Traded Brokerage Firms Types: Full Service Discount Income Only 15% come from commission paid by investors Brokers Income Less than 50% customer commissions Selling mutual funds owned by their firm Load funds-commission Principal transactions Public buy recommendation Or Being compensated to sell this security Sale of new issues of securities Administrative fees on Inactive accounts Transfers Maintenance fees Types of Brokerage Accounts 1. Cash Account Pays cash no later than settlement + 2 business days Reg T Extension Granted by exchange on which the security trades and gives the customer another 3 business days Failure to pay on time ---brokerage firm obligated to sell out the position 2. Margin Account Buy sec or sell short as long as Reg T initial margin is met If Reg T doesn't apply then meet the exchange's maintenance margin Initial Margins set by Fed. Res. Reg T Long Positions Short Positions Stock=50% Stock =50% Convertible Sec.=50% Convertible Sec.=50%
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U.S. Govt = na U.S. Govt = na Muni=na Muni=na Corp bond = na Corp bond = na Stock Options= 100% of Premium Broad Based Index Option = 100% of Premium Int. Rate/Foreign Currency Option=100% of Premium Minimum Margins: Exchanges require a min. margin be maintained after the Reg T requirement has been met Usually less than the initial Maintenance Calls Must bring up to the min maintenance margin within 3 bus. days NYSE margins $2000 for both long/short positions long-$2000 equity or price of security if less than $2000 short---$2000 equity at any time NYSE Min. Maintenance Long Short Stock=25% Stock=30% Convert. Sec.=25% Convert. Sec.=30% Corp Debt = Same Greater of 20% of market value Or 7% of face value Muni = Same Greater of 15% of market value Or 7% of face value All Options=100% of Premiums
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Example: Investor's Equity ---Long Position Buy 200 shares @ $100 Long MV - Debit(Loan) = Equity Margin (Reg. T) 20000 - 10000 = 10,000 50% market value drops to $90 18000 - 10000 = 8000 8000/18000=44% Actual Margin=(MV of Sec - Amt borrowed)/MV of Sec Market value drops to $65 13,000 - 10,000 = 3000 3000/13000 =23% Maintenance call to bring account up to 25% (set by NYSE) 25% (13000)=3250 ----- call for $250 MV at Maintenance Call: MV-Loan =.25 MV Loan/.75= MV Ie. 10000/.75 = 13,333
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4504c5 - How Securities Are Traded Brokerage Firms Types:...

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