Robert j mckeown u of t eco358 week one a short

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Robert J. McKeown (U of T) ECO358 Week One
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A Short History of Investing A Short History of Investing Disasters More than two-thirds of professional portfolio managers have been outperformed by the unmanaged S&P 500 Index. Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Topic 2: Trading with Margin Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Stock Margin Trading Use some of your own money Borrow the rest Margin arrangements di er for stocks and futures For now, we will focus on stocks. Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Initial Margin To trade on margin, the investor must open a margin account. The initial margin is the fraction of her own money (equity) deposited to open an account. For example, if Google shares cost $500 and the initial margin is 80%, she must deposit $400 to open a margin account. Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Maintenance (Minimum) Margin Maintenance (Minimum) Margin represents the minimum percentage of equity that must be maintained in order to keep the margin account open. If the equity is below the minimum margin, the investor will receive a margin call requesting additional funds. If the additional funds are not provided, the account is closed and the investor must pay any balance owing on her account. Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Purchase 1,000 in X Corp on margin X Corp $70 Initial Margin 50% Minimum Margin 30% Shares Purchased 1,000 Balance Sheet – Initial Position Stock $70,000 Borrowed $35,000 Equity $35,000 Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Stock price falls to $60 per share Balance Sheet – New Position Stock $60,000 Borrowed $35,000 Equity $25,000 What is the new margin? $25,000 / $35,000 = 41.67% Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin How far can the stock price fall before a margin call? Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Leveraging E ect of Margin Purchases You buy 200 shares of XYZ at $100 with an initial margin of 50% at 9% interest per year. In one year, the stock price is 30% higher. What is your total return? Robert J. McKeown (U of T) ECO358 Week One
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Trading with Margin Leveraging E ect of Margin Purchases Robert J. McKeown (U of T) ECO358 Week One
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Short Selling Topic 3: Short Selling Robert J. McKeown (U of T) ECO358 Week One
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Short Selling Short Sales Purpose : to profit from a decline in the price of a stock or security. “The inverse of selling a security” Robert J. McKeown (U of T) ECO358 Week One
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Short Selling Short Sale Mechanics To open a short position: Borrow stock through a dealer. Sell it and deposit the proceeds in a margin account. To close out the position: buy the stock and return it to the party who lent it to dealer Robert J. McKeown (U of T) ECO358 Week One
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Short Selling Short Sale – Initial Conditions Z Corp $100 Initial Margin 50% Minimum Margin 30% Shares Sold Short 100 Balance Sheet – Initial Position Sales Proceeds $10,000 Stock Owing $10,000 Margin Account Deposits $5,000 Equity $5,000 Borrow stock worth $10,000 and deposit an additional $5,000 in a margin account.
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  • Summer '14
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