Characteristics of well-functioning
markets
Trading Costs
Commission: fee paid to broker for making
the transaction
Spread: cost of trading with dealer
a) Low cost transfer of funds (competition among
market makers and brokers).
Operational or internal efficiency
Bid: price dealer will buy from you
Ask: price dealer will sell to you
Spread: ask - bid
b) Adequate trading activity to ensure purchases
and sales occur in timely fashion without affecting
price. (Trading volume)
Combination: on some trades both are paid
Operational or internal efficiency
ตัวอย่างค่าธรรมเนียม
https://wwwa1.settrade.com/brokerpage/011/StaticPage/th/openacc/commi
ssion.html
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Buying on Margin
Buying on Margin
Defined: borrowing money to purchase stock.
Initial Margin Requirement IMR (minimum set by
Federal Reserve under Regulation T), currently
50% for stocks
From whom do you borrow? What is a hypothecation
agreement? Do you pay interest on the loan?
The IMR is the minimum % initial investor equity.
Maintenance margin requirement (MMR): minimum
amount equity can be before additional funds must be put
into the account
Equity = Position Value - Borrowing + Additional Cash
maximum % amount investor can borrow
1-IMR = ________________________
Exchanges mandate minimum _____.
35%
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Margin Call
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Margin Call
Margin call: notification from broker you must put up
additional funds or have your position liquidated.
If the Equity / Market Value  MMR a margin
call occurs.
At what price does the investor receive a margin call?
(Market Value - Borrowed) / Market Value 
MMR ; solve for Market Value
While the position is open the investor's equity = Market
Value - Amount borrowed
A margin call will occur when:
Market Value = Borrowed / (1 – MMR)
Thus a declining stock price reduces the investor's
equity.
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Margin Trading
Margin Trading
(MMR = 40%)
Stock price falls to $60 per share (1000 shares)
Margin Trading: Initial Conditions
X Corp Stock price = $70
50% Initial Margin
40% Maintenance Margin
1000 Shares Purchased
New Position
Stock
$60,000
Borrowed
$35,000
$25,000
Equity
Margin% = $25,000 / $60,000 = 41.67%
Margin Trading: Margin Call How far can the stock price
fall before a margin call? (MMR = 40%)
Initial Position
Market Value = Borrowed / (1 – MMR)
Market Value = $35,000 / (1 – 0.40) =
$35,000
Stock
$70,000
Borrowed
$35,000
Equity
$58,333
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Margin Trading
Margin Trading
With 1000 shares, the stock price at which we receive
a margin call is $58,333 / 1000 = $58.33
New Position
Stock
Why do people purchase on margin?
Suppose you buy at $70 per share (borrow at a 7% APR
interest cost if use margin, use full amt. margin)
APRs (365 day year)
$60,000
Borrowed
$35,000
$23,333
Equity
Buy at $70
Sell at $72 in 90
days
Sell at $68 in 90
days
How much cash must you put up?
No Margin
11.59%
-11.59%
To restore the IMR you will need
equity = ½ x $58,333 = $29,167
Margin
16.17%
-30.17%
%Margin = $23,333 / $58,333 = 40%
have equity =
so owe
Do institutions generally purchase on
Leverage
Factor
1.4x
2.6x
margin?
$23,333
$ 5,834
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Short Sales
How is it done?
Mechanics
Short Sales
Borrow stock from a broker/dealer, must post margin
Broker sells stock and deposits proceeds and margin
in a margin account (you are not allowed to withdraw
the sale proceeds until you ‘cover’)
Covering or closing out the position:
o Buy the stock and broker returns the stock title to the
party from which it was borrowed
o
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The Long & Short of “Round Trips”
o A “Round Trip” is a purchase and a sale
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Short Sales
Required initial margin: usually 50% but more for low
priced stocks
o Long position
 Buy first and then sell later
 Bullish
Liable for any cash flows: Dividend on stock
o Short position
 Sell first and then buy later
 Bearish
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Short Sales
Short Sales
Example:
You sell short 100 shares of stock priced at $60 per
share.
o The proceeds of $6000 must be pledged to broker.
Short sale maintenance margin requirements (equity)
Price
< $ 2.50
$2.50 - $ 5.00
$5.00 - $16.75
> $16.75
MMR
$2.50
o You must also pledge 50% margin.
$9000
$3000 Now you have ______
• You put up ______.
invested in margin account.
100% market value
$5.00
Short Sale Equity = Total Margin Account - Market Value
30% market value
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Short Sales
Short Sales
Maintenance margin for short sale of a stock with price > $16.75
is 30% of market value or
When: Equity  (0.30 * Market Value)
Equity =
Total Margin Account – Market Value
30% x $6,000 = $1,800
________________________________.
When: Market Value = Total Margin Account / (1 + MMR)
Market Value = $9,000 / (1 + 0.30) = $6,923
So you have $1,200
_______in excess margin. (This may be withdrawn Price at which get a margin call:
at your pleasure but assume that it is not.)
$6,923 / 100 shares = $69.23
At what stock price do you get a margin call?
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Short Sales
Short Sales
If this occurs:
Equity = $9,000 - $6,923 = $2,077
Equity as % market value = $2,077 / $6,923 = 30%
Naked short sales
You get a margin call &
You may have to restore the 50% initial margin.
If so you must deposit an additional
($6,923 / 2) - $2,077 = $1,384.5
Should the zero tick/uptick rule be utilized?
Should any or all short sales be prohibited?
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Insider Trading
Illegal, but what is it?
Selected Problems
Definition of insiders can be ambiguous
SEC’s Official Summary of Securities
Transactions and Holdings
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Chapter 3: Problem 1
Chapter 3: Problem 2
Chapter 3: Problem 5
Chapter 3: Problem 3
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Chapter 3: Problem 6
Chapter 3: Problem 8
Chapter 3: Problem 7
Chapter 3: Problem 9
Chapter 3: Problem 10
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