3InvestmentsBodie8thEdition,slides.ppt

Table 3.4 Illustration of Buying Stock on Margin Short Sales Purpose: to profit from a decline in the price of a stock or security Mechanics Borrow stock through a dealer Sell it and deposit proceeds and margin in an account Closing out the position: buy the stock and return to the party from which is was borrowed Short Sale – Initial Conditions Example 3.3 Dot Bomb 1,000 Shares 50% Initial Margin 30% Maintenance Margin $100 Initial Price Sale Proceeds $100,000 Margin Equity 50,000 Stock Owed 100,000 Short Sale - Maintenance Margin Stock Price Rises to $110 Sale Proceeds $10,000 Initial Margin 5,000 Stock Owed 11,000 Net Equity 4,000 Margin % (4000/11,000) 36% Short Sale - Margin Call How much can the stock price rise before a margin call? ($150,000* - 1000P) / (100P) = 30% P = $115.38 * Initial margin plus sale proceeds Regulation of Securities Markets Major regulations Securities Act of 1933 Securities Act of 1934 Securities Investor Protection Act of 1970 Self-Regulation Stock markets are largely self-regulating Regulation Securities Markets Continued Regulatory Responses to Recent Scandals Public Company Accounting Oversight Board Financial experts to serve on audit committees of boards of directors CEOs and CFOs personally certify firms’ financial reports Boards must have independent directors Sarbanes-Oxley Act Circuit Breakers Trading halts Collars Insider Trading Officers, directors, major stockholders must report all transactions in firm’s stock Insiders do exploit their knowledge Leakage of useful information to some traders * 3-* Investments, 8th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright ? 2009 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 3 How Securities are Traded How Firms Issue Securities Primary New issue Key factor: issuer receives the proceeds from the sale Secondary Existing owner sells to another party Issuing firm doesn