e. compare positions an investor can take in an asset;
f. calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call;
What is a long position?
A long position is owning or holding securities or contracts.
What is a short sale?
A short sale allows investors to profit from a decline in a security's price if they believe the security is overpriced. In this procedure an investor (the seller) borrows shares of stock from another investor (the lender) through a broker and sells the shares. The lender keeps the proceeds of the sale as collateral. Later, the investor (the short seller) must repurchase the shares in the market in order to return the shares that were borrowed (covering the short position) to the lender.
What is a leveraged position called margin transactions?
Margin transactions occur when investors who purchase stocks borrow part of the purchase price of the stock from their brokers and leave purchased stocks with the brokerage firm because the securities are used as collateral for the loan.
What is Percentage margin?
The ratio of the net worth or "equity value" of the account to the market value of the securities.
What is Maintenance margin?
The required proportion of equity to the total value of the stock. It protects the broker if the stock price declines.
What is a Margin call?
If the percentage margin falls below the maintenance margin, the broker issues a margin call requiring the investor to add new cash or securities to the margin account.