Chapter- 02 (William Sharpe)
Chapter- 03 (B. K. M.)
Buying & Selling
Securities
Md. Shoriful Islam
Senior Lecturer in Finance
Order Specification for Common
Stock
Investors Must Specify:
 The name of the firm
 Whether the order is to buy or sell
shares
 The size of the order
 How long the order is to be outstanding
 What type of order is to be used

Types of Order
i. Market Orders

The broker is instructed to buy or sell a
stated number of shares immediately.
In this situation the broker is obligated
to act on a “best-efforts” basis to get the
best possible price ( as low as possible
for a purchase order, as high as
possible for a sell order) at the time the
order is placed.
Types of Order
ii. Limit Orders

Limit price is specified by investor when
the order is placed with the broker.
Purchase order- execute at a price that is
less than or equal to the limit price. Sell
order- execute at a price that is greater
than or to the limit price. Using a limit
order investor cannot be certain that the
order will be executed.
Types of Order
iii. Stop Orders
 Stop-loss order: similar to limit orders in
that the trade is not to be executed unless
the stock hits a price limit. Stock is to be
sold if its price falls below a stipulated
level.
 Stop-buy Order: specify that the stock
should be bought when its price rises
above a given limit.
Margin Purchase



Margin: The percentage margin is defined as
the ratio of the net worth, or “equity value” of
the account to the market value of the
securities.
Initial Margin Requirement: The minimum
percentage of the purchase price that must
come from the investor's own fund. Usually
50% or above.
Actual Margin and Maintenance Margin
requirements.
Example

Mr. Shafiq buys on margin 1000
shares of DESCO at Tk. 1532 per
share. The initial margin requirement
is 50% and the maintenance margin
requirement is 30%. If the DESCO’s
stock falls to Tk. 970, will Mr. Shafiq
receive a margin call? Why or why
not?
Example

Samia Jaman originally purchased
1000 share of Uttara Bank for Tk. 69
per share on margin. The initial
margin requirement is 50% and the
maintenance margin req. is 30%. To
what price must the stock fall for
Samia to receive a margin call?
Practice!



Mr. Buffet purchased 500 shares of Eastern
Lubricants stock on margin at the beginning of the
year for Tk. 416 per share. The initial margin
requirement was 40%. Buffet paid 14% interest on
the margin loan and never faced a margin call.
Eastern paid 80% dividend on face value during
this year. Face value of Eastern Stock was Tk. 10
per share.
At the end of the year, if Buffet sold the Eastern
stock for Tk. 450 per share, what would Buffet’s
rate of return be for the year?
At the end of the year, if Buffet sold the Eastern
stock for Tk. 400 per share, what would Buffet’s
rate of return be for the year?
Short Sales


A short sale allows investors to profit from a
decline in a security’s price.
Before short sales:
XYZ
Dividends, annual reports,
voting rights
Salta
Capital
Forwards
Everything
Mr. Shafi
Short Sales

Short sales:
Mr. Ahmed
Pays
purchase
price
XYZ Notified that Mr. Ahmed
Receives
stock
certificates
Salta Capital
now own stock
Allows stock
to be lent
Provides
initial
margin
Mr. Tushar
Mr. Shafi
Short Sales

After Short sales:
Mr. Ahmed
Dividend, annual reports,
voting rights
XYZ
Annual report
Salta Capital
Annual report,
dividends
Provides
cash to make up
for dividends
Mr. Tushar
Mr. Shafi
Math Problem

i.
ii.
iii.
iv.
Old Economy traders opened an account to short
sell 1000 shares of Internet Dreams at the price
$40 per share. The initial margin requirement was
50%. Interest rate on margin loan is stated 14%. A
year later, the price of ID has risen from $40 to $50,
and the stock has paid a dividend of $2 per share.
What is the remaining margin in the account?
If the maintenance margin requirement is 30%, will
Old Economy receive a margin call?
What is the rate of return on the investment?
Calculte the rate of return for cash purchase
instead of margin.
Math Problem

a)
b)
Through a margin account, William Sharpe
short sells 100 shares of Macksons Spinning
stock for Tk. 100 per share. The initial margin
requirement is 60%.
If Macksons subsequently rises to Tk. 160 per
share, what is the actual margin in William’s
account?
If Madison subsequently falls to Tk. 75 per
share, what is the actual margin in William’s
account? Calculate the rate of return
considering Tk. 6 dividend payment within this
period.
Math Problem

You are bearish (pessimistic) on Oradell
stock and that its current market price is $100
per share. You tell your broker to sell short
1000 shares. The initial margin requirement
is 50%. The broker has a maintenance
margin 30% on short sales. How far can the
price of Oradell stock go up before you get a
margin call?
Practice!!

a.
b.
Suppose that you sell short 500 shares of Intel,
currently selling for $40 per share, and give your
broker $15000 to establish your margin account.
If you earn no interest on the funds in your
margin account, what will be your rate of return
after 1 year if Intel stock is selling at $44, and
$34? Assume that Intel pays $2 dividend per
share within this investment period.
If the maintenance margin is 25% how high can
Intel’s price rise before you get a margin call?