Explore essential terms and concepts related to equity transactions, including market orders, margin accounts, and investment strategies, within the Canadian financial landscape.
In this section, we delve into the essential terms and concepts related to equity transactions, providing a comprehensive glossary that will enhance your understanding of Chapter 9. This glossary serves as a quick reference guide to help you navigate the complexities of equity securities and transactions within the Canadian financial landscape.
A cash account is a brokerage account where the client must pay the full amount for all transactions by the settlement date. This type of account is straightforward and involves less risk compared to margin accounts, as it does not allow for borrowing funds to purchase securities. In Canada, cash accounts are commonly used by individual investors who prefer to avoid the complexities and risks associated with trading on margin.
A market order is an instruction to buy or sell a security immediately at the best available current price. This type of order is executed quickly, ensuring that the investor enters or exits a position without delay. However, the final execution price may vary from the last quoted price due to market fluctuations. Market orders are ideal for highly liquid securities where price changes are minimal.
A confirmation is a written statement sent to buyers and sellers confirming the details of a trade. This document includes information such as the security traded, the price, the quantity, and the trade date. Confirmations are crucial for record-keeping and ensuring that both parties agree on the terms of the transaction.
An on-stop buy order is an order to purchase a security once its price reaches a specified level, known as the stop price. This type of order is used to enter a position when the investor believes the security’s price will continue to rise after reaching the stop price. It is a strategic tool for capturing upward momentum in a stock’s price.
A day order is an order that expires if it is not executed by the end of the trading day. This type of order is suitable for investors who want to limit their exposure to overnight market risks. If the order is not filled by the market close, it is automatically canceled.
An on-stop sell order is an order to sell a security once its price reaches a specified level to limit losses. This order becomes a market order when the stop price is reached, providing a mechanism to protect against significant declines in the security’s value.
A good through order remains active until it is executed or until a specified date. This type of order provides flexibility for investors who want their orders to remain open beyond a single trading day, allowing them to take advantage of longer-term market trends.
A professional (PRO) order refers to orders placed by dealers for accounts in which they have an interest. These orders are given lower priority than client orders to ensure that client interests are prioritized in the market. This distinction is important for maintaining fairness and transparency in trading practices.
A limit order is an order to buy or sell a security at a specific price or better. This type of order allows investors to control the price at which they enter or exit a position, providing protection against unfavorable price movements. Limit orders are particularly useful in volatile markets where prices can change rapidly.
The settlement date is the date by which a trade must be completed, with payment and delivery of securities. In Canada, the standard settlement period for most securities is two business days after the trade date, known as T+2. Understanding the settlement date is crucial for managing cash flow and ensuring timely delivery of securities.
A long position refers to the ownership of a security with the expectation that its price will rise. Investors holding long positions benefit from price appreciation and may also receive dividends if the security pays them. Long positions are fundamental to traditional buy-and-hold investment strategies.
A short position involves selling a security that is not currently owned, anticipating a price decline. Investors profit from short positions by buying back the security at a lower price in the future. Short selling carries significant risk, as potential losses are theoretically unlimited if the security’s price rises.
Margin is the amount of funds an investor must provide to cover the initial cost of buying securities on credit. Trading on margin allows investors to leverage their positions, potentially increasing returns but also amplifying losses. Margin requirements are set by regulatory bodies and brokerage firms to manage risk.
Short selling is the practice of selling securities that are not currently owned, with the intention of buying them back later at a lower price. This strategy is used to profit from declining markets but involves significant risk due to the potential for unlimited losses if the market moves against the position.
The Margin Account Agreement Form is a legal document outlining the terms and conditions for a margin account. This agreement specifies the rights and responsibilities of both the investor and the brokerage firm, including margin requirements, interest rates, and the process for margin calls.
A margin call is a demand by a broker for the investor to deposit additional funds or securities to cover potential losses. Margin calls occur when the value of the securities in a margin account falls below the required maintenance margin, prompting the investor to either add funds or liquidate positions to restore the account balance.
The stop price is the trigger price at which a stop order becomes a market order. Stop prices are used in both stop-loss and stop-buy orders to automate the execution of trades once a predetermined price level is reached, helping investors manage risk and capture gains.
A trail stop is a type of stop order that moves with the market price to lock in gains and limit losses. As the market price moves in the investor’s favor, the trail stop adjusts accordingly, providing a dynamic risk management tool that adapts to changing market conditions.
The short sale declaration is the process of marking a sell order as a short sale. This designation is required by regulatory bodies to ensure transparency and compliance with short selling regulations, helping to prevent market manipulation and maintain fair trading practices.
Order ticket designation involves labeling an order as being short or non-client. This designation helps brokerage firms prioritize orders and comply with regulatory requirements, ensuring that client orders receive precedence over professional or proprietary trades.
A short margin account is a margin account used to hold a short position. This type of account allows investors to borrow securities to sell short, subject to margin requirements and regulatory oversight. Short margin accounts involve higher risk due to the potential for unlimited losses.
The buy-in process occurs when a broker buys securities on behalf of a client to cover a short position. This action is taken when the client fails to deliver the securities sold short, ensuring that the broker fulfills its obligations to the buyer of the securities.
Liquidity risk is the risk that an asset cannot be sold quickly enough in the market to prevent a loss. This risk is particularly relevant for less liquid securities, where large trades can significantly impact the market price. Investors must consider liquidity risk when constructing portfolios and executing trades.
Regulatory risk refers to the risk that changes in regulations will affect the investment. Regulatory changes can impact market conditions, trading practices, and the valuation of securities, making it essential for investors to stay informed about regulatory developments.
Financial leverage involves the use of borrowed funds to increase the potential return on investment. While leverage can amplify gains, it also increases the risk of significant losses, making it crucial for investors to carefully manage leveraged positions.
An investment strategy is a plan designed to achieve a long-term investment aim. Strategies vary based on individual goals, risk tolerance, and market conditions, and may include approaches such as value investing, growth investing, or income investing.
These resources provide further insights into the terminology and concepts discussed in this glossary, offering valuable information for those seeking to deepen their understanding of equity transactions.
Practice 10 Essential CSC Exam Questions to Master Your Certification
This glossary and quiz are designed to reinforce your understanding of equity transactions and prepare you for practical application in the Canadian financial markets.