Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 2, Part 1 – Buying and Selling Securities – Sept 20
Chapter Three Outline
− Getting started.
− Brokerage accounts.
− Short sales.
− Investor objectives, constraints, and strategies.
Buying and Selling Securities
− This chapter covers the basics of the investing process.
− We begin by describing how you go about buying and selling securities, such as stocks
and bonds. Then, we outline some important considerations and constraints to keep in
mind as you get more involved in the investing process.
Choosing a Broker
− Brokers are now divided into three groups:
o Fullservice brokers.
o Discount brokers.
o Deepdiscount brokers.
− These three groups can be distinguished by the level of service provided, as well as the
level of commissions charged.
Choosing a Broker, I
− As the brokerage industry becomes more competitive, the difference among broker types
continues to blur.
− Another important change is the rapid growth of online brokers, also known as ebrokers
− Online investing has really changed the brokerage industry.
o Slashing brokerage commissions.
o Providing investment information.
o Customer place buy and sell order over the internet.
Canadian Investor Protection Fund
− Canadian investor protection fund (CIPF): insurance fund covering investors’ brokerage
accounts with member firms. − The CIPF does not guarantee the value of any security (unlike CDIC coverage).
− Rather, CIPF protects whatever amount of cash and securities that were in your account,
in the event of fraud or other failure.
− There are several important things to remember when you deal with a broker:
o Any advice you receive is not guaranteed.
o Your broker works as your agent and has a legal duty to act in your best interest.
o However, brokerage firms make profits from brokerage commissions.
o Your account agreement will probably specify that any disputes will be settled by
arbitration and that the arbitration is final and binding.
− A cash account is a brokerage account in which securities are paid for in full.
− A margin account is a brokerage account in which, subject to limits, securities can be
bought and sold short on credit.
− In a margin purchase, the portion of the value of an investment that is not borrowed is
called the margin. Of course, the portion that is borrowed incurs an interest charge.
o This interest is based on the broker’s call money rate.
o The call money rate is the rate brokers pay to borrow money to lend to customers
in their margin accounts.
− In a margin purchase, the minimum margin that must be supplied is called the initial
− The maintenance margin is the margin amount that must be present at all times in a
− When the margin drops below the maintenance margin, the broker can demand more
funds. This is known as a margin call.
Hypothecation and Street Name Registration
− Hypothecation is t