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What are the 5 steps of a trade? Explain them.
- Order entry: order ticket details regarding how to execute
- Execution: occurrence of a trade in a market center
- Clearing: executing firms agree to details, unrecognized trades result in DK
- Settlement: the day when the customer's name is put on/off the books
- Custody: safeguarding of client and firm assets
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What are the settlement date conventions for corporate/muni securities?
T+2
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What are the settlement date conventions for gov't securities and options?
T+1
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What are the settlement date conventions for cash-settled securities?
Same day
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What are the settlement date conventions for seller's option trades?
The settlement is negotiated, but not earlier than T+2. This is useful for restricted sales.
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What are the settlement date conventions for when issued trades?
Trade the security when it's issued (determined by the national uniform practice committee.
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What does Reg T say about payment date?
- The reg T payment date must be obtained for purchases that are made in either cash or margin accounts within 2 business days of settlement (S+2)
- Before settlement, a customer can request that the broker-dealer transfer a trade from a cash account to a margin account
- If no payment is made by T+4 (S+2), the position is closed out on S+3. Then, the account is frozen for 90 days (all payments must be paid in advance)
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What is freeriding?
When an investor buys a stock and sells it but fails to meet the Reg T requirement of 50%.
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What are the two types of stock splits?
- Forward (e.g. 2:1 or 3:2) more shares, lower price [2:1 = even, 3:4 = odd]
- Reverse (e.g. 1:5) fewer shares, higher price
- Dividends are adjusted proportionally
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How are stock splits treated for tax purposes?
Additional shares received are usually not taxed as income since your total basis is unchanged.
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What is a tender offer?
- It is a public announcement that indicates the intent to buy shares from the owner at a fixed price.
- The offer is made by the issuer or a 3rd party
- The offer is usually made to acquire a company or a controlling position
- These are often used for buybacks
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What are the exclusions for tender offers?
- Seller must be long shares or equivalent
- Convertible security (don't have to ex)
- Right or warrant (don't have to ex)
- Call option (must ex)
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