The Turkwel Hydroelectric Power Station was construced between 1986 and 1991. The Turkwel Hydroelectric Power Station, Kenya’s tallest, with a height of 153m, crest length of 150m, volume of 170,000m³ and retains a water volume of 1,641,000m³. It’s construction was riddled with claims of corruption. The dam was eventually built at three times the estimated cost, twice the allocated amount and producing energy significantly below capacity.
This was the first corruption scandal in Kenya. It was widely known as the Ngei maize scandal. This scandal happened in 1965. Paul Ngei, an independence hero who was at that time the Minister for Marketing and Cooperatives, was involved in a maize scandal that caused a national maize shortage. The first commision of iquiry since independence, the Commission of Maize Inquiry, found that Ngei’s wife, Emma was getting preferential treatment for her business, Emma Stores – Uhuru Millers of Kangundo at that time, through which she bought maize directly from farmers, which was illegal in that era.
What are capital markets? Capital Markets are a part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. Capital markets trade securities with lives of more than one year. Capital Markets are grouped into various forms. Read Also: Investor Constraints, Strategies And Policies
Before we look at the functions, here are a few examples of Capital Markets;
Read Also: Types of Orders in Buying and Selling Shares in the stock market.
Investor Constraints refers to the limitations or restrictions faced by investors in their trading endeavours. Incase you missed out, check out the various types of orders used in trading financial securities. Back to the day’s business, here are a few of those constraints;
Read Also: Introduction To Buying And Selling Financial Securities
A short sale is sale in which the seller does not actually own the security that is sold. This simple statement can help you comprehend how short selling works in finance and especially when trading stocks, shares or financial securities.
The way this works is simple. As an investor, you anticipate that the price of shares will go down and therefore, you borrow and sell at the current market price and when the share price eventually falls, you buy from the market and return the shares. Say for example. You borrow 1000 shares of Company X, sell the shares at $20 each earning a total of $20,000. A few days later, the market price of the shares of company X falls to $17 per share. You therefore go to the market, buy the 1000 shares at a total of $17,000 and return the shares to the broker. By so doing, you have made a total of $3,000 in profit. Only works if indeed the share price goes down.
Read More: Types Of Orders In Buying And Selling Financial Securities Or Stock
Note that an investor who buys and owns shares of stock is said to be long in the stock or to have a long position. An investor with a long position benefits from price increases (Buys low and Sells High), whereas, an investor with a short position benefits from price decreases (Sells High – buys low.)
Read Also: Choosing A Broker And The Broker Customer Relationships
Short interest: The amount of common stock held in short positions
In practice, short selling is quite common and a substantial volume of stock sales are initiated by short sellers. Note that with a short position, you may lose more than your total investment, as there is no limit to how high the stock price may rise.
In the previous article, we looked at three types of orders, which were, market order, Limit order and Stop order. We will continue on to look at the remaining types of orders used in trading shares.
An investor can avoid the risk of a stop order not guaranteeing a specific price by placing a stop-limit order. A stop-limit order is an order to buy or sell a stock that combines the features of a stop order and a limit order. Once the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price. The benefit of a stop-limit order is that the investor can control the price at which the trade will get executed. But, as with all limit orders, a stop-limit order may never get filled if the stock’s price never reaches the specified limit price. This may happen especially in fast-moving markets where prices fluctuate wildly.
Read Also: Role Of Short Term Investment Vehicles, Advantages And Disadvantages
Day orders are good only during that trading day. Unless you give your broker specific instructions to the contrary, orders to buy or sell a stock are day orders. Orders that have been placed but not executed during regular trading hours will not automatically carry over into the next regular trading day.
Read Also: Choosing A Broker And The Broker Customer Relationships
A Good Till- Cancelled order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or cancelled. A Good Till- Cancelled order will not be executed until the limit price has been reached, regardless of how many days or weeks it might take. Investors often use GTC orders to set a limit price that is far away from the current market price.
There you have it, all the types of orders you can use in trading financial securities in order to maximize profits or say minimize losses on a bad trading day. As always, best of luck in your trading endeavours.
Looking at the types of Orders in Buying and Selling Financial Securities or stock, we note that investors have several options when it comes to placing an order to buy or sell securities.
A market order is an order to buy or sell a stock at the current market price. Unless you specify otherwise, your broker will enter your order as a market order. The advantage of a market order is you are almost always guaranteed your order will be executed (as long as there are willing buyers and sellers). A market order may also be less expensive than a limit order. The disadvantage is the price you pay when your order is executed may not always be the price you obtained from a real-time quote service or were quoted by your broker. This may be especially true in fast-moving markets where stock prices are more volatile.
Read Also: Types of Brokerage Accounts in securities market.
A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Limit orders may never be executed because the market price may quickly surpass your limit before your order can be filled. Some firms may charge you more for executing a limit order than a market order. But by using a limit order you also protect yourself from buying the stock at too high a price.
Must Read: What Are Short Sales In The Financial Markets?
A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the specified price is reached, your stop order becomes a market order. Buy Stop Order — Investors typically use a stop order when buying stock to limit a loss or protect a profit on short sale. The order is entered at a stop price that is always above the current market price. Sell Stop Order — A sell stop order helps investors to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell is always placed below the current market price. The advantage of a stop order is you don’t have to monitor how a stock is performing on a daily basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock’s price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price
The rest of the types of orders used in trading shares, that is, Stop limit order, day orders and good till- cancelled orders in the next article.
Successful trading of financial instruments requires one to be fully equipped with enough information before diving deep into investing. We covered two main types of brokerage accounts and here comes the other Types of brokerage accounts.
Pledging securities as a collateral against a loan, so that the securities can be sold by the broker if the customer is unwilling or unable to meet a margin call.
An arrangement under which a broker is the registered owner of a security.
The account holder is the “beneficial owner.”
Trading accounts can also be differentiated by the ways they are managed.
You may be asking yourself, is it a must to have a brokerage account for one to invest in financial securities? the simple answer is No. The long answer is that you do not need a brokerage account to invest in financial securities because a brokerage account is not a necessity. One can buy securities directly from the issuer or another alternative is to invest in mutual funds.
We have discussed before what a margin account is. In a margin purchase, the portion of the value of an investment that is not borrowed is called the margin. The portion that is borrowed incurs an interest that is based on the broker’s call money rate, which is the rate brokers pay to borrow bank funds for lending to customer margin accounts. Here are a few case scenarios of margin accounts calculations:
Example 1: The Account Balance Sheet
You want to buy 1000 TechnologySage shares at $24 per share. You put up $18,000 and borrow the rest.
Solution
Amount borrowed = $24,000 – $18,000 = $6,000
Margin = $18,000 / $24,000 = 75%
ASSETS LIABILITIES AND ACCOUNT EQUITY
1000 WM shares $24,000 Margin loan $ 6,000
Account equity 18,000
Total $24,000 Total $24,000
In a margin purchase, the minimum margin that must be supplied is called the initial margin. The maintenance margin is the minimum margin that must be present at all times in a margin account. When the margin drops below the maintenance margin, the broker may demand for more funds. This is known as a margin call.
Read also: Choosing A Broker And The Broker Customer Relationships
Example: Margin Requirements
Your account requires an initial margin of 50% and a maintenance margin of 30%. Stock A is selling at $50 per share. You have $20,000, and you want to buy as much of stock A as you possibly can.
Solution:
You may buy up to $20,000 / 0.5 = $40,000 worth of shares.
ASSETS LIABILITIES AND ACCOUNT EQUITY
800 A shares $40,000 Margin loan $20,000
Account equity 20,000
Total $40,000 Total $40,000
Example: Margin Requirements
After your purchase, the share price of stock A falls to $35 per share.
ASSETS LIABILITIES AND ACCOUNT EQUITY
800 A shares $28,000 Margin loan $20,000
Account equity 8,000
Total $28,000 Total $28,000
New margin = $8,000 / $28,000 = 28.6% which is less than maintenance margin of 30% Therefore, you are subject to a margin call.
In conclusion, Margin is a form of financial leverage. It is important to bear in mind that when you borrow money to make an investment, the impact is to magnify both your gains and your losses. You should therefore deal with margin accounts with caution.
What is a brokerage account, you may ask. Well, a brokerage account refers to a formal arrangement between an individual investor or firm and a licensed brokerage firm which allows the investor to deposit funds with the firm and place investment orders (buy and sell orders) through the brokerage firm. The firm then carries out the transactions on the investor(s)’ behalf. We are aware on what to consider in choosing a broker and its only fare we to it up with the types of Brokerage Accounts to open with those brokers.
We will discuss two main types brokerage accounts that you can consider opening as an investor. Check out the other types of brokerage accounts to be well equiped.
Cash account
A brokerage account in which all transactions are made on a strictly cash basis. In other words, a cash account refers to a regular brokerage account where the customer or the investor is required by law to pay for all securities’ purchases in full within two days of when a purchase is made.
Read Also: Introduction To Buying And Selling Financial Securities
Margin account
This is a brokerage account in which, subject to limits, securities can be bought and sold on credit. To expound further, a margin account is one offered by brokerages which permit investors to borrow money for use in buying securities. An investor may put down a given percentage, say 60% of the total value of a purchase and borrow the remaining amount from the broker. The broker then charges the investor interest for the right to borrow money using the securities as collateral. Take a look at the margin accounts calculations to better understand these type of account.
Given the information above on the Types of Brokerage Accounts together with the fact that you a rational investor that you are, I believe you are well placed to make the best possible account depending on your financial position.