3. Short Selling. Under what conditions might investors consider short selling a
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3. Short Selling. Under what conditions might investors consider short selling a specific stock?
7. SEC Structure and Role. Briefly describe the structure and role of the Securities and Exchange Commission (SEC).
13. Bid-Ask Spread of Penny Stocks. Your friend just told you about a penny stock he purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks and, after conducting a large amount of research, you find a stock with a quoted price of $0.05. Upon further investigation, you notice that the ask price for the stock is $0.08 and that the bid price is $0.01. Discuss the possible reasons for this wide bid-ask spread.
14. Ban on Short Selling. Why did the SEC impose a temporary ban on short sales of specific stocks in 2008? Do you think a ban on short selling is effective?
1. Buying on Margin. Assume that Vogl stock is priced at $50 per share and pays a dividend of $1 per share. An investor purchases the stock on margin, paying $30 per share and borrowing the remainder from the brokerage firm at 10% annualized interest. If, after one year, the stock is sold at the price of $60 per share, what is the return to the investor?
Explanation / Answer
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3. Short Selling. Under what conditions might investors consider short selling a specific stock?
Answer:
Investors consider short selling when they expect that a stock's price to decrease. Investors submit the order to their broker who borrows the stock on behalf of the investors and sells the stock. The investors will ultimately need to purchase the stock that they borrowed. Their gain is the difference between the price at which they sold the stock versus the price at which they purchased it. If the stock price declined over time, they should have been able to purchase the stock for a lower price at which they sold it.
7. SEC Structure and Role. Briefly describe the structure and role of the Securities and Exchange Commission (SEC).
Answer:
The SEC is composed of five commissioners appointed by the president of the United States and confirmed by the Senate. Each commission serves a five-year term. The terms are staggered, so that one commissioner's term is added each year and replaced by a new appointee. The president also assigns one of the five commissioners the role of Chairman.
The commissioners meet to assess whether the existing regulations are successfully preventing abuses, and to revise the existing regulations. Specific staff members of the SEC may be assigned the role of developing a proposal for a new regulation to prevent a particular abuse that is occurring. New regulations can be adopted within the commission, and then distributed to the public for feedback before final approval. Some of the more critical proposals are subject to Congressional review before final approval
13. Bid-Ask Spread of Penny Stocks. Your friend just told you about a penny stock he purchased, which increased in price from $0.10 to $0.50 per share. You start investigating penny stocks and, after conducting a large amount of research, you find a stock with a quoted price of $0.05. Upon further investigation, you notice that the ask price for the stock is $0.08 and that the bid price is $0.01. Discuss the possible reasons for this wide bid-ask spread.
Answer:
There are several reasons penny stocks often have wide bid-ask spreads. First, penny stocks are often extremely risky and volatile. Second, order costs for those stocks tend to be higher, since they often do not trade on an organized exchange or on NASDAQ. Third, penny stocks often have zero or few market-makers and little competition. Fourth, penny stocks tend to be illiquid, which makes it hard to sell those stocks at any given time.
14. Ban on Short Selling. Why did the SEC impose a temporary ban on short sales of specific stocks in 2008? Do you think a ban on short selling is effective?
Answer:
This action was intended to prevent stock prices from being pushed down solely by actions of short sellers, which could cause fear about these firms, and could disrupt the financial system. Even if short sales are banned, speculators have other methods of betting against a stock (such as put options on stock) that could possibly place downward pressure on a stock's price.
1. Buying on Margin. Assume that Vogl stock is priced at $50 per share and pays a dividend of $1 per share. An investor purchases the stock on margin, paying $30 per share and borrowing the remainder from the brokerage firm at 10% annualized interest. If, after one year, the stock is sold at the price of $60 per share, what is the return to the investor?
Answer:
R = SP
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