MLD Margin Tutorial Rev Aug 20051

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• Publié par: Uste
• Nombre de lectures: 50
• Langue: English

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Margin Tutorial forMerrill Lynch DirectAccounts Merrill Lynch & Co., Inc.                                                                            

          Revised August 2005

 

 

I M P O R T A N T N O T I C E

      The following information is provided for Merrill Lynch Direct (MLD) clients to help you learn more about margin trading rules and requirements, especially for trades entered online through the Merrill Lynch Online Client Order Entry function. (Note: MLOL Client order Entry requires separate enrollment.) Clients who also have Merrill Lynch Direct accounts should read the Merrill Lynch Direct Account Margin Tutorial as the rules and requirements for self-directed margin trading in Merrill Lynch Direct accounts are different in some respects. MLOL clients who have questions about margin trading rules should contact their Financial Advisors for assistance; Merrill Lynch Direct clients can call the Merrill Lynch Help Desk at 1-877-ML-DIRECT (1-877-653-4732) with questions about the Merrill Lynch Direct Margin Tutorial.   This tutorial contains information, terminology, and requirements associated with margin trading at Merrill Lynch. As a Merrill Lynch Direct client, you will have access to your accounts and, if approved, be permitted to enter margin trades online. We believe you should have a basic understanding of margin prior to entering trades involving an extension of credit.Please note the examples contained in this Margin Tutorial do not include commissions, margin interest, account fees, or any other fees associated with your Merrill Lynch Direct Account.

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C O N T E N T S

  CHARACTERISTICS OF CASH AND MARGIN ACCOUNTS ....................................................................4   C ASH A CCOUNT ...................................................................4........................................................................................   M GIN AR A TNUOCC ..................................................................................................................................................... 4   ADVANTAGES AND RISKS ASSOCIATED WITH A MARGIN ACCOUNT.........................................6   A DVANTAGES OF HAVING A M  RILLER L YNCH D IRECT MARGIN ACCOUNT ........................................................ 6   P OETTNAI L R ISKS OF HAVING A M ARGIN A CCTNUO :............................................................................................ 7   SECURITIES ELIGIBLE FOR MARGIN ............................................................................................................9   BASIC MARGIN DEFINITIONS ..........................................................................................................................11   L ONG M ARKET  V ALUE (LMV) ............................................................................................................................... 11   S HORT M  TARKE V ALUE (SMV) ............................................................................................................................. 11   D EBIT B EC LANA (DR) .............................................................................................................................................. 11   C  ITEDR B  CEANAL (....RC.)........................2.....1..........................................................................................................   E QUITY ................................................................................................................................QE(...)................21...........   R E TIONGULA T   (R EG .   T) .......................................................................................................................................... 13   R EG .   T   C ALL (TCL) .................................................................................................................................................. 13   R EG .   T   C ALL (TCL)   P T ENYMA T EIMEFRAM ......................................................................................................... 13   S  LAICEP M NMAERO MUD A CCOUNT (SMA).......................................................................................................... 14   M NCNAE ATEIN R TERIUQNEME ............................................................................................................................... 14   M  ECNANEAINT C ALL (MCL)   P ENYMAT  T MASEFRMEI ....................................................................................... 15   F IRM M  CEANENNTAI E XCESS (FME) ..................................................................................................................... 15   M INIMUM E QUITY R ERIUQNEMET .......................................................................................................................... 16   M INIMUM E QUITY P YATNEM  T MESIMEFRA .......................................................................................................... 16   MARGIN REQUIREMENTS ..................................................................................................................................17   M  NIGRA R EQUIREMENTS FOR S UCEITIRES ............................................................................................................ 17   D EBT I SNRUSTNTME ................................................................................................................................................. 17   E QUITIES .....................................................................................................71................................................................   C D NOECTNARET E QUITY R TNEMSEQREUI ............................................................................................................ 18   OPTION REQUIREMENTS ...................................................................................................................................19   OPTIONS.......................................................................................................................................................................20   R ISK D RUSOELCSI ..................................................................................................................................................... 20   C OMPONENTS OF O PTIONS ....................................................................................................................................... 20   O PTION T RANSACTIONS AND S ESTEGITAR ............................................................................................................ 21   Buying Long Calls and Long Puts....................................................................................................................21   Covered Option Writing.....................................................................................................................................24   Minimum Option Equity Requirement for Covered Option Writing ............................................................... 26   Naked Options.....................................................................................................................................................27   TRADING VIOLATIONS ........................................................................................................................................28   D ESCRIPTION OF V RIAS OU T RADING V NSLOIOITA .............................................................................................. 28   T YPES OF V ILONSATIO ............................................................................................................................................. 28   Cash Account Violations....................................................................................................................................28   Technical Violation - Cash Accounts ............................................................................................................... 28   90 Day Violation - Cash Accounts ................................................................................................................... 28   Sale-Not -Long Violation - Cash Accounts ....................................................................................................... 30   Margin Account Violations................................................................................................................................30  

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0   Day Trade Violation.......................................................................................................................................... 33   FREQUENTLY ASKED QUESTIONS ................................................................................................................38  

 

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Characteristics oCf ash and Margin Accounts    Cash Account   Trades entered in a cash account are on a non-credit basis. Funds are due promptly (generally by settlement date or trade date + 3 business days) to satisfy purchase commitments.   Under federal laws and regulations, if you do not make full payment by trade date + 5 business days, Merrill Lynch is required to liquidate (sell) the security that you purchased. This liquidation will take place on trade date + 6 business days. Failure to satisfy trading commitments in cash accounts will result in a trading violation. Please refer to the "Trading Violations" section on cash accounts for further information.   Sales in a cash account should not take place unless all prior securities purchased are fully paid for or a fully paid for security is deposited in the account. Separately, short sales (described in more detail below) are not permitted in cash accounts.     Margin Account   A margin account is a loan account. In other words, margin is an extension of credit by Merrill Lynch using eligible securities in your account as collateral. At Merrill Lynch we refer to margin as the Margin Lending Program.   With your Merrill Lynch Direct margin account, you may make partial payments towards your trades and borrow the remainder from Merrill Lynch. Below are some important details about a margin account that you should keep in mind:   o   be used as collateral for the loan.Only margin eligible securities may   o   You will be charged interest on the loan that is extended to you by Merrill Lynch.   o   All securities in your Merrill Lynch Direct margin account are held in "street name". In other words, in Merrill Lynch's name on your behalf.   o   must sign a Hypothecation/Lending Agreement prior to opening aYou margin account. These terms are contained in the Merrill Lynch

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Direct Cash Management Account® Agreement, the terms of which you agreed to when you opened your account. This agreement allows Merrill Lynch to sell your securities in the open market if a maintenance call (described below) is not met within the designated time periods. Also, the terms of the agreement permit Merrill Lynch to loan out your securities. Please refer to the agreement for specific terms and conditions.   o   Payment timeframes for margin trades are based on the different types of margin calls (see "Basic Margin Definitions" section).   o   You can lose more funds than you deposit in your account if the securities decline in value.   o    call, Merrill Lynch has the right to sell securitiesTo meet any margin in your margin account.   o   Merrill Lynch may notify you of a margin call and allow you time to meet the call, but we also can sell your securities without contacting you.   o   In the event of a maintenance call, you may not be permitted to decide which securities should be sold in your account.   o   may increase our margin maintenance requirements atMerrill Lynch any time.   o    time to meet ofMerrill Lynch does not have to grant you an extension a margin call.

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Advantages and Risks Associated with a Margin Account Advantages of having a Merrill LynDcihr ect margin accou nt   With Merrill Lynch Direct margin account you can increase your profit potential by leveraging your margin eligible securities. You can also earn more profits/dividends by purchasing additional securities on credit.   Example of a Margin Account vs. Cash Account:   Let's assume that yo u wish to invest $5,000 and purchase 100 shares of ABC Corp. @ $50 per share.   In a Cash Account In a Margin Account you can buy 100 shares (100 You can buy 200 shares with the same shares ABC @ $50 = $5,000) investment (200 shares ABC @ $50 = $10,000     You are required to deposit  You are only required to deposit $5,000, the full amount of the  $5,000. Merrill Lynch will lend you purchase. the  other $5,000).   Now let's assume the price of ABC Corp. rises to $60 per share. In a Cash account In a Margin account Your investment of 100 shares of Your investment of 200 shares of ABC Corp is worth $6,000. ABC is worth $12,000. Profit: $1,000 less anyProfit: $2,000 less commission commission charges. charges and interest charges.       You can sell short securities. This is an investment strategy whereby you sell a security you do not own in anticipation of a decline in the price of the security. A profit can be realized if the security sold decreases in value and is bought back at lower price on some future date. Short selling is permitted only in margin accounts.   Note: Merrill Lynch will not permit selling short securities that are below $10.00 per share in ML Direct accounts.   Example of a Short Sale in a Margin Account   Let's assume that you enter into the following transactions. Your account is calculated as follows:

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  Day 1 - A short sale of 100 shares of ABC Corp. @ $50 per share Day 2 - The price of a share of ABC Corp. declined to $40.You bought in (i.e., covered) the short position @ $40 per share resulting in a $1,000 profit:   Profit = Short Sale Proceeds - Cost to Cover Short Profit = $5,000cr* - $4,000dr* Profit = $1,000cr less commission charges and interest charges. *dr refers to debit, cr refers to credit   You can borrow money against fully paid for securities that you deposited. Example of Borrowing Funds in a Margin Account:   Let's assume that you deposited 1,000 shares of DEF at a price $20. Your market value is $20,000 (1,000 × $20). You can withdraw $10,000 from your account.   Potential Risks of having a Margin Account:   Your potential losses are greater due to leverage if there is adverse market movement.   Example of Potential Losses in Declining Markets   Let's assume that you wish to invest $5,000 and purchase ABC Corp. @ $50 per share.   In a Cash Account In a Margin Account You can purchase 100 shares You can purchase 200 shares (100 × $50=$5,000) (200 × $50 = $10,000).   The remaining $5,000 is borrowed from Merrill Lynch.     The following business day the price of ABC Corp. falls 20% to $40 per share.      In a Cash Account In a Margin Account Your investment of 100 shares of ABC Your investment of 200 shares of ABC is Corp is worth $4,000. (100 × $40) worth $8,000.     Potential loss: $1,000 plus any commission  c P h o a te rg nt e i s a   l a   nd l   o i ss0,2$ :siismmcos lu p00 hc.seg  on charges. nterest ar    

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If the market value of your securities decline, you must meet maintenance calls that become due specified dates or Merrill Lynch will liquidate your securities to meet the calls.     The potential loss on short sales is unlimited because there is no ceiling on the price of stock.   Examples of a Short Sale in a Rising Market   Let's assume that you enter into the following transactions. Your account is calculated as follows:   Day 1 - A short sale of 100 shares of ABC Corp. @ $50 per share Day 2 - The price of a share of ABC Corp. increased to $60.Your potential loss if bought in the short position @ $60 per share is $1,000:   Loss = Short Sale Proceeds - Cost to Cover Short Loss = $5,000cr* - $6,000dr * Loss = $1,000dr plus commission charges and interest charges. *dr refers to debit, cr refers to credit   Please keep in mind other risks associated with short selling which are outlined below: Important Notice Regarding Short Selling Securities Merrill Lynch cannot assure its customers that we will be able to continue to lend the securities that were sold short for more than the day on which the short sale is made. If Merrill Lynch cannot continue to lend the securities to the customer, we must require that the customer cover the short sale. This may occur at an inopportune time requiring that the shares be bought in at an unfavorable price and creating a loss.   If the issuer of the securities that are sold short declares a dividend, issues warrants or rights, engages in a merger or other transaction that results in the issuer's shareholders receiving cash or other securities, the account of the short seller will be charged accordingly. The customer who sold the shares short will be required to repay all cash and to return all securities so distributed.

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Securities Eligible for Margin   As mentioned earlier, you may collateralize your margin eligible securities to borrow funds and/or purchase additional securities on margin. Securities that are eligible for margin include the following:   United States Government Securities such as: o   United States Treasury Bills o   United States Treasury Notes o   United States Treasury Bonds o   United States Government Agency Bonds

  Municipal Bonds must meet the following investment grade criteria to be eligible for margin: o   Rated BBB or better by Standard & Poor's Financial Rating Services; (or) o   Rated Baa or better by Moody's Investors Services.   Corporate Bonds must meet the following criteria to be eligible for margin: o   Corporate bonds must be investment grade, by being rated BBB or better by Standard & Poor's Financial Rating Services or Baa or better by Moody's Investors Services. o   The corporate bond must have an aggregate amount of $25,000,000 shares outstanding.

  Equity securities must meet the following criteria to be eligible for margin: o   Securities listed on a major National Securities Exchange such as the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX). o   Securities that trade on the NASDAQ over-the-counter market and are designated as a National Market System (NMS) issue. o    andSecurities that trade on the NASDAQ over-the counter market, designated as Small Capitalization (Small Cap), with an average weekly volume of 10,000 shares and a price of at least $6.00 per share.

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Note: Merrill Lynch will not permit ML Direct Accounts to purchase securities that are below $1.00 per share.

  Convertible Securities - Securities that are convertible to margin eligible securities are considered margin eligible.   Open-End Mutual Funds- These issues must initially be paid for in full in accordance with federal securities regulations. Merrill Lynch will extend margin loan value on certain open-ended mutual funds 30 days after settlement date of the purchase.   Options–Only certain option transactions/strategies are permitted to be client initiated online. These transactions include buying long calls and long puts, selling long calls and long puts and covered call writing. For further details please refer to the section entitled “Options” in the latter part of the tutorial. . It is important to distinguish that options are not granted loan value.   See " Margin Requirements" section for margin requirements on various eligible securities.  

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