margin outline

Long Margin account

·        Customer buys stock and bonds on margin

·        Opening purchase, buy stock first

·        Closing purchase, sell held stock

·        Long market value=debit + eqity

·        Equity-theoretical value

·        Market value goes up, equity goes up

·        Minimum maintenance requirement, 25% in long account

A customer has a long margin account with a market value of $86,000 and a debit balance of $23,000. What is the equity in the account?

·        $63,000

·        MV-debit balance=equity

·        86-23=63

Restricted account

·        Equity dips below 50% of market value

·        Retention requirement, firm keeps 50% of customer sale proceeds to cover debit balance

·        If customer leave proceeds from sale in account, debit balance decreases, SMA increases

Releasing money

·        NO LONGER tested

Special Memorandum account, SMA

·        Sell stock, leave proceeds in account create SMA

·        Decrease debit balance, increase SMA

·        If market value in long account increases, SMA increases

·        SMA=equity-(Reg T x MV)

·        Line of credit

·        Don’t lose until used

SMA uses

·        Buy more stock

·        Short sale

·        Buy calls and puts

·        Personal use

·        Cannot let equity <$2,000

·        Equity can’t <minimum

Initial margin call

·        Meet Reg T requirements

Maintenance call

·        Equity must get to maintenance level

Increase SMA

·        Market value increases

·        Sell stock

·        Receive cash dividends

Decrease SMA

·        Buy more stock

No SMA effect

·        Receive stock dividends because more shares at lower price

·        Market value decrease

An investor has a long margin account with a market value of $65,000 and a debit balance of $40,000. If the investor sells $20,000 all of the following are true except:

·        Equity increases

·        Equity does not increase when stock sold

·        Sell stock, equity decrease unless proceeds used to pay debit balance

·        With sale-equity same, SMA increase

margin outline

Which of the following is NOT needed to open a margin account with a broker/dealer firm?

·        Discretionary authorization

·        Only for discretionary account

·        Not for margin account

·        Hypothecation agreement,customer agreement,lending authorization: all needed to open a margin account

margin outline

·        MV: market value

 

·        Dr: debit balance,debit receipt in long account

 

·        Cr: credit balance,credit receipt in short account

 

·        E:equity

 

·        SMA: special memorandum account or excess equity

 

·        B/D: broker/dealer

margin outline

Initial margin requirement

·        A.k.a. Reg T requirement

·        Amt customer must deposit when borrowing to buy stock

·        Deposit 50% of market price when buying or selling short

Long margin account,long account

·        Debit balance, remaining balance after Reg T paid

·        Pay interest for borrowing

Short margin account,short account

·        Short stock

·        Customer doesn’t own stock

·        Customer has to borrow stock to short stock

·        Credit receipt=Credit balance=Deposit $ + proceeds

margin outline

Federal Reserve Board (FRB) a.k.a The FED

·        Creates margin rules

·        Margin: customer borrows $ or stock

·        Regulation T, a.k. Reg T: Fed rule about broker/dealers giving credit/stock for customer purchases

·        Decided which stocks can be bought on margin

·        Listed stocks can be bought on margin

·        NASDAQ NMS stocks can be bought on margin

·        Some unlisted over the counter OTC stocks can be traded on margin

·        DO NOT NEED TO KNOW MARGIN REQUIREMENTS

·        Reg T, broker/dealers give credit to customers to buy stock

·        Reg U, banks give $ to customers to buy stock, to members of b/d firm who buy for account of firm

Reg T

·        When customers pay for purchase

·        Amount customer must pay for purchase

·        50% down for stock and bonds

·        b/d must follow regulations

·        b/d make sure payments made

margin agreement

·        a.k.a customer agreement

·        fill out before client can buy/sell

·        has lending authorization and hypothecation agreement

settlement date/trade date

·        NOT TESTED

retirement plan outline

Individual retirement account (IRA)

·        For individuals with income from working

·        Account at broker/dealer or insurance company

·        Income must be earned

·        Working person with non-working spouse can put away $ into separate IRA account for spouse

·        Max: less of $5,500 or 100% of earned income for year

·        If person has other retirement assets, IRA contribution amount decreases

·        No collectibles in IRA or bought for IRA

Different contribution amounts for

·        a)single person with/without another retirement plan

·        b) married people-with or without another retirement plan

·        c)married people-with/without a retirement plan

no retirement plan

·        single person or married person can put in $5,500 per year or $6500 if age 50 or above

·        single making $59,000 or less, marries making $95,000 or less WITH plan can do $5500 per year $6500 if age 50 or above

·        single making >$59,000, <$69,000 or married making >$95,000 or <$115,000 WITH plan can do a partial tax deductible contribution

·        single making >$69,000 WITH plan or married couple >$115,000 WITH retirement plan for both CAN NOT make tax deductible contribution

·        married making $178,000-$188,000 with one WITHOUT plan and one WITH plan may make full-tax deductible contribution for person without retirement plan

·        married making >$188,000 one WITH plan, both WITH plan-can NOT make tax deductible contributions

·        if income over limit + have retirement plan, max contribution can be made, not tax deductible

·        married couple with nonworking spouse can contribute for spouse under same rules as working spouse

·        married couple-one works, one does not work, working spouse with plan contributes, not tax deductible for either

·        put in $ after tax, voluntary, already taxed, part of cost basis-no tax at withdrawal

·        individuals<max limits can put in whole income but can not put more than they make

·        each person must have their own IRA and pay taxes on it when they retire

·        6% penalty for overpayment,taxed every year until taken out

·        IRAs taxed on appreciation + penalties when they apply

·        Person can rollover $ from trustee to new trustee once per year

·        When person leaves job, must rollover money from company plan to IRA in 60days

·        Banned-income averaging

An investor has contributed $40,000 to an IRA over the last 20 years. The account is now worth $120,000. Any withdrawal from the IRA by an investor who is 65 will be taxed as which of the following?

·        All ordinary income

·        Made with pretax $

·        Appreciation tax deferred

·        Whole amount is ordinary income

·        Taxes were not paid on income originally

Roth IRA

·        Taxpayer Relief Act of 1997 created Roth individual retirement accounts

·        $ put in is after tax $

·        10% Penalty if withdraw before 59.5

·        First dollars-contributions with Roth IRA

·        First dollars traditional IRAs + annuity-appreciation

·        High income limits-$127,000 for individual, $178,000 for married couple

·        If individual or spouse WITH retirement plan with employer, there is NOT a lower amount that can be put in

·        Max contribution: less of $5,500 or 100% of earned income, $6500 if 50 years old+

·        50+ years old can put in $6500 if under income limit

·        If person WITH >1 IRA account total contributions can be $5500/year or $6500/year if 50+

·        Don’t have to withdraw funds at 70.5 years old

·        10% penalty, withdraw before 59.5 years

·        If under 59.5, Withdraw regular contributions with no tax penalty

·        If under 59.5, withdraw rollover contributions with income tax and penalty charge

·        If under 59.5 earnings taxes as ordinary income

 

Roth IRA uses

·        Account must be 5+ years

·        Higher education

·        Medical expenses

·        Buying first time house

·        Withdrawal taxed as ordinary income

 

Coverdell education savings plans

·        To pay for kid’s college costs

·        Individual + client can donate up to $2000/year

·        Principal and earnings distribution tax free for education expenses

Expenses

·        Tuition

·        Books

·        Supplies

·        Equipment

·        Room and board-school’s charge or $2500 if student is off campus

·        New beneficiary needed-when kid turns 30, either used up $ or transfer to a younger kid within 30 days

·        10% penalty: Non-education use of distributions

·        Maximum contribution does NOT include rollover Savings plan amounts

·        Can NOT contribute once kid is 18 years old

Which of the following are similarities of a Coverdell ESA and a traditional IRA?

·        Earning accrue tax deferred in both

·        Withdrawals must start before a certain age in both the Coverdell ESA and the traditional IRA

·        Coverdell ESA contributions-not tax deductible

·        Coverdell-withdrawals by 30 years old, traditional IRA withdrawals by 70.5 years old.

·        Traditional IRA and Keogh can have tax deductible contributions

Qualified Tuition Plans-529 plan a.k.a qualified tuition program

·        Economic Growth and Tax Relief Reconciliation Act of 2001 provides an incentive for investors to put $ into college savings plan

·        Federal tax exempt distributions

·        Est. under IRS

·        $ after tax

·        Don’t pay gross income tax when withdraw

·        Can do 5x the gift tax free amount first year, no gifts for five years after that

·        Any age can put $ in plan

·        Can withdraw $ at any age

·        Est. by states as a trust

·        Managed by investment advisor firm

·        Tax exempt if beneficiary lives in state of plan

·        States decide tax treatment, beni’s of  state’s plan, beni’s of outside state’s plan, who can invest, what investments are available in plan, max-total amount of contributions that can be made to plan, do not guarantee investments except some special cases

·        Contributors, owners of account until $ taken out

·        Change beni to somebody outside family, earnings are taxed as income to beni

·        Contributor to plan can’t pick investments

·        Only cash can be put in

·        Contributor can set up plan for relatives

·        Beni can be changed

·        States decide who can contribute

·        After tax contributions-grow tax deferred

·        10% penalty if not for higher ed, Withdraw $, withdrawal/distribution taxed as income to contributor/beni

·        Contributions, a fift

·        State and estate tax benefits if 529 for paying tuition within your state

·        No 10% penalty if death or disability of beni

What is the maximum contribution that can be made in any one year to a 529 college savings plan without a single contributor without a single contributor incurring a gift tax?

·        5x the gift tax free amount

·        Can’t contribute for five years after 5x gift made

Higher education expenses

·        Tuition

·        Fees

·        Books

·        Supplies

·        Room

·        Board-must be half time students, must be reasonable

·        Special needs expenses