Question

13. Which of the following statements is INCORRECT about trading on margin A. It is a leveraged equity investment. B. Stocks purchased on margin are registered in street name. C. It increases payoff both on the upside and downside. D. In general, a limit-buy order may be placed to limit potential losses.

17. Consider the following short sale example: an investor borrows 100 shares of a stock from the broker, put down 50% as the initial margin, and sells the stock at $50/share in the market. If the maintenance margin is 30%, how much can the stock price rise before the investor gets a margin call?

      A. 56.79

      B. 57.69

      C. 59.69

      D. 58.79

18. Regarding the previous question, suppose the stock price later goes up from $50/share to $75/share, put a ____________may limit the potential loss for the investor?

      A. limit sell order at $60/share

      B. limit buy order at $60/share

      C. stop loss order at $60/share

      D. stop buy order at $60/share

Answer 1

Answer to question number 13> Margin trade refers to the trade, wherein the broker allows the trader to buy more shares by letting them borrow money for a period (generally by keeping an upfront collateral), this enables the trader to buy more quantity of shares with a given amount.

Consider option A> Margin trade is actually a leveraged equity instrument as it enables the trader to leverage their deposits to buy more shares

Option C> Since margin trading is a leveraged equity instrument, it results in a higher pay off or a loss compared to normal trade.

Option D> A limit buy order can be placed in both normal trading as well as margin trading to limit losses.

Option B> The shares purchased in margin trading are not registered in the name of the broker (broker is referred to as street name), it can be taken as a collateral though.

Based on the above analysis, Option B is the incorrect answer.

Hope this answers one of your questions.