Question

After reviewing the topic of short selling in your text, and researching the topic of short selling on your favorite web browser or library, please respond to the following Discussion topics: What are the processes of buying a stock on margin and short selling? What are the advantages and benefits of buying stock on margin and short selling?

Answer 1

The process of buying a stock on margin is when you open a account for trading with any brokerage. Every broker has an initial margin wherein there is a requirement for the investor/trader to put in initial cash amount of a certain proportion and the rest can be contributed by the broker. For example, buying 1000 $ worth of stock at a margin of 60% implies 600$ is contributed by the trader and balance 400$ by broker firm. So this margin trading is basically a leverage based trading.

The advantages are that one can take bigger position on a security and larger gains can be made through them.

In short selling, the trader sells a stock without owning them and squares off the position later by buying the stock. So in this, the trader or investor through his trading account sells the stock after taking it on loan and then buys the stock later to return the stock.

The advantages is that through this the trader is able to have a advantageous position even from decrease in stock price.