Question

Discuss margin buying of common stocks. Include in your discussion the advantages and disadvantages, investors’ motivation of employing the margin buying strategy.

Answer 1

Martin buying is a facility which is offered to the investor by the brokers in which investors can buy the stocks and sell the stocks at margin so even if the investor is not having the high amount of money then he is being provided with margin at a rate of interest which will be chargeable from the investor and investor will be able to keep his position for longer period of time.

For Example, if the investor has margin requirement of 50% then he will get the rest 50% of money from the broker for purchasing a stock at certain interest.

Advantages of buying common stocks on margin is that they will be helpful for the investor in order to maximize their rate of return even if they do not have money and it will also mean that the investor will have optimum flexibility and he can take position in the longer period of time if he is highly secured of making a higher rate of return on different security so it will offer him with high rate of return and high flexibility.

The disadvantages in association with buying of stocks on margin is that it will have a ripple effect on negative side if the investor is starting to lose the money because the overall loss will be very high and investor can find himself in a debt trap if he is not able to to manage his margin properly so Margin Call will be triggered.

The motivation of investors of employment of the margin strategy is related to to maximization of his overall rate of return because investor will always want to maximize his rate of return and it is for the high risk investor who will always want to get exposed to margin trading as he believes in taking high risk in order to maximize the overall rate of return in the market.