Question

A- With a cash account, an investor is able to borrow cash from a broker to increase the number of shares purchased.

True

False

B- An investor who purchases shares on margin will receive a margin call if the stock’s price rises too much.

True

False

C- If the account balance falls below the initial margin, an investor receives a margin call

True

False

Answer 1

1) False, Through a cash account an investor cannot buy shares on margin or credit and has to pay the full amount within 2 days of purchasing such shares.

2)False, A margin call occurs when the price of shares purchased on margin is reduced below the maintenance margin.A broker demands the investors to deposit additional cash to maintain the minimum level of maintenance margin required by the broker as per a pre-determined agreement.

3)False, A margin call occurs when the account balance is reduced below the maintenance margin.

Suippose Initial Margin is 50% and Maintenance margin is 40%.

The Investor buys securities worth a $100. Therefore his balance in his margin account is $50.

Now stock price is reduced by 9% his margin account will have a balnce of $(50-9)=$41

which is above maintenance margin of $40. Hence there will be no margin call.

If price falls above 10% and his margin account balance is reduced below $40, a margin call occurs.