What does "buying on margin" refer to in stock purchasing?

What does "buying on margin" refer to in stock purchasing?

• A. Buying stocks outright with savings
• B. Purchasing stocks with a small down payment and a promise to pay later
• C. Investing in stocks with borrowed money only
• D. Selling stocks for immediate cash

Answer: (B)

"Buying on margin" refers to the practice of purchasing stocks with a small down payment and a promise to pay later. This means that an investor can buy more shares than they could if they were paying the full price upfront. In this scenario, the investor typically borrows money from a brokerage firm to finance part of the stock purchase. The use of margin allows investors to leverage their investments, potentially leading to greater gains if the stock price rises. However, it also carries significant risk; if the stock price declines, the investor could face margin calls, whereby they must deposit more cash or sell off securities to maintain their position. This mechanism contributed to the stock market volatility leading up to the Great Depression, as many investors were over-leveraged. The other options do not capture the essence of margin buying. Simply paying cash outright or borrowing money exclusively would not encompass the complete process of "buying on margin," which involves both a down payment and the obligation to pay the remaining balance. Selling stocks for immediate cash is unrelated to purchasing stocks at all.

"Buying on margin" refers to the practice of purchasing stocks with a small down payment and a promise to pay later. This means that an investor can buy more shares than they could if they were paying the full price upfront. In this scenario, the investor typically borrows money from a brokerage firm to finance part of the stock purchase.

The use of margin allows investors to leverage their investments, potentially leading to greater gains if the stock price rises. However, it also carries significant risk; if the stock price declines, the investor could face margin calls, whereby they must deposit more cash or sell off securities to maintain their position. This mechanism contributed to the stock market volatility leading up to the Great Depression, as many investors were over-leveraged.

The other options do not capture the essence of margin buying. Simply paying cash outright or borrowing money exclusively would not encompass the complete process of "buying on margin," which involves both a down payment and the obligation to pay the remaining balance. Selling stocks for immediate cash is unrelated to purchasing stocks at all.