What is a key characteristic of the buying on margin investment strategy?

What is a key characteristic of the buying on margin investment strategy?

• A. High risk due to limited initial investment
• B. No risk involved in stock trading
• C. Only government approved stocks can be purchased
• D. Guaranteed returns regardless of market performance

Answer: (A)

Buying on margin is an investment strategy that involves borrowing money from a broker to purchase stocks. This allows investors to buy more shares than they could with just their own capital. A key characteristic of this strategy is its high risk, primarily because the investor is using borrowed funds to invest. If the price of the stock goes up, the investor can make a substantial profit, as they have more shares. However, if the stock price declines, the investor may face significant losses, potentially exceeding their initial investment. In this situation, investors are not only at risk of losing their own money, but they also incur obligations to repay the borrowed funds, which can lead to margin calls or forced sales of their assets. Options indicating no risk or guaranteed returns ignore the inherent volatility and unpredictability of the stock market, which are fundamental to all investment strategies. The notion that only government-approved stocks can be purchased misrepresents the nature of margin trading, as investors may buy shares from a wide range of public companies on the stock exchanges. Thus, the high-risk aspect of buying on margin, emphasized in the correct answer, accurately reflects the complexities and potential dangers of leveraging borrowed money for investments.

Buying on margin is an investment strategy that involves borrowing money from a broker to purchase stocks. This allows investors to buy more shares than they could with just their own capital. A key characteristic of this strategy is its high risk, primarily because the investor is using borrowed funds to invest. If the price of the stock goes up, the investor can make a substantial profit, as they have more shares. However, if the stock price declines, the investor may face significant losses, potentially exceeding their initial investment. In this situation, investors are not only at risk of losing their own money, but they also incur obligations to repay the borrowed funds, which can lead to margin calls or forced sales of their assets.

Options indicating no risk or guaranteed returns ignore the inherent volatility and unpredictability of the stock market, which are fundamental to all investment strategies. The notion that only government-approved stocks can be purchased misrepresents the nature of margin trading, as investors may buy shares from a wide range of public companies on the stock exchanges. Thus, the high-risk aspect of buying on margin, emphasized in the correct answer, accurately reflects the complexities and potential dangers of leveraging borrowed money for investments.