Buying on Margin

### What is buying on margin? - [ ] Buying stocks from a margin store. - [x] Purchasing securities with money borrowed from a broker. - [ ] Selling securities at a margin. - [ ] Borrowing money to invest in real estate. > **Explanation:** Buying on margin involves purchasing securities using funds borrowed from a broker, which allows investors to buy more securities than they could with just their cash. ### Who regulates the practice of buying on margin? - [ ] Securities and Exchange Commission (SEC) - [x] Federal Reserve Board (FRB) - [ ] Internal Revenue Service (IRS) - [ ] World Bank > **Explanation:** The Federal Reserve Board (FRB) regulates the practice of buying on margin to maintain market stability. ### What is a margin account? - [ ] An account for depositing dividends. - [x] A brokerage account allowing investors to borrow money to purchase securities. - [ ] A savings account with a higher interest rate. - [ ] An insurance policy for investments. > **Explanation:** A margin account is a type of brokerage account that allows investors to borrow funds from their broker to buy securities, using those securities as collateral. ### What is a margin call? - [ ] A call for buying low-priced stocks. - [ ] A call to sell all securities. - [x] A broker's demand for an investor to deposit additional money or securities. - [ ] A government regulation. > **Explanation:** A margin call occurs when a broker demands that an investor deposit additional money or securities into their margin account to meet the minimum maintenance margin. ### What is the initial margin requirement? - [ ] The amount of interest paid on borrowed funds. - [x] The percentage of the purchase price of securities that must be paid with the investor's own funds. - [ ] The total value of the securities purchased. - [ ] The fee charged for opening a margin account. > **Explanation:** The initial margin requirement is the percentage of the purchase price of securities that an investor must pay for with their own funds, as set by the Federal Reserve Board. ### What effect does buying on margin have on potential returns and risks? - [ ] Decreases both. - [ ] Increases returns but decreases risks. - [x] Amplifies both. - [ ] Has no effect. > **Explanation:** Buying on margin can amplify both potential returns and potential risks since you are leveraging borrowed funds. ### What happens if the value of margin-purchased securities falls below a certain level? - [ ] Nothing; the broker absorbs the loss. - [ ] The investor gains more money. - [x] A margin call is issued for the investor to provide additional funds. - [ ] The securities are transferred to the broker. > **Explanation:** When the value of securities falls below a certain level, a margin call is issued, requiring the investor to deposit more money or sell off assets to meet the maintenance margin. ### What types of securities are typically not marginable? - [x] High-risk or low-liquidity securities - [ ] High-value stocks - [ ] All ETF’s - [ ] Government bonds > **Explanation:** High-risk or low-liquidity securities are often excluded from being marginable. ### Margin calls must be met by which methods? - [ ] Avoiding trading for a month. - [ ] Depositing funds in a savings account. - [x] Depositing additional funds or selling securities. - [ ] Signing a new margin agreement. > **Explanation:** Margin calls are typically met by depositing additional funds into the margin account or by selling some of the securities. ### What role does leverage play in margin trading? - [ ] It guarantees profits. - [x] It uses borrowed capital to increase potential returns and risks. - [ ] It ensures lower interest rates. - [ ] It requires government approval. > **Explanation:** Leverage involves using borrowed capital to increase the potential returns on an investment, although it also increases potential risks.