#1
What is margin trading?
Trading securities using borrowed funds from a broker
ExplanationMargin trading involves using borrowed funds to trade securities.
#2
Which of the following is NOT a potential risk associated with margin trading?
Increased potential for higher returns
ExplanationHigher returns are a potential benefit, not a risk, of margin trading.
#3
Which of the following is NOT a typical margin requirement?
Excess margin
ExplanationExcess margin is not a typical margin requirement.
#4
What is the main purpose of margin trading for investors?
To maximize profit potential
ExplanationInvestors engage in margin trading to maximize profit potential.
#5
What is a margin account?
An account that allows investors to trade using borrowed funds
ExplanationA margin account permits trading with borrowed funds.
#6
What does Regulation T specify in the context of margin trading in the United States?
Minimum margin requirements for securities transactions
ExplanationRegulation T sets minimum margin requirements for securities transactions in the US.
#7
What is a margin call?
A demand from a broker for additional funds to cover potential losses
ExplanationA margin call is a request for more funds to cover potential losses in a margin account.
#8
Which regulatory body oversees margin trading activities in the United States?
Securities and Exchange Commission (SEC)
ExplanationThe SEC oversees margin trading activities in the US.
#9
What is the main difference between buying on margin and short selling?
Short selling involves selling securities borrowed from a broker, while buying on margin involves buying securities using borrowed funds
ExplanationShort selling borrows securities to sell, while buying on margin borrows funds to buy securities.
#10
What is the formula for calculating the margin call price?
Maintenance margin / Current stock price
ExplanationMargin call price is calculated as maintenance margin divided by the current stock price.
#11
In margin trading, what is the purpose of maintenance margin?
To cover the minimum equity level required to keep positions open
ExplanationMaintenance margin ensures there's enough equity to maintain open positions.
#12
What happens if a margin account falls below the maintenance margin level?
The investor receives a margin call
ExplanationA margin call is triggered if the account falls below the maintenance margin level.
#13
What is the role of a margin agreement in margin trading?
To outline the terms and conditions of the margin account
ExplanationMargin agreements define terms and conditions for margin accounts.
#14
What is a hypothecation agreement in margin trading?
An agreement between a broker and an investor allowing the broker to lend out securities in the investor's margin account
ExplanationA hypothecation agreement permits brokers to lend securities in investor margin accounts.
#15
What is the main risk associated with trading on margin during a market downturn?
Forced liquidation of assets
ExplanationMarket downturns may force liquidation of assets in margin trading.