Main Answer:
An investor must be pre-approved for this special type of loan offered through commercial banks, and the loan re-payment is then calculated like a standard annuity.
Step-by-step explanation:
Buying stocks on margin involves borrowing money from a broker to purchase more shares than the investor could afford with their own funds. The statement highlights a crucial aspect: the need for pre-approval from commercial banks to engage in margin trading. This process ensures that the investor meets certain financial criteria and understands the risks associated with trading on margin.
Unlike the assertion that buying on margin helps avoid the disadvantages of odd lots, the reality is that margin trading introduces its own set of risks. The claim that there is no maximum dollar amount or portion of the investment proposed when buying stocks on margin is inaccurate. Margin accounts have specific requirements, including minimum equity levels, which act as safeguards to protect both the investor and the broker.
The statement regarding a margin call accurately describes a critical event in margin trading. When the value of the stock decreases to a certain level, the broker may issue a margin call, demanding the repayment of the loan in full. This is a protective measure to prevent further losses and ensures that the investor can cover their debt. In essence, buying on margin amplifies both potential gains and losses, making it a strategy that demands careful consideration and risk management.
In summary, the main answer underscores the necessity of pre-approval for margin trading, while the explanation clarifies the intricacies and risks associated with buying stocks on margin.