Question

Buying stock on margin allows an investor to borrow funds from the brokerage company as part of the transaction. This __________ the potential return to the investor and ___________ the risk.

Answer 1

This INCREASES the potential return to the investor and INCREASES the risk.

Step-by-step explanation:

Whenever a company or an investor operates with a high level of leverage, the potential returns increase, but the potential risks also increase since the possibility of not being able to pay back the borrowed money always exists.

Buying stock on the margin was the main cause of the stock market collapse prior to the Great Depression in 1929. Since the price of stocks had constantly increase during a relatively long period of time, speculative investors thought they could increase their earnings by borrowing money and investing in the stock market. It all worked perfectly, many made millions, until something failed and like a sand castle, the stock market collapsed immediately.

Nowadays borrowing on the margin still exists and broker firms exercise a larger control on the stock prices. If they fall below a maintenance margin, the broker requests that the investor deposit more funds into their account or they gain control over the stocks.

Answer 2

Increases, Increases

Step-by-step explanation:

Buying stock on margin allows an investor to borrow funds from the brokerage company as part of the transaction. This increases the potential return to the investor and increases the risk.

The act of borrowing from the brokerage company to invest will increase potential returns to the investor because he is technically earning returns on the brokerage company's money

Conversely, with debt comes risk and if the investment fails he will have to pay the brokerage firm the amount invested on his behalf.