o The following statement was made by Wall Street Analysts and Portfolio Manager
ID: 2666048 • Letter: O
Question
o The following statement was made by Wall Street Analysts and Portfolio Managers. “Individual investors who purchase stock on margin might as well go to Vegas” with their funds. Based on this statement, how would you interpret the market? As a potential investor, would you invest in the market after hearing this comment? Why or Why not?o In a short sale, investors place an order to sell a stock that they do not own. Describe the short sale process. What conditions might investors consider when contemplating a short sale?
Explanation / Answer
a) Trading on margin is very risky due to high gearing. If market goes the other way, the entire margin money can be lost. So, better not to invest or if at all you want to take risk, hedge your positions. b) In a short sale you do not have the stock you sell. This can be done in future trading or derivative trading. When price of stock falls to your desired level, you close the position by buying the stock to cover the sell position. To, safeguard, you may take opposite position in spot and option markets.
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