What was the financial practice known as "buying on margin"?

What was the financial practice known as "buying on margin"?

• A. Purchasing stocks without any initial investment
• B. Paying full price for stocks upfront
• C. Buying stocks with borrowed funds to increase size of investment
• D. Investing in real estate instead of stocks

Answer: (C)

"Buying on margin" refers to the practice of purchasing stocks using borrowed funds, allowing an investor to increase the size of their investment without having to pay the full price upfront. This approach can amplify both potential gains and losses; if the value of the stock rises, the investor can realize significantly higher profits since they invested more than their initial capital. Conversely, if the stock declines in value, losses can be substantial, as the investor still owes the borrowed amount regardless of the stock’s performance. The other options do not accurately capture the essence of buying on margin. Purchasing stocks without any initial investment implies a completely different strategy that isn’t sustainable or typical in stock trading. Paying full price for stocks upfront is the traditional method of investing and does not reflect the leverage aspect inherent in margin buying. Lastly, investing in real estate instead of stocks shifts the context away from stock investments entirely and does not relate to the financial strategies around buying on margin in the stock market.

"Buying on margin" refers to the practice of purchasing stocks using borrowed funds, allowing an investor to increase the size of their investment without having to pay the full price upfront. This approach can amplify both potential gains and losses; if the value of the stock rises, the investor can realize significantly higher profits since they invested more than their initial capital. Conversely, if the stock declines in value, losses can be substantial, as the investor still owes the borrowed amount regardless of the stock’s performance.

The other options do not accurately capture the essence of buying on margin. Purchasing stocks without any initial investment implies a completely different strategy that isn’t sustainable or typical in stock trading. Paying full price for stocks upfront is the traditional method of investing and does not reflect the leverage aspect inherent in margin buying. Lastly, investing in real estate instead of stocks shifts the context away from stock investments entirely and does not relate to the financial strategies around buying on margin in the stock market.