Dealers in security markets are also known as market makers. They engage in the buying and selling of securities for their own accounts thus making a market. Money makers ensure a smooth flow in security trade. They also quote prices of stock in a bid and ask basis. Bid and ask involves buying stock at a lower price and reselling them at a higher price.
Margin is the amount paid by the investor for the purchase of securities using a combination of both cash and borrowed funds. When an investor chooses to use margin, one can make an initial payment and borrow the remaining funds to complete the purchase. There must be an agreement between the investor and the broker on the use of securities and the control over the broker’s account. The advantage of using margin is that it is the easiest way to increase returns. However, there are a lot of risks involved. First, the interest rate on the borrowed funds is set by the broker and it is subject to fluctuations on a general variation of interest rates. Second, the broker can easily raise the minimum rate without notice. Third, the broker determines the types of assets to sell in an investor’s account in case of a margin call. Fourth, in case of loss of funds the investor bears the burden.
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Short stock is the stock bought by a broker from an investor. The broker lends it back to the investor, sells it and credits the investor’s account. The investor then promises to buy the stock in future at a relatively lower price to pay the loan. Short stock allows the investor to reap great returns without investing a lot of money. Besides, it is a way of hedging an investor’s investment if he/ she bought some stock earlier. Compounding is the increase in the earnings of a particular investment from interest rates or capital gains. Building blocks for investments are elements that make up an investor’s portfolio. They include stocks, bonds, real estate, cash and some commodities.
