Borrowing against Yourself by Jason Zweig - Assignment Example

Introduction Margin means import securities, such as stock by means of funds rented from brokers. Margin loans permit someone to borrow currency against the worth of the brokerage account to allow one to buy property at interest, which is frequently below those you could obtain from other debt protected by your own assets, for example home-equity loan. Questions on the article, “Borrowing against Yourself” Qn. 1. Definition of “buying stock on margin” Buying stock on margin simply means borrowing money from the brokerage and using them to purchase assets. The money borrowed will be later refunded with the additional interest. It is also similar to buying goods or stock on mortgage. 2. Consider the primary risks of buying stocks on margin. One should consider the following primary risk of buying stock on margin; enlarged losses due to amplified leverage. This happens when one experience a loss. He is accountable for repaying the money rented plus the interest on top of the loss when there is increased leverage. The second risk is maintenance call. It requires maintaining of a smallest amount equality level in the form of cash. When sustenance condition fails, a preservation call will be issued that requires one to sell securities, put down cash, among others, until the account meet the minimum equity requirement (Zweig, 2012). The necessities for the early acquiring of securities using rented assets are characteristically higher than the maintenance necessities. Apart from fed calls, one should also consider forced bankruptcy and finally the margin interest which one is required for repaying the interest on his/her margin loan regardless of any changes in interest that occurred during the time you loan was outstanding. Qn. 3. Types of financial ratios that illustrate leverage. They include; liquidity ratios. This type of ration is used to measure the ability of cash to pay debt. Activity ratios, measures the firm’s ability to repay long–term debt. Productivity ratios measures the firm’s usage of its benefit and control of its expenses to make a satisfactory rate of return and finally market ratios, which measures inventors’ reply to possessing a firm’s stock and also the price of issuing stock. These are also concerned with the return on investment for shareholders and with relationship between return and the worth of an investment in the company’s shares (Zweig, 2012). Difference between accompany using debts as leverage and an individual investor using margin The difference is that the company using debts as leverage will prosper faster than an individual using margin in that, the company will enjoy the appreciation of the assets over time than an individual who borrows money to cover the risks. The other difference is that debts as leverage is used in mainly investment, but the margin is mainly applied to cover the risk of the company or an individual investor from losing of his/ her investment. Qn. 4. Critique of the second to last paragraph of the article From the article, margin loans allows one to borrow money from the broker and buy stock. The disadvantage is that the margin interest is very low compared to other investment policies, but while the stock and bonds are swollen with gains and, they never get to the past committee to approve credit-worthiness. It has been noted that many investors seem to bold due to the increments of the interest obtained from the investment. The disadvantage of the margins, it may appear that one is borrowing from himself but instead borrowing from one who is most unstable and unreliable. The other disadvantage is when the margin debt decreases as one is forced to sell all the assets to boost the account up to the required target. Messrs Jacob and levy argue that modern portfolio theory is the formula for diversification developed in the 1950s by economist Harry Markowitz Qn. 5. How to reconcile savings is equal to investments (S=I) versus the use of buying on margin. To reconcile savings is equal to investments in buying on margin is by decreasing the investment of the margin. The investment should be greater than savings. This will lead to inflation, since the organization will not have enough capital to run its daily functions hence the investment should be at a lower point than savings (Zweig, 2012). Qn. 6. Reasons why there was decrease in broker loans after 1929. The causes of the great depression in brokers loan was the debt deflation. This happened when the banks lend out more money than they had to lend. Falls in the levels of asset prices was also a cause as a greater fall in the net worth of business as well as predicating bankruptcies and fall in profile was experienced. Apart from those listed, a breakdown of international trade resulted to a decrease of the broker loans and finally problems with the Federal Reserve (Zweig, 2012). Measure of security analysis and investment knowledge Qn. 1. How to analyze the stock of Wal-Mart. To analyze the stock, one should identify the key areas, for example financial statements, assets, and statements of cash flow. In addition, analyze the revenue and output by the Wal-Mart store. The steps taken are to find the capital invested and revenue collected. Qn. 2. Analyzing a new corporate bond. To analyze the bond, a good start is by using Bloomberg to screen for a bond that meets certain criteria. This will be done by keying kicker symbols for bonds into the Bloomberg, followed by the corporate bond function key CORP. This will outline the details of the bond (Schug et al, 1997). Qn. 3. How to analyze a commodity market. Essential analysis is a means of examining commodities and attempting to forecast where the price of products should be trading and what they will be doing in the future. The central basis for fundamentals is supply and demand commodities. Supply of commodities Steps taken are analyzing the commodity and the price of the commodity analyzed before the commodity is taken to the market for selling to the customers (Schug et al, 1997). Qn.4. Technical analyze values. Technical examination upholds that all information is mirrored already in the trend. The technical analysis includes three values. These values are; economics analysis, industrial analysis and company analysis. They help the company to achieve their goal of investment especially in its investment and debating (Schug et al, 1997). Conclusion Margin has positive and negative impacts as described above. To some extend it gives upper hand advantage in the investment especially company organization or personal investment. Work Cited Mark C. Schug, John S. Morton, Kathleen Ryan Johnston. Learning from the Market: Integrating the Stock Market Game Across the Curriculum. Council for Economic Educat., 1997. Zweig, Jason. Borrowing against yourself, in "the intelligent investor", 2012. Read More