Finance Assignment Example | Topics and Well Written Essays - 1000 words

Finance - Assignment Example 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. 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). 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