You purchase a stock on margin. If the stock price drops, your return will be ____ than if you had purchased the stock with cash. If the stock price rises, your return will be ____ than if you had purchased the stock with cash.
A) lower; lower
B) lower; greater
C) greater; greater
D) greater; lower
E) Insufficient information.

Question

Quizplus · Accepted Answer

Purchasing stocks on margin amplifies both gains and losses compared to purchasing with cash. If the stock price drops, the loss is greater because of the borrowed funds that need to be repaid. Conversely, if the stock price rises, the return is greater because the gains are amplified by the leverage effect of using borrowed money.

You Purchase a Stock on Margin