Investment companies perform several important functions for their investors. List and explain each function. 6. What is meant by buying on margin: Give an example.

Here's the solution for Questions 5 and 6.

Question 5: Investment companies perform several important functions for their investors. List and explain each function.

Investment companies provide several key functions for investors:

• Record Keeping and Administration: They handle all administrative tasks, such as issuing periodic statements, keeping track of capital gains and dividends, and providing tax information, simplifying the process for investors.
• Diversification and Divisibility: Investment companies allow investors to achieve broad diversification across many securities, even with relatively small investments. They also enable investors to buy fractional shares of a portfolio.
• Professional Management: They employ professional portfolio managers who conduct research and make investment decisions on behalf of the investors, aiming to achieve specific investment objectives.
• Lower Transaction Costs: Due to the large volume of trades they execute, investment companies can achieve economies of scale, resulting in lower commission costs per dollar invested compared to individual investors.

Question 6: What is meant by buying on margin? Give an example.

Buying on margin refers to the practice of purchasing securities by borrowing money from a broker. The investor pays for a portion of the investment, and the broker lends the remaining amount, using the purchased securities as collateral. This strategy amplifies potential gains but also significantly increases potential losses.

Example:
Suppose an investor wants to buy \10,000$worth of stock. If the initial margin requirement is$50%$, the investor would pay$$5,000$from their own funds and borrow the remaining$$5,000$from their broker. If the stock value increases, the investor profits on the full$$10,000$ investment, but if it decreases, the losses are also magnified, and the investor might face a margin call if the value drops below a certain threshold.