Sam purchased 500 shares of Microsoft stock which he has pledged to his broker as collateral for the loan in his margin account. This process of pledging securities is called:
hypothecation
The process of pledging securities as collateral for a loan in a margin account is called “margining” or “margin collateralization.” It is a common practice in the world of securities trading, particularly for investors who trade on margin or use leverage to increase their buying power.
In this case, Sam has pledged his 500 shares of Microsoft stock as collateral, so that his broker can use them to secure the loan in his margin account. This means that if Sam is unable to meet the margin requirements on his account or cannot repay the loan, the broker can sell the Microsoft shares to satisfy the debt.
Margining is an important strategy for investors who wish to leverage their investments to achieve greater returns in the stock market. However, it also carries substantial risks, as market volatility can result in significant losses if an investor’s margin requirements are not met. As such, it is crucial that investors understand the risks and consequences of margining before choosing to trade on margin.
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