Question

- make a report on what is margin lending and how does it work?
- how does Exchange Traded Funds works?

Answer 1

Margin lending allows you to borrow money to buy and invest in shares, ETF's and mutual funds. It helps to diversify our portfolio, increase our investment horizon, an claim tax deductions due to borrowed money.

In margin lending if we want to purchase $2,00,000 worth of stocks , we have to first deposit a margin money of 30% that is $60,000. After deposit the amount, we can raise stocks worth of $2,00,000. We have to maintain, the maintenance margin as well. In case, the value of the stocks fall below the maintenance margin a margin call will be made to us.

ETF :

ETF's are similar to mutual funds, the only difference is that it trades on an exchange.Since, ETF'S trade on an exchange, we can buy or sell ETF'S throughout the day. So, EFT'S provide flexibility,it also provides transparency and tax efficiency,

ETF'S function through a mechanism of creation and redemption and they try to keep the prices of shares very close to the NAV. The prices of the ETF fluctuate due to the changes in the supply and demand. Through creation , the ETF sponsor wishes to increase the number of shares and through redemption, the ETF sponsor wishes to reduce the number of shares. If there are more buyers than sellers, the prices of the ETF will rise. As the ETF price deviates from the NAV, there arises an arbitrage opportunity. the traders exploit these arbitrage opportunities and the share prices returns back to the NAV.