without investing -


        90 PART I Introduction     Table 3.9 Illustration of Buying Stock on Margin   Change

in End of Year Repayment of Investors Stock Price Value of Shares Principal and Interest Rate of Return*   30% increase $26,000 $10,900 51% No change 20,000 10,900 9% 30% decrease 14,000 10,900 69%   *Assuming the investor buys $20,000 worth of stock by borrowing $10,000 at an interest rate of 9% per year.     Table 3.9 summarizes the possible results of these hypothetical transactions. Note that if there is no change in IBMs stock price, the investor loses 9%, the cost of the loan.     CONCEPT C H E C K ☞ QUESTION 4 Suppose that in the previous example the investor borrows only $5,000 at the same interest rate of 9% per year. What will be the rate of return if the price of IBM stock goes up by 30%? If it goes down by 30%? If it remains unchanged?         3.7 SHORT SALES   A short sale allows investors to profit from a decline in a securitys price. An investor bor- rows a share of stock from a broker and sells it. Later, the short seller must purchase a share of the same stock in the market in order to replace the share that was borrowed. This is called covering the short position. Table 3.10 compares stock purchases to short sales. The short seller anticipates the stock price will fall, so that the share can be purchased at a lower price than it initially sold for; the short seller will then reap a profit. Short sellers must not only replace the shares but also pay the lender of the