What defines securities eligible for reduced margin?

• A. Securities that are high-risk investments
• B. Securities that exhibit high liquidity and low price volatility
• C. Securities that have low market demand
• D. Securities that can only be purchased in cash

Answer: (B)

The definition of securities eligible for reduced margin revolves around their liquidity and price volatility. Securities that exhibit high liquidity are easily bought and sold in the market without causing significant price fluctuations. This characteristic minimizes the risk associated with holding these securities, making them more favorable for margin trading. Additionally, low price volatility indicates that the securities are unlikely to see extreme price swings, providing a level of stability that brokers can rely on when allowing reduced margin. Reduced margin requirements encourage trading activity by allowing investors to leverage their positions with less initial capital, provided they are dealing with securities considered relatively safer due to their liquidity and stability.

The other options do not align with the criteria for reduced margin. High-risk investments typically require full margin or higher margin requirements due to the increased potential for loss. Low market demand would suggest a lack of liquidity, which is counter to the profile of securities eligible for reduced margin. Lastly, securities that can only be purchased in cash would not be eligible for margin trading at all, as margin trading involves borrowing funds to buy these securities.