Definition of Margin

What is a Margin？

In finance, the margin is the collateral that an investor must put into a broker or exchange to cover the credit risk that the holder poses to the broker or exchange. Investors may take credit risk when borrowing cash from a broker to buy a financial product, borrowing a financial product for short-term sales, or entering into a derivative contract.

Margin purchases occur when an investor borrows a balance from a broker to buy an asset. Margin purchase refers to the initial payment of an asset to a broker. Investors use the securities in their securities accounts as collateral.

In the general business context, a margin is a difference between the selling price and production cost of a product or service, or the ratio of profit to sales. Margin may also refer to the portion of the Adjustable Rate Mortgage (ARM) interest rate that is added to the Adjusted Index Rate.

Purchase with Margin

Margin purchases include borrowing money from a broker to buy stock. You can think of it as a loan from your broker. Margin trading allows you to buy more stock than usual. To trade with margin, you need a margin account. This is different from a regular cash account where you exchange money in your account.

Your broker is required by law to obtain your consent to open a margin account. Margin accounts can be part of a standard account opening contract or a completely separate contract. Some brokers charge more, but a margin account requires an initial investment of at least $ 2,000. This deposit is known as the minimum margin.

What Does It Mean to Trade on Margin？

Trading on margin means borrowing money from a brokerage firm to carry out trades. When trading on margin, investors first deposit cash that then serves as collateral for the loan and then pay ongoing interest payments on the money they borrow. This loan increases the buying power of investors, allowing them to buy a larger quantity of securities. Purchased securities are automatically used as collateral for margin loans.

Use of Other Margin

Invoice Margin

In business accounting, profit margin refers to the difference between revenue and expense, and companies typically track gross margin, operating margin, and net margin. Gross profit margin measures the ratio of a company's revenue to the cost of goods sold (COGS). The operating margin is compared to sales, taking into account the cost of goods sold and operating expenses, and the net margin is taking into account all these costs, taxes, and interest.

Mortgage Margin

Adjustable-Rate Mortgage (ARM) offers a fixed interest rate during the introduction period, after which the interest rate is adjusted. To determine the new rate, the bank adds a margin to the established index. In most cases, the margin remains the same for the entire duration of the loan, but the index rate changes. To understand this more clearly, imagine that a floating rate mortgage has a 4% margin and is linked to the Treasury index. If the Treasury index is 6%, the mortgage interest rate will be the index rate of 6% plus a margin of 4% or 10%.

What Does It Mean to Trade on Margin？

Trading on margin means borrowing money from a brokerage firm to carry out trades. When trading on margin, investors first deposit cash that then serves as collateral for the loan and then pay ongoing interest payments on the money they borrow. This loan increases the buying power of investors, allowing them to buy a larger quantity of securities. The securities purchased automatically serve as collateral for the margin loan.

What is a Margin Call？

A margin claim is a scenario in which a broker who previously provided a margin loan to an investor sends a notice asking the investor to increase the amount of collateral in the margin account. In the face of margin claims, investors often have to put additional money into their accounts by selling other securities. If the investor refuses, the broker reserves the right to forcibly sell the investor's position to raise the necessary funds. Many investors are afraid to claim margin because they can force investors to sell their positions at a disadvantageous price.

What Are Some Other Meanings of the Term Margin？

Outside of margin lending, the term margin also has other uses in finance. For example, it is used as a catchall term to refer to various profit margins, such as the gross profit margin, pretax profit margin, and net profit margin. The term is also sometimes used to refer to interest rates or risk premiums.

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