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Margin

Definition of 'Margin'

1. Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".
2. The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
3. In a general business context, the difference between a product's (or service's) selling price and the cost of production.
4. The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.

1. Buying with borrowed money can be extremely risky because both gains and losses are amplified. That is, while the potential for greater profit exists, this comes at a hefty price - the potential for greater losses. Margin also subjects the investor to a number of unique risks such as interest payments for use of the borrowed money.

2. For example, if you hold futures contracts in a margin account, you have to maintain a certain amount of margin depending on how the market value of the contracts change.

3. Gross profit margin (which is the difference between revenue and expenses) is one measure of a company's performance.

4. The formula for calculating the interest rate on an adjustable-rate mortgage is the adjustment-index rate (e.g. Treasury Index) plus the percentage of the margin. For example, if the Treasury Index is 6% and the interest rate on the mortgage is 8%, the margin is 2%.

Definition of 'Margin Account'

A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralize by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.In a margin account, you are investing with your broker's money. By using leverage in such a way, you magnify both gains and losses.

The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or margin-able securities. Also called the "initial margin requirement". According to Regulation T of the Federal Reserve Board, the initial margin is currently 50%. This level is only a minimum and some brokerages require you to deposit more than 50%.

Definition of 'Margin Call'

A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when a you account value depresses to a value calculated by the broker's particular formula.

You would receive a margin call from a broker if one or more of the securities you had bought (with borrowed money) decreased in value past a certain point. You would be forced either to deposit more money in the account or to sell off some of your assets.

Definition of 'Maintenance Margin'

The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.

As governed by the Federal Reserve's Regulation T, when a trader buys on margin, key levels must be maintained throughout the life of the trade. First off, a broker cannot extend any credit to accounts with less than $2,000 in cash (or securities). Second, the initial margin of 50% is required for a trade to be entered. Finally, the maintenance margin says that an equity level of at least 25% must be maintained. The investor will be hit with a margin call if the value of securities falls below the maintenance margin.

Definition of 'Regulation T - Reg T'

The Federal Reserve Board regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities.

According to Regulation T, you may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin.





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