What is a margin?
In finance the definition of ‘margin’ varies depending on the context. Buying on margin, or simply “to margin”, means buying an asset using borrowed funds provided by a broker. For example, if I want to buy $100,000 of Apple stock and the margin demanded by the broker is 20%, I only need to pay $20,000. The broker provides the remaining $80,000, which I now owe him and will have to pay interest on.
Margin is a form of leverage – it amplifies both gains and losses, making it very appealing to speculators. In the event that assets bought on margin drop in value past a certain point, brokers need reassurance that you will be able to pay back their loan and conduct a ‘margin call’, requiring you to add more funds to your account. If you cannot do this, they will liquidate your positions to pay instead.
Related Articles:
Category: Financial Glossary