When someone purchases stocks or commodities through a broker using a margin account, it is referred to as a margin transaction. In this case, the individual is borrowing money from the broker to complete the purchase. The margin serves as a form of protection for the broker against potential losses and is the amount of money or collateral that the investor must provide. The good-faith margin, on the other hand, is the specific amount of margin that a creditor would typically require for a particular security position.
A margin transaction, also known as buying on margin, is a securities or commodities transaction conducted through a broker on a margin account. The term “margin” can have various meanings, including a boundary or edge, a measure of difference, profit margin, the difference between a loan’s face value and the market value of the collateral, or the cash or collateral required by an investor to protect the broker against losses from securities bought on credit. When an investor purchases securities on credit through a broker, they must provide a certain amount of cash or collateral as a margin to safeguard the broker against potential losses. This margin, known as the good-faith margin, is determined by the creditor based on their judgement and the specific security position. For instance, if an investor wishes to buy $10,000 worth of stock on credit, the broker may require a good-faith margin of $2,000 to mitigate potential losses. Consequently, the investor would only need to pay $2,000 upfront, while the remaining $8,000 would be borrowed from the broker. Similarly, if an investor intends to purchase a futures contract for a commodity like oil, the broker may demand a certain amount of cash or collateral upfront as a margin to protect against potential losses in case the oil price decreases. The margin requirement can vary depending on the specific futures contract and the broker’s policies.
A margin transaction is a type of investment where an investor borrows money from a broker to purchase securities.
In a margin transaction, the investor puts up a portion of the investment as collateral and the broker lends the rest. The investor pays interest on the borrowed amount and must maintain a certain level of equity in the investment.
A margin call is a demand by the broker for the investor to deposit additional funds or securities to meet the minimum equity requirement.
If an investor fails to meet a margin call, the broker may sell securities in the investor’s account to cover the shortfall.
Margin trading can be risky because the investor is using borrowed money to invest, which can amplify losses as well as gains.
The amount an investor can borrow in a margin transaction depends on the value of the securities being purchased and the broker’s margin requirements.
A margin requirement is the minimum amount of equity an investor must maintain in a margin account.
Not all securities are eligible for margin trading. Brokers have specific requirements for the types of securities that can be purchased on margin.
If the value of the securities in a margin account drops, the investor may receive a margin call or the broker may sell securities in the account to cover the shortfall.
Margin trading can be a useful tool for experienced investors, but it is not suitable for everyone. It is important to understand the risks and consult with a financial advisor before engaging in margin trading.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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