Fundamental Financial Concept: Margin (Finance)

Definition of Margin (Finance)

In financial language, Margin is referred to as security that a financial instrument holder has to deposit to decrease or null the credit risk of their counterparty. The collateral can take any form such as cash or securities, and the amount come under a margin account.

Margin can be interpreted in different ways, in one definition; margin is the sum of borrowed money that is used to purchase securities. On the other one, margin is the amount of equity, which is invested by the consumer as a percentage of the current market value of the securities that go into the margin account. From a simple business plan point of view, margin is cited as the difference between the selling price of a product and the production cost. In other words, margin is explained as the portion of interest that is on an adjustable-rate mortgage that is over and above the adjustment-index rate.

Books on Margin (Finance)

Book 1:

Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor By Seth A. Klarman (published by HarperBusiness, 1991)

Book 2:

Foundations of Airline Finance: Methodology and Practice By Bijan Vasigh, Ken Fleming, Liam Mackay (published by Ashgate Publishing, Ltd., 2010)

How Margin (Finance) works?

Margin (finance) can be elucidated by a few examples; here two examples are given to clear the notions of Margin (finance),

• Suppose a person named as Rose has the intentions to buy shares worth of $100, so she decided to use her own money $20 and approach her broker for rest $80, after borrowing the money from the broker the net value comes as (the share price- the borrowed amount) $20, so the broker wants to have a minimum margin requirement of $10.

• Let’s say, the same share worth of $100 drops to $85, so the net value becomes only $5, (the previous net value of $20 minus the share's $15 drop in price), as a result, to maintain the broker’s minimum margin, so Rose needs to increase this net value to $10 or more, Rose has to increase the net value of the share to $10 or more, there are two ways to execute the work, either by selling the shares or by repaying the debt.

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