When a bullish investor buys shares they normally pay the full purchase price of say £5,000. However the same investor could choose to place an up bet on the underlying company, by buying a derivative like a spread bet, instead.
This time they will only have to pay a smaller initial deposit, or ‘margin’, of say 10% of the value of the shares to a broker – in this case £500. The subsequent up bet, agreed at say £10 per penny movement in the underlying share price, could go wrong if the share price starts to fall rather than rise as they originally hoped.
When the investor’s losses look like exceeding £500 (caused by the share dropping 50p or more) then the broker will make a ‘margin call’, at which point additional funds need to be deposited by the investor to keep the bet running. Margin is normally paid in cash, however, where it is supplied using other assets, such as bonds or shares, it is usually known as ‘collateral’.