Margin
When buying a derivative like a spread bet, an investor will only have to pay a small initial deposit, or 'margin', of say 10% of the value of the shares.
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'.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
Money tips for the end of the tax year
The tax year will end on 5 April, and your annual allowances for 2024/25 will disappear with it. Here’s how to get your finances in shape
By Katie Williams Last updated
-
India's stock market decline wipes out $1.3 trillion in market value
More than $1 trillion has been wiped off from India's stock market after investors turn to China. Has the emerging-market darling hit rock bottom?
By Alex Rankine Published