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'.

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021