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'.

Most Popular

Best debit and credit cards to use while travelling abroad
Personal finance

Best debit and credit cards to use while travelling abroad

If you’re going on holiday or travel abroad regularly, it’s worth knowing what the best card is to avoid hefty fees. We weigh up the charges and any p…
6 Jun 2023
Nationwide to give £100 cash boost to customers
Personal finance

Nationwide to give £100 cash boost to customers

Nationwide Building Society is giving customers £100 as it reinvests profits. Dubbed the Nationwide Fairer Share scheme, we look at who is eligible.
22 May 2023
A discounted REIT to buy now
Investments

A discounted REIT to buy now

This real estate investment trust is carving out a niche for itself by recycling old offices. Investors should take advantage of the discount and buy …
6 Jun 2023