Margin

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'.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.