What is ‘Margin’
Margin is the difference between the total value of securities held in an investor’s account and the loan amount from a broker. Buying on margin is the act of borrowing money to buy securities. The practice includes buying an asset where the buyer pays only a percentage of the asset’s value and borrows the rest from the bank or broker. The broker acts as a lender and the securities in the investor’s account act as collateral.
In a general business context, the margin is the difference between a product or service’s selling price and the cost of production. Margin can also refer to the portion of the interest rate on an adjustable-rate mortgage (ARM) added to the adjustment-index rate.
BREAKING DOWN ‘Margin’
Margin is the amount of equity an investor has in her account. “To margin” means to use borrowed money to purchase securities. For example, if you have an initial margin requirement of 60% for your margin account, and you want to purchase $10,000 worth of securities, then your margin would be $6,000, and you could borrow the rest from the broker. Using margin to buy purchase securities is effectively like using the current cash or securities already in your account as collateral for a loan. Margin investing can be advantageous in cases where the investor anticipates earning a higher rate of return on the investment than he is paying in interest on the loan.
In business accounting, margin refers to the difference between revenue and expenses, where businesses typically track their gross profit margins, operating margins and net profit margins. Gross profit margin measures the relationship between a company’s revenues and its cost of goods sold (COGS). Operating profit margin takes into account COGS and operating expenses and compares them with revenue, and net profit margin takes all these expenses, taxes and interest into account.
What Is a Margin in Mortgage Lending?
Adjustable-rate mortgages offer a fixed interest rate for an introductory period of time, and then the rate adjusts. To determine the new rate, the bank adds a margin to an established index. In most cases, the margin stays the same throughout the life of the loan, but the index rate changes. To illustrate, imagine a mortgage with an adjustable rate has a margin of 4% and is indexed to the Treasury Index. If the Treasury Index is 6%, the interest rate on the mortgage is the 6% index rate plus the 4% margin, or 10%.