Legal Definitions - Margin

The term "margin" generally refers to a difference or a security payment in financial contexts. It can have a few distinct meanings depending on the situation:

• Profit Margin: In business, margin, or profit margin, is the difference between the selling price of a product or service and the cost incurred to produce or acquire it. It represents the profit generated from a sale before accounting for other operating expenses.

  • Example 1: A custom furniture maker sells a handcrafted dining table for $2,500. The cost of materials (wood, hardware, finish) and the labor involved in crafting the table totals $1,200. The profit margin on that table is $1,300 ($2,500 selling price - $1,200 production cost). This $1,300 represents the direct profit from that specific sale, contributing to the business's overall profitability.

    Explanation: This example illustrates the profit margin as the direct financial gain from selling a product after covering its direct costs of creation.

• Investment Margin: In the financial markets, "margin" refers to a payment or deposit made by an investor to a stockbroker to cover part of the risk of a financial transaction, particularly when buying securities with borrowed money. This allows investors to control a larger amount of stock or other assets than they could with their own cash alone. The investor's account holding these funds is known as a "margin account."

  • Example 2: An investor wants to purchase $20,000 worth of shares in a particular company. Instead of paying the full amount, their brokerage firm allows them to buy "on margin," requiring an initial deposit of $10,000, with the broker lending the remaining $10,000. This initial $10,000 deposit is the margin payment. It serves as collateral for the loan and the larger stock purchase, enabling the investor to leverage their capital.

    Explanation: Here, the margin is the upfront payment made by the investor to secure a larger investment position using borrowed funds, acting as a form of security for the broker.

  • Example 3: In the context of bankruptcy, a "margin payment" refers to a payment or deposit of cash, securities, or other property that is commonly recognized in financial trading (such as forward contracts) as an original, initial, maintenance, or variation margin. These payments are typically made by a debtor to secure a financial position or to reduce a deficiency in a margin account. Bankruptcy law specifically defines these payments to ensure they are treated appropriately during insolvency proceedings.

    Explanation: This highlights how the concept of a margin payment, as used in investment, takes on a specific legal definition within bankruptcy law, focusing on payments made to secure financial contracts or cover shortfalls in leveraged accounts, which can impact how assets are distributed to creditors.