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Simple English definitions for legal terms
margin transaction
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A quick definition of margin transaction:
A margin transaction is when someone buys stocks or commodities through a broker using a margin account. This means they are borrowing money from the broker to make the purchase. The margin is the amount of money or collateral that the investor has to put up to protect the broker from losses. The good-faith margin is the amount of margin that a creditor would typically require for a specific security position.
A more thorough explanation:
A margin transaction is a type of securities or commodities transaction that is made through a broker on a margin account. This is also known as buying on margin. The term "margin" can have different meanings, including:
- A boundary or edge
- A measure or degree of difference
- Profit margin
- The difference between a loan's face value and the market value of the collateral that secures the loan
- Cash or collateral required to be paid to a securities broker by an investor to protect the broker against losses from securities bought on credit
When an investor buys securities on credit through a broker, they are required to pay a certain amount of cash or collateral as a margin to protect the broker against potential losses. This amount is known as the good-faith margin, and it is determined by the creditor based on their judgment and the specific security position.
For example, let's say an investor wants to buy $10,000 worth of stock on credit through a broker. The broker may require the investor to pay a good-faith margin of $2,000 to protect against potential losses. This means the investor would only need to pay $2,000 in cash or collateral upfront, and the remaining $8,000 would be borrowed from the broker.
Another example would be if an investor wants to buy a futures contract for a commodity like oil. The broker may require the investor to pay a certain amount of cash or collateral upfront as a margin to protect against potential losses if the price of oil goes down. This margin requirement can vary depending on the specific futures contract and the broker's policies.