Legal Definitions - margin transaction

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:

1. A boundary or edge
2. A measure or degree of difference
3. Profit margin
4. The difference between a loan's face value and the market value of the collateral that secures the loan
5. 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.