Business Glossary

1. see gross margin; profit margin.
2. partial payment made by an investor to a broker for securities purchased, with the remainder on credit. The broker retains the securities as collateral and charges the investor interest on the money owed. The Federal Reserve Board determines margin requirements. The margin requirement for stocks is higher than that for convertible bonds because of greater risk. Assume that with a margin requirement of 50% (present requirement), 100 shares of XYZ stock are bought at $100 per share. The actual amount invested is $5000, with a margin of $5000 on credit.
3. in commodities trading, deposits required by commodities exchanges.
4. in accounting, a reference to revenue or profitability. Examples are gross profit margin (gross profit/sales) and profit margin (net income/sales).

interest cost paid by a financial institution for the use of money. Brokerage firms' cost of funds are comprised of the total interest expense to carry an inventory of stocks and bonds. In the banking and savings and loan industry, the cost of funds is the amount of interest the bank must pay on money market accounts, passbooks, CDs, and other liabilities. Many adjustable rate mortgage loans are tied to a cost-of-funds index, which rises and falls in line with the banks' interest expenses.

Commodities: in futures trading, the difference in price between delivery months in the same market, or between different or related contracts. See also mob spread; nob spread; ted spread.
Fixed-income securities: (1) difference between yields on securities of the same quality but different maturities. For example, the spread between 6% short-term Treasury bills and 10% long-term Treasury bonds is 4 percentage points. (2) difference between yields on securities of the same maturity but different quality. For instance, the spread between a 10% long-term Treasury bond and a 14% long-term bond of a B-rated corporation is 4 percentage points, since an investor's risk of default is so much less with the Treasury bond. See also yield spread.
Foreign exchange: spreading one currency versus another, or multiple spreads within various currencies. An example would be a long position in the U.S. dollar versus a short position in the Japanese yen or the Euro. An example of an intermonth spread would be a long March spot position in Swiss francs versus a short March position in the same currency. Spreads are frequently done in cash and futures markets. Interest rate differentials often have significant impact.
Options: position usually consisting of one long call and one short call option, or one long put and one short put option, with each option representing one "leg" of the spread. The two legs, if taken independently, would profit from opposite directional price movements. Spreads usually have lower cost and lower profit potential than an outright long option. They are entered into to reduce risk, or to profit from the change in the relative prices of the options. See also bear spread; bull spread; butterfly spread; calendar spread; credit spread; debit spread; diagonal spread; option; price spread; selling the spread; vertical spread.
Stocks and bonds: (1) difference between the bid and offer price. If a stock is bid at $45 and offered at $46, the spread is $1. This spread narrows or widens according to supply and demand for the security being traded. See alsobid-asked spread; dealer spread. (2) difference between the high and low price of a particular security over a given period.
Underwriting: difference between the proceeds an issuer of a new security receives and the price paid by the public for the issue. This spread is taken by the underwriting syndicate as payment for its services. A security issued at $100 may entail a spread of $2 for the underwriter, so the issuer receives $98 from the offering. See also underwriting spread.

annual return on an investment including appreciation, dividends, or interest, and other distributions. For bonds held to maturity, total return is Yield To Maturity. For stocks, future appreciation is projected using the current Price/Earnings Ratio. In options trading, total return means dividends plus capital gains plus premium income.