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).

equity level that must be maintained in brokerage customers' margin accounts, as required by the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), and individual brokerage firms. Under Regulation T, $2000 in cash or securities must be deposited with a broker before any credit can be extended; then an initial margin requirement must be met, currently 50% of the market value of eligible securities long or short in customers' accounts. The NYSE and NASD, going a step further, both require that a margin be maintained equal to 25% of the market value of securities in margin accounts. Brokerage firm requirements are typically a more conservative 30%. When the market value of margined securities falls below these minimums a margin call goes out requesting additional equity. If the customer fails to comply, the broker may sell the margined stock and close the customer out.

selling securities (or commodities futures contracts) not owned by the seller. The investor (seller) earns a profit when the market price of the security declines, and loses money when the purchase price is higher than the original selling price. To make a short sale, the broker borrows stock and loans it to the investor. Later on, hopefully when the market price is lower, the investor buys the shares to repay the lending broker. Assume an investor sells short 50 shares of stock having a market price of $25, for a total of $1250. The broker borrows the shares and holds onto the proceeds of the short sale to secure the loan and satisfy margin requirements. Later on, the investor buys the stock at $20 a share, repays the 50 shares, earning a per share profit of $5, or a total of $250.

Investors "sell short against the box" when they sell short shares they actually own ( not borrowed shares). Short sales against the box may occur so that a loss is minimized or the tax consequences of a long sale may be postponed to a subsequent tax year.

security that may be bought or sold in a margin account. Regulation T defines margin securities as (1) any registered security (a listed security or a security having unlisted trading privileges); (2) any OTC margin stock or OTC margin bond, which are defined as any unlisted security that the Federal Reserve Board (FRB) periodically identifies as having the investor interest, marketability, disclosure, and solid financial position of a listed security; (3) any OTC security designated as qualified for trading in the National Market System under a plan approved by the Securities and Exchange Commission; (4) any mutual fund or unit investment trust registered under the Investment Company Act of 1940. Other securities that are not exempt securities must be transacted in cash.