Margin Definition

In finance, a margin (sometimes called a performance bond) is a type of collateral that some investors must deposit into a margin account cover risk. The risk arises through borrowing funds, selling securities or options short, or entering into futures contracts. Margin accounts are regulated by a Byzantine array of laws and regulations and are frequently blamed for various financial calamities. An overly basic example might be an investor with $2,000 who wants to borrow $8,000 to purchase a $10,000 security. The lender (or, more accurately, the law) requires the investor to deposit some amount-about $1,000 in this case-into a margin account to cover the contingency of security devaluation. It can readily be appreciated that the margin account will not cover significant security devaluation. Depending upon the situation, a bewildering variety of margin accounts exist.