What is a 'Margin'
Margin is the difference between a product or service's selling price and its cost of production or to the ratio between a company's revenues and expenses. It also refers to the amount of equity contributed by an investor as a percentage of the current market value of securities held in a margin account. Margin is the portion of the interest rate on an adjustable-rate mortgage added to the adjustment-index rate.
BREAKING DOWN 'Margin'In a general context, margin refers to the edge or border of something or the amount by which an item falls short or surpasses another item. Both of these definitions underscore the word's usage in numerous financial contexts including investing, accounting and lending. "To margin" means to use borrowed money to purchase securities.
What Does Margin Mean in Investing?
To margin, also called buying on margin, refers to the practice of buying an asset where the buyer pays only a percentage of the asset's value and borrows the rest from the bank or broker. The broker acts as a lender, and he uses the funds in the securities account as collateral on the loan's balance. The margin is the amount the investor puts down on the account and is typically expressed as a percentage.
For example, if an investor wants to buy a $10,000 futures contract on margin, and the margin is 20%, he must pay $2,000 in cash but can borrow the rest of the balance from the bank or broker. This is advantageous in cases where the investor anticipates earning a higher rate of return on the investment than he is paying in interest on the loan.
What Does Margin Mean in Accounting?
In business accounting, margin refers to the difference between revenue and expenses, and businesses typically track their gross profit margins, operating margins and net profit margins. Gross profit margin measures the relationship between a company's revenues and its cost of goods sold (COGS); operating profit margin takes into account COGS and operating expenses and compares them to revenue; and net profit margin takes all of these expenses, taxes and interest into account.
What Is a Margin in Mortgage Lending?
Adjustable-rate mortgages (ARMs) offer a fixed interest rate for an introductory period of time, and then the rate adjusts. To determine the new rate, the bank adds a margin to an established index. In most cases, the margin stays the same throughout the life of the loan, but the index rate changes. To illustrate, imagine a mortgage with an adjustable rate has a margin of 4% and is indexed to the Treasury Index. If the Treasury Index is 6%, the interest rate on the mortgage is 10%.