Highly liquid collateral that is required (to be posted) in order to cover adverse market price movements. This reflects the amount or eligible securities that a customer deposits with a broker against borrowed funds for the purpose of buying securities on margin (buying on margin).
The initial margin to be deposited with a broker is set and calculated on the basis of a formula defined by regulators (or a central counterparty, CCP) or by the counterparties to a trade. The customer will be required to provide additional collateral if the collateral that has been posted drops below sufficient levels (with this “margin call” implying a shortage in the margin coverage).
In another context, margin reflects the difference between the price received by a firm for its products and services and the costs it incurred to produce them (in which case, it is known as a gross profit margin).
In banking, margin represents the difference between the current market value of collateral posted for a loan and the par value of the loan.
