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Simple English definitions for legal terms
margin requirement
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A quick definition of margin requirement:
Margin requirement: When someone wants to buy a stock using borrowed money (also known as buying on margin), they have to give a certain amount of money to their broker as a deposit. This amount is a percentage of the total cost of the stock and is set by the Federal Reserve Board.
A more thorough explanation:
Definition: Margin requirement refers to the percentage of the purchase price that a buyer must deposit with a broker to buy a security on margin. This percentage is set and adjusted by the Federal Reserve Board.
Example: Let's say you want to buy $10,000 worth of stock on margin. If the margin requirement is 50%, you would need to deposit $5,000 with your broker to complete the purchase.
Explanation: The margin requirement is a way for brokers to ensure that investors have enough money to cover potential losses. By requiring a deposit, the broker can use those funds to cover any losses if the value of the security drops. In the example above, the investor would need to deposit $5,000 to cover half of the purchase price. If the stock drops in value and the investor can't cover the losses, the broker can sell the stock to recoup their funds.