margin

In finance, the amount by which the value of collateral pledged as security for a loan exceeds the amount of the loan. This excess provides the lender a “margin” of safety over and above the collateral offered and thus makes extending a loan a more attractive proposition. The size of the margin varies with the type of collateral, the stability of its market price, and the credit standing of the borrower. The term is also used in reference to securities transactions. When securities are purchased “on margin,” the buyer supplies a percentage of the purchase price in cash, pledges the security as collateral, and borrows the remainder from the broker. The U.S. Federal Reserve Board (see Federal Reserve System) sets minimum margin requirements on loans made for the purpose of buying securities, so as to prevent excessive use of credit for speculation in stocks, as happened before the stock-market crash of 1929.

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