What defines the margin in a stock transaction?

What defines the margin in a stock transaction?

• A. The total cost of the stock
• B. The difference between the market value and the amount loaned
• C. The net profit from selling the stock
• D. The transaction fees charged by the dealer

Answer: (B)

The margin in a stock transaction refers to the difference between the market value of the securities owned and the amount of money borrowed to purchase those securities. This concept is essential in understanding how margin accounts work in trading. When an investor uses margin, they are essentially borrowing funds from a broker to buy more stock than they could with just their own capital. The margin is significant because it indicates the equity that an investor has in their investment relative to the borrowed funds. If the market value of the stock increases, the investor's equity also rises, but if the value decreases, it can lead to a margin call where the investor may need to deposit more funds to maintain the minimum equity requirement.

In contrast, the total cost of the stock reflects what the investor pays, which does not account for the borrowing aspect. The net profit from selling the stock pertains to the eventual gains realized from the sale and is not a direct measure of the margin. Transaction fees are additional costs incurred during trading and do not define margin. Thus, the definition of margin provided captures the essence of equity and borrowing in a stock transaction.