Canadian Securities Course (CSC) Level 1 Practice Exam

What does the word margin refer to?

1. Available funds for investing

2. Sum of initial investment

3. Amount investor must personally provide

4. Market value of securities

The correct answer is: Amount investor must personally provide

Margin refers to the amount of money that an investor must personally provide when borrowing money from a brokerage firm to purchase securities. This concept is central to margin trading, where investors can buy more securities than they could with just their own funds by leveraging borrowed funds. When engaging in margin trading, the investor typically needs to deposit a certain percentage of the total value of the securities being purchased, which acts as collateral for the loan. The rest can be borrowed from the brokerage. This means that the investor is responsible for maintaining a minimum amount of equity in their margin account, which ensures that they have a personal stake in the investment and reduces the risk for the lender. This definition is distinct from other terms related to investments. The available funds for investing generally refer to the total cash the investor has, while the sum of the initial investment does not specifically imply a borrowing component. Similarly, the market value of the securities pertains to their current price in the market, which is not directly tied to the concept of margin.