Haircut (redirected from Haircuts)

Haircut

The margin or difference between the actual market value of a security and the value assessed by the lending side of a transaction).

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haircut

A deduction in the market value of securities being held by brokerage and investment banking firms as part of net worth for calculating their net capital. The size of a haircut varies with the particular type of security held.

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Haircut

1. The reduction of value to securities used as collateral in a margin loan. That is, when one places securities as collateral, the brokerage making the loan treats them as being worth less than they actually are, so as to give itself a cushion in case its market price decreases.

2. The bid-ask spread at which a market maker buys and sells securities. It is called a haircut because it is a thin spread.

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Haircut. A haircut, in the financial industry, is a percentage discount that's applied informally to the market value of a stock or the face value of a bond in an attempt to account for the risk of loss that the investment poses.

So, for example, a stock with a market value of $30 may get a haircut of 20%, to $24, when an analyst or money manager tries to anticipate what is likely to happen to the price.

Similarly, when a broker-dealer calculates its net capital to meet the 15:1 ratio of debt to liquid capital permissible under Securities and Exchange Commission (SEC) rules, it typically gives volatile securities in its portfolio a haircut to reduce the potential for being in violation.

The only securities that consistently escape a haircut are US government bonds because they are considered free of default risk.

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Haircut

What Does Haircut Mean?

(1) The difference between the prices at which a market maker can buy and sell a security. (2) The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels.

Investopedia explains Haircut

(1) The term “haircut” comes from the fact that market makers can trade at such a thin spread. (2) When securities are used as collateral, they generally are devalued since a cushion is required by the lending parties in case the market value falls.

Related Terms:
• Initial Public Offering—IPO
• Investment Bank
• Margin
• Market Maker
• Market Value