Haircut

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Haircut

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

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.

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.

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.

References in classic literature ?
"But I thought it was worth while to be a little wicked to get rid of red hair. I counted the cost, Marilla.
Golden hair wouldn't suit you at all Queen Anne--MY Queen Anne--queen of my heart and life and home."
"The Magician wants me to get three hairs from the end of a Woozy's tail."
I had my hair cut off and sold because I couldn't have lived through Christmas without giving you a present.
Legree burned the hair, and burned the letter; and when he saw them hissing and crackling in the flame, inly shuddered as he thought of everlasting fires.
"Oh, no; if I do my hair will be straight again by night.
"There!" panted Pollyanna, hastily plucking a pink from a vase near by and tucking it into the dark hair where it would give the best effect.
Then there came a wind, so strong that it blew off Curdken's hat; and away it flew over the hills: and he was forced to turn and run after it; till, by the time he came back, she had done combing and curling her hair, and had put it up again safe.
His hair is auburn, not red, and he was very polite, and I had a delicious redowa with him."
The hair of this Trunk is REAL hair--so to speak--white in patched, brown in patches.
Never did he hang back when she sat down, extended her welcoming hands to him, and invited: "Come on, Sing Song Silly." He would come to her, sit down with the loved fragrance of her hair in his nostrils, lay the side of his head against hers, point his nose past her ear, and almost immediately follow her when she began her low singing.
He coloured very deeply, and giving a momentary glance at Elinor, replied, "Yes; it is my sister's hair. The setting always casts a different shade on it, you know."