Haircut

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: A haircut is the percentage discount a lender or clearinghouse applies to the market value of an asset used as collateral, so a loan is backed by more value than it lends; informally, it also means accepting a loss on an investment.

How a haircut works

When securities back a loan, their price can fall before the lender can sell them. To protect itself, the lender counts only part of the collateral's value. If a security worth $100 receives a 20% haircut, it supports only $80 of borrowing. The riskier and less liquid the asset, the larger the haircut, because a forced sale of a hard-to-trade position may have to accept a much lower price than the last quote.

Haircuts appear throughout finance: in brokerage margin accounts, in repurchase agreements (repo) between banks and dealers, at clearinghouses that accept collateral for futures and other derivatives, and in central bank lending facilities.

Typical haircut levels

  • Short-term government securities: small haircuts, because prices are stable and markets are deep.
  • Investment-grade corporate bonds: moderate haircuts.
  • Large, liquid stocks: larger haircuts reflecting equity volatility.
  • Thinly traded or OTC stocks: very large haircuts, or no loan value at all.

Haircuts are not fixed. Lenders raise them when markets become turbulent, which can force borrowers to post more collateral at the worst possible time. Concentrated positions, where one holding dominates an account, may also receive higher haircuts than a diversified mix of the same securities.

Example of a collateral haircut

Suppose a trader holds $50,000 of stock and wants to borrow against it. The broker applies a 50% haircut, so the stock supports up to $25,000 of credit. If the stock falls 20% to $40,000, its collateral value drops to $20,000. With $25,000 borrowed, the account is now short of collateral and the trader may face a margin call. If the broker also raises the haircut to 60% because the stock became more volatile, collateral value falls to $16,000, widening the gap further.

Haircut as slang for a loss

Outside lending, "taking a haircut" means accepting less than full value. Bondholders in a restructuring or bankruptcy may take a haircut when they receive, say, 60 cents per dollar of principal. An investor who sells a position below cost is also said to take a haircut.

Why haircuts matter to investors

Haircuts determine how much leverage is available and how quickly it can disappear. Rising haircuts across a market reduce borrowing capacity, can trigger forced selling, and are one way stress spreads through the financial system. Investors who borrow should know the haircut on each holding and how it might change. A practical habit is to estimate how far prices could fall, and how much haircuts could rise, before an account would run short of collateral, and to keep borrowing well below that point.

Frequently asked questions

What does haircut mean in a repo?

It is the difference between the market value of securities pledged and the cash lent against them, expressed as a percentage, which protects the cash lender.

Why do riskier assets have bigger haircuts?

Their prices can fall more and they may be harder to sell quickly, so the lender needs a larger cushion to avoid losses.

What does it mean to take a haircut on an investment?

It means accepting a loss, such as selling below the purchase price or receiving less than face value on a debt.

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For information only, not investment advice. See the disclaimer.