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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