what is a haircut 
in finance a haircut has two meanings a haircut is most commonly used when referencing the percentage difference between an asset s market value and the amount that can be used as collateral for a loan there is a difference between these values because market prices change over time and the lender factors this fluctuation into their valuation and analysis for risk mitigation for example if a person needs a 10 000 loan and wants to use their 10 000 stock portfolio as collateral the bank is more likely to recognize the 10 000 portfolio as worth only 5 000 in collateral the 5 000 or 50 reduction in the asset s value for collateral purposes is called the haircut should the person s stock portfolio decline in value they may still have sufficient collateral for the amount of debt issued the term haircut is less commonly used as the market maker s spread the term haircut is used since the market maker s spreads are so thin a market maker may trim a very small fee off of proceeds collected as part of providing liquidity in markets or facilitating trades investopedia jiaqi zhouunderstanding collateral haircuta haircut refers to the lower than market value placed on an asset being used as collateral for a loan the haircut is expressed as a percentage of the markdown between the two values when they are used as collateral securities are generally devalued since a cushion is required by the lending parties in case the market value falls 