Margin – definition and types
In continuation of our acquaintance with financial terminology, I suggest you familiarize yourself with such a concept as margin.
I am sure that you have already come across it many times, and it could have happened anywhere – on the stock and financial markets, or heard from traders, investors, businessmen, etc. And each of them can mean something his Let’s see what can be hidden under the word “margin”.
Margin and business
In a business environment, margin is synonymous with profitability. Those. This is the company’s profit, expressed as a percentage of total sales. It is divided into three groups:
- Gross Profit Margin (Gross Margin)
- Operating Profit Margin
- Net Profit Margin
Investors also often use this term, because nothing will illustrate the company’s activities, the competence of its management and prospects better than it does profitability.
Margin and Trading
For a trader, margin is a kind of credit issued by a broker, in addition to trading capital. The margin allows the trader to trade with a large number of assets and enter into transactions for more serious amounts.
The tool often used by traders along with margin is “leverage” – an opportunity for margin account holders to increase the purchasing power of their capital.
Using it, you pay only for a part of the acquired shares, the rest is covered by margin.
Sounds, of course, tempting, but with a margin you need to be extremely careful, because This is a full, formalized loan, which is secured by your shares or funds on deposit.
Forced closing of transactions by a broker, a kind of guarantor of the safety of margin funds. If the positions that the trader holds on his margin account are unprofitable, and the balance is close to the value, which is close enough to cover the amount of the deposit, he will receive a signal about the need to replenish the account. If this does not happen, the transactions will be closed, and the funds will be frozen until the account is replenished.
Margin and investment
The term coined by Benjamin Graham sounds like the investor’s safety margin. Its essence is quite simple, the safety margin is the difference between the cost of buying a stock and its real price. Experienced investors recommend buying stocks only when this difference reaches 30-50%. Ie, for example, you, after reviewing the statistics and analyzing the market, determined that the real price of the shares of any company is $ 50. This means that you should buy it only when the price drops $ 35 or even $ 25. So your contribution will be as safe and reasonable as possible.
By the way, the safety margin is the main principle of the Warren Buffett trading strategy, which he has repeatedly admitted. Agree, it says something.
For now this is all about margin. Until new meetings.