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Margin of safety |
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Margin of safetyThe term given by Benjamin Graham, 'the father of value investing', to the idea that if you buy shares for less than two thirds of their net asset value, you automatically have a cushion against any deterioration in the company's trading position in the future. Put another way, 'buy cheap'.Graham's view was that it is extremely difficult to accurately predict a company's future earnings. For an investment to be 'safe', therefore, he liked to see a margin between the value of its net current assets and its share price. If the share price was below the net current assets divided by the number of shares in issue, he would consider buying it.One of the problems with Graham's approach is that in bull markets it is very difficult to find companies that fulfil his criteria. A second problem is that many of the fastest growing companies in modern economies are those whose assets are intangible - for instance, the value of their intellectual property. Under the Graham rubric, these sorts of assets would be excluded.Margin of safetyWith respect to working capital management, the difference between (1) the amount of long-term financing and (2) the sum of fixed assets and the permanent component of current assets.Margin of safety Similar MatchesMarginMarginThe lender's "retail markup" on the mortgage. For example, if the index rate for an adjustable rate mortgage is 5 percent but the lender has a 2.5 percentage-point margin, the rate the borrower will pay is 7.5 percent. Profit marginProfit marginThe difference between what it costs to produce a product or service and the selling price. Marginal propensity to consumeMarginal propensity to consumeThe fraction of a change in income (or perhaps disposable income) spent on consumption. Contrasts with average propensity to consume. Effective margin (EM)Effective margin (EM)Used with SAT performance measures, the amount equal to the net earned spread, or margin of income, on assets in excess of financing costs for a given interest rate and prepayment rate scenario. Initial marginInitial marginThe payment which investors have to pay to a broker to trade on margin, commonly used in trading futures and contracts for difference. Initial margin is usually set at a percentage of the value of the contracts being traded. For example, a trader who buys long CFDs with a contract value of £12,000 might be required to deposit £2,400 (20%) with the broker as initial margin.The attraction of margin trading for traders is that they are effectively using the broker's money to speculate, and if successful can get a higher return on investment than by only using their own money. Put another way, their £2,400 of cash buys them exposure to £12,000 of shares, whereas if they were trading the shares themselves it would give them exposure only to £2,400 of shares.The flip side is that margin trading magnifies losses as well as profits, so if the trader is unsuccessful it can be very risky. Further Suggestionsgross marginMarginal value product operating margin Unmargined account Marginal revenue Marginal Marginal rate of substitution Undermargined account Initial margin requirement Initial margin Marginal cost Marginal product Margin requirement (options) Gross profit margin Margin trading profit margin Buy on margin Net profit margin marginal tax rate Maintenance margin Marginal propensity Marginal propensity to import Marginal revenue product Margin requirement Marginal rate of transformation |
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