Margin of safety

 

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Margin of safety

The 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 safety

With 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 Matches

Margin requirement (options)

Margin requirement (options)

The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intraday price changes.


Operating profit margin

Operating profit margin

The ratio of operating profit to net sales.


Margin account

Margin account

An account with a broker where a client is able to purchase securities on credit after margin has been deposited.


Gross margin

Gross margin

The difference between the selling price of an item and the purchase or manufacturing cost, expressed as a percentage of the selling price.For example, if it costs a company 6 to manufacture an item and the selling price is 10, the gross margin is:(10 - 6) / 10 x 100 = 40%When looking at a company's Report and Accounts, the gross margin of the business as a whole is its turnover less the cost of sales, divided by the turnover, multiplied by 100.For example: (2,000,000 - 1,200,000) / 2,000,000 x 100 = 40%


Margin requirement

Margin requirement

A performance bond paid upon purchase of a futures contract that protects the exchange clearinghouse from loss.


Further Suggestions

Unmargined account
Effective margin (EM)
Marginal propensity to import
Marginal revenue
Margin security
margin call
marginal tax rate
Buy on margin
Profit margin
Marginal propensity to consume
Marginal rate of substitution
Value marginal product
Marginal utility
Margin
profit margin
Initial margin
Net profit margin
Contribution margin
Maintenance margin
variation margin
Marginal product
Marginal rate of transformation
Marginal efficiency of capital
Undermargined account
Initial margin requirement


 
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