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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 MatchesInitial 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. MarginMarginThe difference between the cost price of a product and the selling price.In trading, the amount deposited with a broker in order to obtain credit for purchase of shares or futures. The margin is the price of a security less credit advanced by the broker.The difference between a market maker's buying and selling prices. Also known as spread. Marginal propensity to importMarginal propensity to importThe fraction of a change in income (or perhaps disposable income) spent on imports. Contrasts with average propensity to import. Gross marginGross marginThe 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% Marginal utilityMarginal utilityThe change in total satisfaction as a result of consuming one additional unit of a specific good or service. Further SuggestionsOTC margin stockUnmargined account Margin security Profit margin Original margin Initial margin requirement Dumping margin Operating profit margin Marginal tax rate profit margin Marginal rate of transformation Gross profit margin operating margin Undermargined account Marginal revenue Marginal rate of substitution Marginal cost Contribution margin Profit margin Margin trading Effective margin (EM) Margin Margin requirement margin account Margin |
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