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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 margin requirementInitial margin requirementWhen buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the Board of Governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange. 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. 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% Margin callMargin callA demand from a broker to a client to provide more funds to bring a margin account balance up to a required level. Margin securitiesMargin securitiesSecurities which may be bought or sold on margin. In the USA, an approved list of margin securities is published by the Federal Reserve Board. Further SuggestionsProfit marginMargin security Value marginal product Marginal propensity to save Margin trading Marginal product Profit margin Margin Marginal rate of substitution Marginal propensity Initial margin profit margin Marginal revenue operating margin Marginal revenue product Effective margin (EM) initial margin Operating profit margin Marginal value product Marginal Net profit margin Marginal propensity to import Contribution margin Marginal tax rate Marginal cost |
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