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

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Marginal rate of substitution

Marginal rate of substitution

In a production function or a utility function, the ratio at which one argument (input) substitutes for another along an isoquant or indifference curve.


Margin account

Margin account

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


Initial margin

Initial margin

The 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.


Undermargined account

Undermargined account

A margin account that no longer meets minimum maintenance requirements, requiring a margin call on the investor.


Buy on margin

Buy on margin

Borrowing to buy additional shares, using the shares themselves as collateral.


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Unmargined account
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