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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 MatchesMargin 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 marginOperating profit marginThe ratio of operating profit to net sales. Margin accountMargin accountAn account with a broker where a client is able to purchase securities on credit after margin has been deposited. 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 requirementMargin requirementA performance bond paid upon purchase of a futures contract that protects the exchange clearinghouse from loss. Further SuggestionsUnmargined accountEffective 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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