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

Margin

The lender's "retail markup" on the mortgage. For example, if the index rate for an adjustable rate mortgage is 5 percent but the lender has a 2.5 percentage-point margin, the rate the borrower will pay is 7.5 percent.


Profit margin

Profit margin

The difference between what it costs to produce a product or service and the selling price.


Marginal propensity to consume

Marginal propensity to consume

The fraction of a change in income (or perhaps disposable income) spent on consumption. Contrasts with average propensity to consume.


Effective margin (EM)

Effective margin (EM)

Used with SAT performance measures, the amount equal to the net earned spread, or margin of income, on assets in excess of financing costs for a given interest rate and prepayment rate scenario.


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.


Further Suggestions

gross margin
Marginal value product
operating margin
Unmargined account
Marginal revenue
Marginal
Marginal rate of substitution
Undermargined account
Initial margin requirement
Initial margin
Marginal cost
Marginal product
Margin requirement (options)
Gross profit margin
Margin trading
profit margin
Buy on margin
Net profit margin
marginal tax rate
Maintenance margin
Marginal propensity
Marginal propensity to import
Marginal revenue product
Margin requirement
Marginal rate of transformation


 
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