Often, economic terms are ambiguous and confusing. The meaning laid in them is intuitive, but rarely can anyone explain it with generally accessible words, without preliminary preparation. But there are exceptions to this rule. It happens that the term is familiar, but with an in-depth study of it, it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.
Heard everything, but few people know
Take the term margin for example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people far from the economy or stock trading.
Most people think margin is the difference between any homogeneous metrics. In daily communication, the word is used in the discussion of trading profit.
Few people know absolutely all the meanings of this rather broad concept.
However, modern man needs to understand all the meanings of this term, so that at an unexpected moment for himself “not to hit the face with dirt”.
Margin in the economy
Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activity of the enterprise contributes to the conversion of income into profit.
Margin is a relative indicator, it is expressed as a percentage.
Let's see how to calculate the margin:
Margin = Profit / Income * 100.
The formula is simple enough, but in order not to get confused at the very beginning of the study of the term, consider a simple example. The company operates with a margin of 30%, which means that in each ruble earned 30 kopecks make a net profit, and the remaining 70 kopecks make up expenses.
Gross margin
In the analysis of profitability of the enterprise, the main indicator of the result of the activity is gross margin. The formula for its calculation is the difference in revenue from sales of products in the reporting period and variable costs for the development of these products.
Only the level of gross margin does not allow a full assessment of the financial condition of the enterprise. Also, with his help, it is impossible to fully analyze individual aspects of his activities. This is an analytical indicator. It demonstrates how successful the activities of the company as a whole are. Gross margin is created at the expense of the labor of the enterprise employees spent on the production of goods or the provision of services.
It is worth noting one more nuance that must be taken into account when calculating such an indicator as “gross margin”. The formula can also take into account income outside the sales business of the enterprise. These include the cancellation of receivables and payables, the provision of non-industrial services, income from housing and communal services, etc.
It is extremely important for the analyst to correctly calculate the gross margin, since the net profit of the enterprise, and in the future development funds, is formed from this indicator.
In economic analysis, there is another concept similar to gross margin, it is called “profit margin” and shows the profitability of sales. That is, the share of profit in total revenue.
Banks and Margin
The bank’s profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to calculate as many as four different margin options:
Credit margin is directly related to work under loan agreements, defined as the difference between the amount indicated in the document and actually handed over.
Banking margin is calculated as the difference between interest rates on loans and deposits.
Net interest margin is a key indicator of banking performance. The formula for calculating it looks like the ratio of the difference between commission income and expenses for all operations to all assets of the bank. Net margin can be calculated based on all assets of the bank, and only from those currently involved in the work.
Guaranteed margin is the difference between the estimated value of collateral and the amount issued to the borrower.
So different meanings
Of course, the economy does not like discrepancies, but in the case of understanding the meaning of the term “margin” this happens. Of course, in the territory of the same state, all analytical reports are fully consistent with each other. However, the Russian understanding of the term “margin” in trade is very different from the European one. In the reports of foreign analysts, she represents the ratio of profit from the sale of goods to its selling price. In this case, the margin is expressed as a percentage. Apply this value for a relative assessment of the effectiveness of the trading activities of the company. It is worth noting that the European attitude to calculating margins is fully consistent with the fundamentals of economic theory, which was described above.
In Russia, this term is understood as net profit. That is, making calculations, they simply replace one term with another. For the majority of our compatriots, margin is the difference between the proceeds from the sale of goods and the overhead costs of its production (purchase), delivery, sale. It is expressed in rubles or other convenient currency for settlements. We can add that the attitude to margin among professionals is slightly different from the principle of applying the term in everyday life.
How is margin different from margin?
Regarding the term “margin”, there are a number of common misconceptions. Some of them have already been described, but we have not yet touched on the most common.
Most often, the margin indicator is confused with the trade margin. Determining the difference between the two is very simple. Markup is the ratio of profit to cost. About how to calculate the margin, we have already written above.
A good example will help dispel the doubts.
Suppose a company bought a product for 100 rubles, and sold it for 150.
We calculate the trade margin: (150-100) / 100 = 0.5. The calculation showed that the margin is 50% of the value of the goods. In the case of margin, the calculations will look like this: (150-100) / 150 = 0.33. The calculation showed a margin of 33.3%.
Correct analysis of indicators
For a professional analyst, it is very important not only to be able to calculate the indicator, but also to give a competent interpretation of it. This is a difficult job that requires
great experience.
Why is this so important?
Financial indicators are rather arbitrary. They are influenced by valuation methods, accounting principles, the conditions in which an enterprise conducts its business, changes in the purchasing power of a currency, etc. Therefore, the resulting calculation result cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.
Stock Market Margin
Exchange margin is a very specific indicator. On the professional slang of brokers and traders, it does not mean profit at all, as was the case in all the cases described above. Margin in the stock markets becomes a kind of guarantee for transactions, and the service of such trading is called "margin trading."
The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the full amount of the contract, he uses the borrowed funds of his broker, and only a small deposit is debited from his own account. If the result of the operation conducted by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, profit is credited to the same deposit.
Margin transactions provide an opportunity not only to make purchases at the expense of the broker's borrowed funds. The client can also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.
Each broker gives its investors the right to make margin transactions on their own. At any time, he may refuse to provide such a service.
Benefits of Margin Trading
Thanks to participation in margin transactions, investors receive a number of advantages:
The ability to trade in financial markets without having enough large amounts on the account. This makes margin trading a highly profitable business. However, participating in operations, do not forget that the level of risk is also not small.
Opportunity to receive additional income by reducing the market value of shares (in cases where the client takes securities from a broker).
To trade various currencies, it is not necessary to have funds in these currencies on your deposit.
Management of risks
To minimize the risk when entering into margin transactions, the broker assigns to each of its investors the amount of collateral and the level of margin. In each case, the calculation is made individually. For example, if after a transaction a negative balance appears in the investor's account, the margin level is determined by the following formula:
UrM = (DK + SA-ZI) / (DK + SA), where:
DK - investor funds deposited;
CA - the value of shares and other securities of the investor accepted by the broker as security;
ZI - debt of the investor to the broker for the loan.
Tracing is possible only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to the general rules, the broker cannot conclude transactions that will lead to a decrease in the margin level below the established limit.
In addition to this requirement, a number of conditions are put forward to carry out marginal transactions in the stock markets, designed to streamline and secure the relations of the broker and investor. The maximum amount of loss, terms of repayment of debts, conditions for changing the contract and much more are agreed.
Understanding the diversity of the term “margin” in a short time is quite difficult. Unfortunately, in one article it is impossible to talk about all areas of its application. The above considerations indicate only the key points of its use.