Margin is the difference between Economic terms. How to calculate margin

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Often economic terms are ambiguous and confusing. The meaning inherent in them is intuitive, but it is rarely possible for anyone to explain it in public words, without prior 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 of its meanings are known only to a narrow circle of professionals.

Everyone has heard, but few know

Take the term "margin" as an example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people who are far from the economy or stock trading.

Most people think that margin is the difference between any homogeneous indicators. In daily communication, the word is used in the process of discussing trading profits.

Few people know absolutely all the meanings of this fairly broad concept.

However, a modern person needs to understand all the meanings of this term, so that at an unexpected moment “not to lose face”.

Margin ineconomy

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 transformation of income into profit.

Margin is a relative indicator, expressed as a percentage.

Let's figure out how to calculate the margin:

Margin=Profit/Revenue100.

The formula is quite simple, but in order not to get confused at the very beginning of the study of the term, let's consider a simple example. The company works with a margin of 30%, which means that in each ruble received, 30 kopecks are net profit, and the remaining 70 kopecks are expenses.

Gross Margin

In the analysis of the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for its calculation is the difference between the proceeds from the sale of products in the reporting period and the variable costs of producing these products.

Only the level of gross margin does not allow for a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze individual aspects of its activities. This is an analytical indicator. It shows how successful the company as a whole is. Gross margin is created by the labor of employees of the enterprise spent on the production of products or the provision of services.

It is worth noting one more nuance that must be taken into account when calculating suchindicator as "gross margin". The formula can also take into account income outside the implementation of the economic activity of the enterprise. These include the write-off of receivables and payables, the provision of non-industrial services, income from housing and communal services, etc.

It is extremely important for an analyst to correctly calculate the gross margin, since this indicator forms the net profit of the enterprise, and further development funds.

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 margins

The profit of the bank and its sources demonstrates 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 issued on hand.
• Bank margin is calculated as the difference between interest rates on loans and deposits.
• Net interest margin is a key measure of banking performance. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. The net margin can be calculated on the basis of all the assets of the bank, and only of those involved in the work at the moment.
• Guarantee margin is the difference between the assessed value of collateral and the amount issued to the borrower.

Such 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, on 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, it represents the ratio of profit from the sale of goods to its selling price. In this case, the margin is expressed as a percentage. This value is used for a relative assessment of the effectiveness of the trading activities of the company. It is worth noting that the European attitude to margin calculation is fully consistent with the basics of economic theory, which were described above.

In Russia, this term is understood as net profit. That is, when making calculations, they simply replace one term with another. For the most part, for our compatriots, the margin is the difference between the proceeds from the sale of goods and the overhead costs for its production (purchase), delivery, and sale. It is expressed in rubles or another currency convenient for settlements. It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.

What is the difference between margin and markup?

There are a number of common misconceptions about the term "margin". Some of them have already been described, butthe most common we haven't touched yet.

Most often the margin indicator is confused with the trading margin. It is very easy to tell the difference between them. The margin is the ratio of profit to cost. We have already written about how to calculate the margin above.

An illustrative example will help dispel any doubts.

Let's say a company bought a product for 100 rubles and sold it for 150.

Calculate the trade margin: (150-100)/100=0, 5. The calculation showed that the margin is 50% of the cost of the goods. In the case of margin, the calculations would 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 its competent interpretation. This is a difficult job that requiresa lot of experience.

Why is this so important?

Financial indicators are rather conditional. They are influenced by valuation methods, accounting principles, the conditions in which the enterprise operates, changes in the purchasing power of the currency, etc. Therefore, the result of the calculations cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.

Margin on stock markets

Market margin is a very specific indicator. In the professional slang of brokers and traders, it does not mean profit at all, as it was in all the cases described above. Margin in the stock markets becomes a kind ofa pledge when making transactions, and the service of such trades is called "margin trading".

The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire amount of the contract in full, he uses borrowed funds from his broker, and only a small deposit is debited from his own account. If the result of the operation carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the 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 may also sell borrowed securities. In this case, the debt will have to be repaid with the same papers, 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.

The benefits of margin trading

Through participation in margin transactions, investors receive a number of benefits:

• The ability to trade on financial markets without having large enough amounts on the account. This makes margin trading a highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
• Opportunity to receive additional income when the market value of shares decreases (in cases where the client borrows securities from a broker).
• For trading various currenciesit is not necessary to have funds in these currencies on your deposit.

Risk management

To minimize the risk when entering into margin transactions, the broker assigns each of its investors the amount of collateral and the margin level. In each case, the calculation is made individually. For example, if after a transaction a negative balance appears on the investor's account, the margin level is determined by the following formula:

UrM=(DK+SA-ZI)/(DK+SA), where:

DK - investor's funds deposited;

CA - the value of the investor's shares and other securities accepted by the broker as collateral;

ZI - an investor's debt to a loan broker.

Tracking 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 enter into 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 for margin transactions in the stock markets, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, terms of repayment of debts, conditions for changing the contract and much more are negotiated.

To understand all the variety of the term "margin" in a short time is quite difficult. Unfortunately, in one article it is impossible to tell about all areas of its application. The discussion above only highlights the key points.use it.