Making a profit is the goal of any business commercial enterprise. To increase it, you need to have an idea about the margin and marginality. After all, it is their correct definition that will help to understand in which direction the company should move - to reduce costs or increase the cost of goods. And this understanding will help the investor to decide on the directions of their financial investments.
What is it in simple words
Marginality is one of the main concepts in business, stock exchange and banking. It refers to the difference between the cost of production (the cost of manufacturing it) and the price paid by the buyer. No wonder the word "margin" in translation means "difference" (margin).
Also, marginality often means profit from each unit of production and profitability ratio. The latter helps to determine the success of any enterprise.
Video: marginality is in simple terms:
Therefore, knowledge of the concept of "marginality" is necessary for successful business. After all, even the establishment of a high price of goods does not guarantee a high profit. To do this, you must also take into account the costs incurred. That is why it is necessary to be able to correctly calculate the margin. In simple terms, margin is what you get on top of profits. In other words, it is net income.
It is important for a novice businessman to remember products with high margins. They have a high level of demand and are always in demand in the market, since, as a rule, they are represented by only one or a few sellers. This allows the manufacturer to get more profit from their sale. High-margin products include the following:
- seasonal products, sold, as a rule, on certain dates;
- branded products.
Examples of products with a high level of marginality are: flowers, non-alcoholic products, hand-made products, high-end alcohol, expensive teas and coffees…
Products with high margins
According to a survey of retailers, the highest-margin items are:
- Non-alcoholic products. This category of goods has the highest margin. Indeed, the production costs of these products are minimal, and prices are kept at a high level. This is achieved mainly through the successful advertising campaign and promotion of a certain way of life, which effectively affects target audience- Adolescents and youth. This primarily applies to carbonated drinks. However, plain drinking water is not far behind. Especially the margin increases when it is sold in resorts. Baby water is the highest margin item in this category.
- Flowers. The margin of this product also depends on the season. By certain dates (March 8, February 14), the price of these goods rises significantly.
- Products handmade . Only the author of such a product has an idea of its actual cost. In view of its uniqueness, the price can rise significantly.
- Festive symbols. Many buyers cannot do without certain attributes on a holiday. These include, for example, fancy hats, cake candles, balloons, postcards, etc. These goods are strongly associated with the holiday among the population. The cost of their manufacture is negligible and incomparable with the high prices for them in stores.
- Bijouterie. This item is widely demanded because it does not cost as much as real gemstone jewelry. Since cheap non-natural materials are used for the manufacture of jewelry, the cost of such products is relatively low.
This list of high-margin products will not hurt aspiring entrepreneurs to familiarize themselves with in order to correctly identify their niche in the market.
In business
The concept of business marginality is closely related to the concept of product marginality. The latter is a broader term. It means the ability of a business to bring its owners net profit on invested capital per year. The indicator is measured as a percentage.
Let's take an example. Let's say an entrepreneur has invested 1 million rubles in a business. A year later, the net profit amounted to 200 thousand rubles. To calculate the business margin, or the rate of return, we divide the net profit by the amount of invested funds. We'll get 20%.
Knowledge of this concept is necessary not so much for business founders as for investors. For a successful investment, it is advisable to evaluate not only the marginality of the business as a whole, but also its individual projects. The most high-margin type of business, especially in Russia, is trade.
In banking
The concept of marginality is also central to the banking business. In particular, the determination of the interest margin is particularly important. It is the difference between interest received and paid. In other words, between interest received from borrowers and interest paid to creditors. Therefore, the bank needs to competently set interest rates on loans and deposits in order to have a sufficiently high interest margin. Accordingly, if the bank has lowered interest rates on loans, it will also lower the profitability of deposits so that the interest margin does not decrease. And vice versa.
Why do we need to calculate these indicators
Marginality is of interest to the following categories of businessmen:
- business owners;
- investors.
Investors need it, first of all, in order to determine in which business it is preferable to invest in order to get the best return. Before founding new business, a niche should be identified. For a business to be successful, it is necessary to choose the most high-margin areas of business. Therefore, the first thing the future business owner does is calculate the margin indicators of the business he is interested in in general and goods in particular.
How to calculate marginality: calculation formula
In terms of money
In absolute, or monetary terms, the sales margin is equal to the markup and is calculated using the following formula:
M = CT - C ,
where M - marginality;
CT - the price of the goods;
C is the cost.
M = sales revenue - variable costs
In percentages
M \u003d (CT - C) / CT x 100
Let's give an illustrative example of calculating the marginality of sales of the fictitious company "Vasilek". To do this, we need data from the income statement. Data are given in thousand rubles.
| Indicator | Period | |
| 2017 | 2018 | |
| Sales | 190 000 | 200 000 |
| Cost of goods sold | 160 000 | 180 000 |
| Gross profit | 20 000 | 40 000 |
| Commercial expenses | 19 000 | 30 000 |
| Sales profit | 900 | 2 000 |
| Percentage to be paid | ||
| Other income | 40 | 900 |
| other expenses | -80 | -1 000 |
| Profit before tax | 850 | 1900 |
| taxes | -100 | -500 |
| Income after tax | 700 | 1700 |
The data required for the calculation are highlighted in yellow.
It turns out, the sales margin of Vasilek for 2017 is 15.8% (190,000 - 160,000) / 190,000.
The difference between margin and markup
After studying the presented material, an erroneous opinion could have formed about the identity of the concepts of "margin" and "margin". Of course, these terms have many similarities, but they also have significant differences. Thus, the margin is a measure of income after the deduction of mandatory costs. A markup represents the additional price of a product.
They also differ in the methods of calculation. So, the calculation of the margin depends on the total profit of the company. And the calculation of the markup value depends on the initial cost of the product.
Margin and markup are calculated using different formulas. To begin with, here is the formula for calculating the margin:
Margin = (Sale Price - Cost) / Sell Price x 100
In turn, the markup formula looks like this:
Markup = (sales price - cost) / cost x 100
Thus, they differ only in the denominator. Moreover, if you calculate the markup and margin in absolute terms, then they will have the same value. They differ only in relative terms. In this case, the markup will exceed the margin.
Let's take a simple example. Suppose a certain product costs 10 rubles, its cost is 9 rubles. The markup and margin will be 10 - 9 = 1 (ruble). In relative terms, they will differ: markup will be 1/9=11.11%, margin 1/10=10%
Another difference between margin and markup is that margin can never be 100%. This is because the cost cannot be zero. And the markup can.
Margin and markup are needed to track changes in the situation over time. At the same time, markup and marginality are directly proportional to each other: the higher the markup, the greater the marginality. From this we can conclude that in order to obtain greater profits, the margin should be raised.
With markup and margin, you can track how things change over time. The higher the markup, the higher the margin. From this it follows that in order to increase profits and develop the business, it is necessary to increase the margin on the goods.
Another concept that should be introduced in this topic is gross margin. It should not be confused with margin and markup. Gross margin is the percentage of total revenue after deducting direct costs (which are associated with the production of products and the provision of services).
By itself, the gross margin does not characterize the financial condition of the company. In this we will be helped by such an indicator as the gross margin ratio (KVM). With it, you can track the dynamics economic efficiency company, as well as compare this indicator with competitors. The formula is presented in the following form:
KVM = VM / VR ,
where VM is the gross margin;
VR - proceeds from the sale of products.
This indicator is also necessary to calculate the break-even point and the power of influence operating lever.
Determination of the break-even point
For greater information content, in addition to margin indicators, the break-even point should also be calculated. It shows a situation where the company pays for all the costs of production, while not making a profit.
The definition of the break-even point is clearly shown in the figure.
Judging by the figure, the break-even point is at the intersection of revenue and gross costs and is equal to 40% of sales. Those. the company will reach the break-even point when selling 40% of the goods.
Thus, the calculation of marginality (margin) is necessary to assess the financial condition of the enterprise, successful business, comparability of results with competitors.
Video - difference between margin and markup:
Differences between margin and markup
Photo from the site: http:utmagazine.ru
For the favorable life of the company and the effective functioning of all its financial processes, it is necessary to have all the information on the income, expenses and costs of the company.
Often, various pricing factors are called profit in one word and mix them together. Let's take a closer look at two such ratios - margin and markup.
What is margin and markup
Most people believe that there is no difference between margin and markup and often confuse or combine the two. Our article will help you understand the difference between markup and margin.
Margin
There are several definitions of margin in economics textbooks, and there are even more on the Internet. Let's consider one of them.
Margin is the difference between the final price of a product and its cost.
It is expressed as a percentage of the final price for which the product was sold or the difference in profit per unit of product. First of all, the margin is an indicator of profitability.
This term is used not only in trading, but also in exchange, banking and insurance practice.
In general usage, the word margin refers to the difference between the rates.
In order to obtain data on the financial activities of the enterprise, the following concepts are calculated:
Marginal income is one of the types of profit that shows the difference between revenue and variable costs. It is necessary to obtain conclusions about the share of variable costs in revenue.
Gross margin is the ratio of revenue and fixed or variable costs. It is used to analyze profit taking into account the cost.
The concept of gross margin differs in Russia and Europe, due to the peculiarities financial systems. In Russia, this is the profit received by the company during the sale of products, as well as variable costs for the purchase of raw materials, production, storage and delivery of goods. Calculated using the following formula:
Gross margin = Income received from the sale of products - Costs of production, storage, etc.
To obtain information about the current financial condition of the organization, this indicator is calculated.
In European countries, the gross margin or gross margin is the percentage of the company's total profit from the sale of products, after payment of all mandatory cash costs.
Interest margin is the ratio of total and variable costs to revenue.
The margin is usually calculated at the end of the reporting period - month or quarter. Companies that are confident in the market settle once at the end of the year.
The profitability of a product is reflected in such an indicator as margin. It is calculated to determine the amount of sales growth and for the most effective management pricing.
Photo from the site: iufis.isuct.ru
markup
Let's move on to pricing. It is used to name several quantities:
- The amount added to the original cost of the product when it is sold.
- Retailer profit.
- Difference between retail and wholesale prices.
The markup can be specified in the contract if the supplier (manufacturer) agrees to additional conditions of the intermediary (buyer).
It is established to cover the costs of production, storage and delivery of products.
Its value is set by the end seller, based on the current state of the market, the presence of competitors and the height of demand for the products sold.
Important to consider competitive advantages both the product on the market and the organization-seller.
To determine the correct markup, carefully calculate what costs your business incurs. Consider everything: the cost of raw materials, production, storage, delivery of goods, wages of employees.
Depending on the volume of sales, the margin may vary: for large volumes, the final price is low, for small volumes, it is high. To obtain the greatest profit, it is necessary to determine the added value of products that help maintain a balance between sales volume and the price of goods.
Correctly established added value covers the funds spent on a unit of goods and brings a profit in excess of these costs. This factor makes it clear how much profit is received from the invested funds.
Remember that the current legislation of the Russian Federation for most products does not limit the maximum amount of added value, and leaves the company to determine this indicator on its own.
These are food products for children, medical products, medicines, catering products in schools, colleges and universities, goods that are sold in the regions of the Far North.
The difference between margin and markup: calculating indicators
Photo from the site: ckovok.com
Margin = (Final cost of goods - Cost of goods) / Final cost of goods * 100%
Markup = (Final cost of goods - Cost of goods) / Cost of goods * 100%
Let's look at an illustrative example:
The cost of the item is 50.
The final price of the item is 80.
We get:
Margin = (80 - 50) / 80 * 100% = 37.5%
Markup = (80 - 50) / 50 * 100% = 60%
It follows from the calculations that the margin is the total profit of the company, after deducting all necessary costs, and the markup is the added value to the cost.
If at least one of these factors is known, then the second can be calculated:
Markup = Margin / (100 - Margin) * 100%
Margin = Markup / (100 + Markup) * 100%
Let's take as a condition the margin equal to 25, and the markup 20, it turns out:
Markup = 20 / (100 - 20) * 100% = 25
Margin = 25 / (100 + 25) * 100% = 20
Photo from the site: pilotbiz.ru
The difference between margin and markup
The margin cannot be 100%, but the added value can.
Margin is an indicator of income after covering mandatory costs. A markup is an additional price for a product.
The calculation of the margin depends on the total profit of the enterprise, and the markup depends on the initial cost of the goods.
The higher the markup, the higher the margin, but the second factor is always lower than the first.
Finally
The financial activity of the enterprise is the most important element his existence.
It is necessary to carry out all the calculations that will help to find weak spots in the budget and get on the right track in pricing.
It is important to know what margin and markup are and how they differ from each other. These figures are effective tool analysis of the financial condition of the enterprise.
Now you know, if your competitors say: "Our company is operating at a margin of 150%", then they do not distinguish between markup and margin. Therefore, you already have one advantage over them.
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Source: http://lady-investicii.ru/articles/biznes/otlichiya-marzhi-ot-naczenki.html
What is margin and how to calculate it? A detailed overview of the concept for beginners + calculation formulas
03/17/2017 To the procurement participant
Hello dear colleague! In today's article, we will talk about such a well-known economic term as margin.
Many novice entrepreneurs, as well as procurement participants, have no idea what it is and how it is calculated.
This term, depending on the area in which it is used, has different meanings.
Therefore, in this article we will consider the most common types of margin and dwell on the margin in trading in detail, because. it is she who is of greatest interest to suppliers participating in government and commercial tenders.
1. What is margin in simple terms?
The term “margin” is most often found in areas such as trading, stock trading, insurance and banking. Depending on the field of activity in which this term is used, it may have its own specifics.
Margin(from the English. Margin - difference, advantage) - the difference between the prices of goods, securities rates, interest rates and other indicators. Such a difference can be expressed both in absolute terms (for example, ruble, dollar, euro) and as a percentage (%).
In simple words, the margin in trade is the difference between the cost of goods (the cost of its manufacture or purchase cost) and its final (sales) price. Those. it's a measure of efficiency economic activity particular company or entrepreneur.
In this case, this is a relative value, which is expressed in% and is determined by the following formula:
M = P / D * 100%,
P - profit, which is determined by the formula:
P \u003d selling price - cost price
D - income (selling price).
In industry, the margin rate is 20% , and in trade 30% .
However, I want to note that the margin in our and Western understanding is very different. For European colleagues, it represents the ratio of profit from the sale of goods to its selling price. We use net profit for calculation, namely (selling price - cost price).
2. Types of margin
AT this section In this article, we will consider the most common types of margin. So let's get started...
2.1 Gross margin
Gross margin(English gross margin) is the percentage of a company's total revenue that it retains after direct costs incurred in the production of its goods and services.
Gross margin is calculated using the following formula:
VM \u003d (VP / OP) * 100%,
VP - gross profit, which is defined as:
VP \u003d OP - SS
OP - sales volume (revenue);
CC - cost of goods sold;
Thus, the higher the company's VM indicator, the more money the company saves for each ruble of sales to service its other expenses and obligations.
The ratio of VM to the amount of proceeds from the sale of goods is called the gross margin ratio.
2.2 Profit margin
There is another concept that is similar to gross margin. This concept is profit margin. This indicator determines the profitability of sales, i.e. share of profit in the company's total revenue.
2.3 Variation margin
Variation margin- the amount paid/received by a bank or a trading participant on the stock exchange in connection with a change in the monetary obligation for one position as a result of its market adjustment.
This term is used in the exchange activity. In general, there are a lot of calculators for stock traders to calculate the margin. You can easily find them on the Internet for this search query.
2.4 Net interest margin (bank interest margin)
Net interest margin- one of the key indicators for evaluating the effectiveness of banking activities. NIM is defined as the ratio of the difference between interest (fee) income and interest (fee) expenses to the assets of a financial institution.
The formula for calculating net interest margin is as follows:
NPM \u003d (DP - RP) / AD,
DP - interest (commission) income; RP - interest (commission) expenses;
AD - assets that generate income.
As a rule, NIM indicators financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial institution when opening an account with it.
2.5 Guarantee margin
Guarantee margin is the difference between the value of the collateral and the amount of the loan.
2.6 Credit margin
Credit margin- the difference between the estimated value of the goods and the amount of credit (loan) issued financial institution to purchase this item.
2.7 Bank margin
Bank margin(bank margin) is the difference between the rates of credit and deposit interest, lending rates for individual borrowers, or interest rates on active and passive operations.
The BM indicator is influenced by the terms of loans issued, the terms of keeping deposits (deposits), as well as interest on these loans or deposits.
2.8 Front and back margin
These two terms should be considered together, as they are connected,
Front margin is the markup profit, and back margin is the profit received by the company from discounts, promotions and bonuses.
3. Margin vs Profit: What's the Difference?
Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice, these concepts differ from each other.
Margin is the difference between the indicators, and profit is the final financial results. The profit calculation formula is given below:
Profit \u003d V - SP - KI - UZ - PU + PP - VR + VD - PR + PD
B - revenue; SP - production cost; CI - commercial costs; UZ - management costs; PU - interest paid; PP - interest received; BP - unrealized expenses; VD - unrealized income; PR - other expenses;
PD - other income.
After that, income tax is charged on the resulting value. And after deducting this tax, it turns out - net profit.
Summing up all of the above, we can say that when calculating the margin, only one type of cost is taken into account - variable costs that are included in the cost of production. And when calculating profits, all expenses and incomes that a company incurs in the production of its products (or the provision of services) are taken into account.
4. What is the difference between margin and markup?
Very often, the margin is mistakenly confused with the trading margin. markup- the ratio of profit from the sale of goods to its cost. In order for you to no longer have confusion, remember one simple rule:
Let's go on specific example Let's try to tell the difference.
Suppose you bought a product for 1000 rubles, and sold it for 1500 rubles. Those. In our case, the markup was:
H \u003d (1500-1000) / 1000 * 100% \u003d 50%
Now let's define the margin:
M \u003d (1500-1000) / 1500 * 100% \u003d 33.3%
For clarity, the ratio between the margin and markup indicators is shown in the table below:
In order to better understand the difference between these two concepts, I suggest you watch a short video:
5. Conclusion
As you can already understand, margin is an analytical tool for evaluating the performance of a company (with the exception of stock trading).
And before increasing production, bring to market new product or service, you need to estimate the initial value of the margin.
If you increase the selling price of a product, and the margin does not increase, then this only indicates that the size of the costs of its production is also growing. And with such dynamics, there is a risk of being at a loss.
On this, perhaps, everything. I hope that now you have the necessary understanding of what margin is and how it is calculated.
Source: http://zakupkihelp.ru/uchastniku-zakupok/chto-takoe-marzha.html
What is margin
A lot of people come across the concept of "margin", but often do not fully understand what it means. We will try to correct the situation and give an answer to the question of what margin is in simple words, as well as analyze what varieties there are and how to calculate it.
The concept of margin
Margin (eng. margin - difference, advantage) is an absolute indicator that reflects how the business functions.
Sometimes you can also find another name - gross profit. Its generalized concept shows what is the difference between any two indicators.
For example, economic or financial.
Important! If you are in doubt about how to write - walrus or margin, then know that from the point of view of grammar, you need to write through the letter "a".
This word is used in various fields. It is necessary to distinguish between what margin is in trading, on stock exchanges, in insurance companies and banking institutions.
This term is used in many areas of human activity - there are a large number of its varieties. Consider the most widely used.
Gross Profit Margin
Gross or gross margin is the percentage of total revenue left after variable costs.
Such costs may be the purchase of raw materials and materials for production, payment wages employees, spending money on selling goods, etc.
It characterizes the overall work of the enterprise, determines its net profit, and is also used to calculate other quantities.
Operating profit margin
Operating margin is the ratio of a company's operating profit to its revenue. It indicates the percentage of revenue that remains with the company after taking into account the cost of goods, as well as other related expenses.
Important! High performance indicates good performance of the company. But you should be on the alert, because these numbers can be manipulated.
Net (Net Profit Margin)
Net margin is the ratio of a company's net profit to its revenue. It displays how many monetary units of profit the company receives from one monetary unit of revenue. After its calculation, it becomes clear how successfully the company copes with its expenses.
It should be noted that the value of the final indicator is affected by the direction of the enterprise. For example, firms in the field retail, usually have rather small numbers, and large manufacturing enterprises have rather high numbers.
Interest
Interest margin is one of the important indicators of the bank's activity, it characterizes the ratio of its revenue and expenditure parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.
This variety is absolute and relative. Its value can be influenced by inflation rates, various kinds of active operations, the ratio between the bank's capital and resources that are attracted from outside, etc.
variational
Variation margin (VM) is a value that indicates the possible profit or loss on the trading floors. It is also a number by which the amount of funds taken on bail during a trade transaction can increase or decrease.
If the trader correctly predicted the market movement, then this value will be positive. Otherwise, it will be negative.
When the session ends, the running VM is added to the account, or vice versa - it is canceled.
If a trader holds his position for only one session, then the results of the trade transaction will be the same with the VM.
And if a trader holds his position for a long time, it will add up daily, and ultimately its performance will not be the same as the result of the transaction.
Watch a video about what margin is:
Margin and Profit: What's the Difference?
Most people tend to think that the concepts of "margin" and "profit" are identical, and cannot understand what is the difference between them. However, even if insignificant, the difference is still present, and it is important to understand it, especially for people who use these concepts on a daily basis.
Recall that margin is the difference between a firm's revenue and the cost of the goods it produces. To calculate it, only variable costs are taken into account without taking into account the rest.
Profit is the result of the financial activity of the company at the end of any period. That is, these are the funds that remain with the enterprise after taking into account all the costs of production and marketing of goods.
In other words, the margin can be calculated in this way: subtract the cost of goods from revenue. And when profit is calculated, in addition to the cost of goods, various costs, business management costs, interest paid or received, and other types of expenses are taken into account.
By the way, such words as “back margin” (profit from discounts, bonus and promotional offers) and “front margin” (profit from markup) are associated with profit.
What is the difference between margin and markup
To understand the difference between margin and markup, you must first clarify these concepts. If everything is already clear with the first word, then not quite with the second.
The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: for production, delivery, storage and sale.
Therefore, it is clear that the margin is an allowance to the cost of production, and the margin just does not take this cost into account during the calculation.
- To make the difference between margin and markup more visual, let's break it down into several points:
- Different difference. When they calculate the margin, they take the difference between the cost of goods and the purchase price, and when they calculate the margin, they take the difference between the company's revenue after sales and the cost of goods.
- Maximum volume. The margin has almost no limits, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
- The basis of the calculation. When calculating the margin, the company's income is taken as the base, and when calculating the margin, the cost is taken.
- Conformity. Both quantities are always directly proportional to each other. The only thing is that the second indicator cannot exceed the first.
Margin and markup are quite common terms used not only by specialists, but also by ordinary people in Everyday life, and now you know what their main differences are.
Margin Formula
Gross margin reflects the difference between revenue and total costs. The indicator is necessary for the analysis of profit taking into account the cost and is calculated by the formula:
GP=TR-TC
Similarly, the difference between revenue and variable costs will be called Marginal income and is calculated by the formula:
CM=TR-VC
Gross margin ratio, equal to the ratio of the gross margin to the amount of sales revenue:
KVM = GP / TR
Similarly Marginal income ratio is equal to the ratio of marginal income to the amount of sales revenue:
KMD = CM / TR
It is also called the marginal return rate. For industrial enterprises, the margin rate is 20%, for trade - 30%.
Interest margin shows the ratio of total costs to revenue (income).
GP=TC/TR
or variable cost to revenue:
CM=VC/TR
Margin in various areas
As we have already mentioned, the concept of "margin" is used in many areas, and perhaps that is why it is difficult for an outsider to understand what it is. Let's take a closer look at where it is used and what definitions give.
In economics
Economists define it as the difference between the price of a good and its cost. That is, in fact, this is its main definition.
Important! In Europe, economists explain this concept as a percentage of the ratio of profit to sales of products at the selling price and use it in order to understand whether the company's activities are effective.
In general, when analyzing the results of the company's work, the gross variety is most often used, because it is it that has an impact on net profit, which is used for the further development of the enterprise by increasing fixed capital.
In banking
In banking documentation, you can find such a term as credit margin. When a loan agreement is concluded, the amount of goods under this agreement and the amount paid in fact to the borrower may be different. This difference is called credit.
When applying for a secured loan, there is a concept called the guarantee margin - the difference between the value of the property issued on security and the amount of funds issued.
Almost all banks lend and accept deposits. And in order for the bank to have a profit from this type of activity, different interest rates are set. The difference between the interest rate on loans and deposits is called the bank margin.
In exchange activities
The exchanges use a variational variety. It is most often used on futures trading platforms.
From the name it is clear that it is changeable and cannot have the same value.
It can be positive if the trades made a profit, or negative if the trades turned out to be unprofitable.
Thus, we can conclude that the term "margin" is not so complicated. Now you can easily calculate its various types, marginal profit, its coefficient, and most importantly, you have an idea in what areas this word is used and for what purpose.
default. What are its consequences for the economy and people of our country?
We will consider in a separate article.
Who are the beneficiaries or true owners of the business?
Source: http://svoedelo-kak.ru/finansy/marzha.html
Margin is the difference between... Economic terms. How to calculate margin
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
Let's 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 the 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 modern man it is necessary to understand all the meanings of this term, so that at an unexpected moment “not to lose face”.
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 transformation of income into profit.
Margin is a relative indicator, it is expressed as a percentage.
Margin=Profit/Revenue*100.
The formula is quite simple, but in order not to get confused at the very beginning of studying 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 the enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for its calculation is the difference in revenue from the sale of products in reporting period and variable costs for the production of 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 at the expense of 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 such an indicator as “gross margin”.
The formula can also take into account income outside the sales economic activity enterprises.
These include the write-off of receivables and payables, the provision of non-industrial services, income from housing and communal services, etc.
For an analyst, it is extremely important to correctly calculate the gross margin, since this indicator forms the net profit of the enterprise, and in the future, 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 margin
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:
- The credit margin is directly related to work under loan agreements, it is defined as the difference between the amount indicated in the document and the amount actually given out.
- Bank margin is calculated as the difference between interest rates on loans and deposits.
- The net interest margin is key indicator banking efficiency. 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 both all the bank's assets, and only those involved in the work at the moment.
- Guarantee margin is the difference between the estimated 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 relative performance evaluation trading activities companies.
It should be noted that the European attitude to margin calculation is fully consistent with the basics economic theory about which was written 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 differs little from the principle of using the term in everyday life.
How is margin different from trading margin?
There are a number of common misconceptions about the term "margin". Some of them have already been described, but we have not touched on the most common 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.
An illustrative example will help dispel any doubts that have arisen.
Suppose a company bought a product for 100 rubles, and sold it for 150.
Let's 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 hard work, which requires
great experience.
Why is it 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 in the stock markets
Exchange 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.
The margin on the stock markets becomes a kind of collateral for 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 the borrowed funds of 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.
Benefits of margin trading
By participating in margin transactions, investors receive a number of advantages:
- The ability to trade on financial markets without having sufficiently large 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.
- The opportunity to receive additional income when the market value of shares decreases (in cases where the client borrows securities from a broker).
- To trade in different 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 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 - cash investor deposited;
SA - the value of the investor's shares and other securities accepted by the broker as collateral;
ZI - the investor's debt to the loan broker.
It is possible to carry out a trace only if the margin level is at least 50%, and if otherwise is not 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.
It is quite difficult to understand all the variety of the term “margin” in a short time. Unfortunately, in one article it is impossible to tell about all areas of its application. In the above reasoning, only the key points of its use are indicated.
a term denoting the difference between the prices of goods, interest rates, exchange rates and securities, also the margin is an indicator of the activity of the enterprise, which is used in marginal analysis
Information about the concept of margin, the use of the term "margin" in stock exchange, banking, insurance, trading and betting activities, margin calculation, calculation of marginal income and the difference between margin and markup, margin trading and types of margin when trading on the exchange
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Margin is, definition
Margin is a concept denoting the difference between the price of a product and its cost, and expressed in absolute terms. Margin also indicates the amount of the required advance when trading on the stock exchange, and the difference between lending rates and interest rates in banking. In general market terminology, the concept of margin refers to the difference between indicators specific to each type of activity.
Margin is a term used in trading, exchange, insurance and banking practice to refer to the difference between the prices of goods, securities rates, interest rates and other indicators.
The concept of margin
Margin is the difference between price and cost (analogous to the concept of profit). It can be expressed both in absolute terms (for example, rubles) and as a percentage, as the ratio of the difference between the price and the cost price to the price (as opposed to the trade margin, which is calculated as the same difference in relation to the cost price).
Margin is a pledge that provides an opportunity to receive a loan for temporary use in money or goods that are used to make speculative exchange transactions in margin trading. Margin differs from a simple loan in that the amount of money received (or the value of the goods received) usually exceeds the amount of the collateral (margin). Typically, the margin (margin requirement) is expressed as a percentage (%), as a ratio of the amount of collateral to the amount of the transaction (for example, 25%) or as a ratio of shares (for example, 1:4). In spread betting, the margin can be 3-5%, which allows you to increase both winnings and losses.
Margin is the difference between selling price and cost. This difference is usually expressed either as a percentage of the selling price (profit margin), or in absolute terms as profit per unit of output.
Margin is the difference between the selling price of a commodity unit and the cost of a commodity unit. This difference is usually expressed as a profit per unit of output or as a percentage of the selling price (profit margin). In general, margin is a term used in trading, exchange, insurance and banking practice to denote the difference between two indicators.
Margin is the percentage of the cost of goods that must be added to their cost to get the selling price.
Margin is the difference between the selling and buying prices of securities by a "market maker" or goods - by a dealer. In informal vocabulary, this process is often called "haircut" (haircut).
Margin is the price added to the market rate of interest or subtracted from the market rate of interest on the deposit in order to ensure that the bank receives a profit.
Margin and business
Margin is the amount of advance paid to a broker or dealer by a person playing on the stock exchange, or by an investor when buying futures.
Margin is money or securities deposited with a stock broker to cover possible losses of a client.
Margin is a term used in trading, exchange, insurance and banking practice to denote the difference between the prices of goods, securities rates, interest rates, and other indicators.
Margin is- in common market terminology - the difference between price and cost.
Working with margin
Margin is- in marketing - the trade margin established by industrial enterprises.
Margin is- in urgent stock transactions - the difference between the rate of a security on the day of conclusion and the day of execution of the transaction or the difference between the price of the buyer and the seller.
Margin is the amount of collateral that is necessary for traders to maintain open positions in the forex market.
Margin is definition that came to e-commerce from finance and banking.
Margin is the difference between the prices of goods, in fact - the profitability of sales.
Margin is the difference between interest rates, loan rates, securities rates, purchase and sale prices of goods and other indicators, on the value of which depends the profit received by companies, firms, individual entrepreneurs who buy and sell these goods, securities, financial resources, etc. d.
Margin is the difference between the rates on credit and deposit interest; between rates on loans provided to different categories of borrowers; between the amount of collateral for which the loan was granted and the amount of the loan issued.
Margin is a term used in banking, stock exchange, trade insurance practice to denote the difference between interest rates, securities rates, commodity prices and other indicators; the difference between the rates on attracted and provided loans; between rates on loans provided to different categories of borrowers; the amount of collateral for which the loan was granted and the amount of the loan issued; an additional share on a deposit, collateral or allowable fluctuations in the exchange rate.
Margin is the difference between securities prices, interest rates, commodity prices and other industry-specific indicators.
In a general sense, margin refers to the difference in commodity prices, stock quotes, interest rates, etc. The term has become widespread in many areas: trading, banking, exchange, insurance, etc. and has a lot of nuances in the definition.
For example, in general economic theory, margin is the difference between the price of a product and its cost.
When analyzing the activities of an enterprise, the interest for an economist-analyst is the gross margin - the difference between the company's revenue from the sale of products and variable costs, that is, those that change in direct proportion to the volume of products produced. The size of the gross margin directly affects the net profit and it is from it that development funds are formed (more on this in the article “what is capital”). There is also a gross margin ratio, calculated as the ratio between the gross margin and the amount of proceeds from the sale of a consignment. At the same time, it is important to assess the level of marginal income received by the company. It can be calculated either as gross margin or as the sum fixed costs and profits. The rate of marginal income is understood as the share of marginal income in the company's total revenue from the sale of goods.
There is also a concept similar to gross margin, as “profit margin” meaning the share of profit in the total trading capital, and simply speaking, determining the profitability of sales.
In the banking sector, concepts such as credit margin are applicable - that is, the difference between the amount of goods fixed in the contract and lending and the actual amount given to the borrower.
And if we talk about the sources of profit of a banking organization, then it will largely be determined by the size of the bank margin - the difference between interest rates on loans and deposits. Or for these purposes, the so-called net interest margin is better suited - the difference between the bank's net interest income (obtained through lending and investment) and the rate paid on capital and liabilities.
It is appropriate to talk about the margin when it comes to a secured loan - in this case it will be the so-called guarantee margin - the difference between the value of the collateral and the amount of the loan issued.
Margin calculation
Margin (profitability of sales) is the difference between the selling price and the cost price. This difference is usually expressed either as a percentage of the selling price or as a profit per unit. Margin calculation (formula):
The purpose of the margin is to determine the amount of sales growth and manage pricing and decision-making on product promotion.
Margin and Price
The sales margin threshold is a key factor among many other basic calculations. commercial activities including estimates and forecasts. All managers need to know (and usually know) their company's estimated return on sales and what it shows. However, managers differ greatly in the assumptions they use when calculating sales margins and in the way they analyze and find out what the margin is.
When talking about margin, it is important to keep in mind the difference between profit margin and unit profit on sales. This difference is easy to reconcile, and managers must be able to switch from one to another.
What is a unit of production? Each company has its own idea of what a unit is, which can range from a ton of margarine to 1 liter of cola or a bucket of plaster. Many industries deal with multiple product units and calculate sales margins accordingly. In the tobacco industry, for example, cigarettes are sold in pieces, packs, blocks and boxes (which hold 1,200 cigarettes). In banks, the margin is calculated on the basis of accounts, customers, loans, transactions, family units and branches of the bank. You need to be ready to easily switch from one concept to another, as decisions can be based on any of them.
Profit Ratio can also be calculated using gross sales in monetary terms and total costs.
When calculating return on sales, expressed both as a percentage (profit ratio) and as profit per unit, you can perform a simple reconciliation by checking whether the individual parts add up to the total.
Markup or margin?
Although some people characterize the terms "margin" and "surcharge" as interchangeable concepts, this is not true. The term "surcharge" usually refers to the practice of adding a certain percentage to the cost to calculate selling prices.
As you know, any trading company lives off the margin, which is necessary to cover costs and make a profit:
What is a margin, why is it needed and how does it differ from a markup, if it is known that the margin is the difference between the sale price and the cost price?
It turns out that this is the same amount.
Margin and markup
What is the difference?
The difference lies in the calculation of these indicators in percentage terms (the markup refers to the cost, the margin refers to the price).
It turns out that in numerical terms, the sum of the markup and margin are equal, and in percentage terms, the markup is always greater than the margin.
For example:
It is interesting to note here that the margin cannot be equal to 100% (unlike the markup), because. in this case, the cost price should be equal to zero, which, as you know, does not happen, although we would very much like to!
The concepts of margin and markup
Like all relative (expressed as a percentage) indicators, markup and margin help to see processes in dynamics. With their help, you can track how the situation changes from period to period.
Looking at the table, we clearly see that markup and margin are directly proportional: the higher the markup, the greater the margin, and hence the profit.
The interdependence of these indicators makes it possible to calculate one indicator with a given second. Thus, if a firm wants to reach a certain level of profit (margin), it needs to calculate the margin on the product, which will allow it to receive this profit.
In order not to get confused once again, learn the rule that margin is the ratio of profit to PRICE (i.e., the percentage of profit in the price of the goods), and the margin is the ratio of profit to COST (i.e., the percentage of profit in the cost of ).
Gross margin
Gross margin is one of the most important indicators of operational analysis, which is widely used in financial management and controlling.
Gross margin (English gross margin) - the difference between the total revenue from the sale of products and the variable costs of the enterprise. Gross margin refers to calculated indicators. By itself, the gross margin does not allow assessing the overall financial condition of the enterprise or a separate aspect of its activities. The indicator "gross margin" is used to calculate a number of other indicators. For example, the ratio of the gross margin to the amount of revenue is called the gross margin ratio.
Gross margin is the basis for determining the net profit of an enterprise; the company's development funds are formed from the gross margin. Gross margin is an analytical indicator that characterizes the result of the enterprise as a whole.
Gross margin is created at the expense of the labor of employees of the enterprise invested in the production of goods (rendering services). The gross margin expresses the surplus product created by the enterprise in monetary form. The gross margin can also take into account income from the so-called non-operating business activities of the enterprise. Non-operating income includes the balance of operations for non-industrial services, housing and communal services, writing off receivables and payables, etc.
Gross margin is the share of each dollar in sales that the company retains as gross profit. For example, if a company's last quarter gross margin was 35%, that meant it was saving $0.35. from each ruble received as a result of sales to be spent on repayment of selling, general and administrative expenses, interest expenses and payments to shareholders. Gross margin levels can vary considerably from one trade to another.
There is an inverse relationship between gross margin and inventory turnover: the lower the inventory turnover, the higher the gross margin; the higher the inventory turnover, the lower the gross margin. Producers must secure a higher gross margin than retail because their product spends more time in the manufacturing process. The gross margin is determined by the pricing policy.
Gross margin is calculated using the following formula:
Gross margin ratio
The gross margin ratio is the ratio of gross profit to revenue. In other words, it shows how much profit we will receive from one dollar of revenue. If the gross margin ratio is 20%, this means that every dollar will bring us 20 cents of profit, and the rest must be spent on the production of goods.
Recall that the gross margin, by definition, is designed to cover the costs associated with general management firms and implementation finished products, and, moreover, provide her with a profit. In this sense, the gross margin ratio shows the ability of the company's management to manage production costs (the cost of raw materials and direct materials, direct labor costs and production overhead costs). The higher this indicator, the more successfully the company's management manages production costs.
Gross margin in Russia
In Russia, the gross margin is understood as the difference between the company's revenue from product sales and variable costs.
However, this is nothing more than marginal income, marginal profit (contribution margin) - the difference between the proceeds from the sale of products and variable costs. Gross margin is a calculated indicator, which in itself does not characterize the financial condition of the enterprise or any of its aspects, but is used in the calculation of a number of financial indicators. The value of marginal income shows the contribution of the enterprise to cover fixed costs and profit.
Gross margin in Europe
There are discrepancies in the understanding of the gross margin that exist in Europe and the concept of margin that exists in Russia. In Europe (more precisely, in the European accounting system) there is the concept of Gross margin. Gross margin, (gross margin) is the percentage of total sales revenue that the company leaves after incurred direct costs associated with the production of goods and services sold by the company. The gross margin is calculated as a percentage. These differences are fundamental to the accounting system. Thus, the Europeans consider the gross margin as a percentage, while in Russia the "margin" is understood as profit.
Margin analysis
important role in justifying management decisions marginal (marginal) analysis plays in business, the methodology of which is based on the study of the relationship between the three groups of the most important economic indicators: "costs - volume of production (sales) of products - profit" and forecasting the critical and optimal value of each of these indicators for a given value of others. This method of management calculations is also called break-even or income assistance analysis.
The essence of marginal analysis is to analyze the ratio of sales volume (output), cost and profit based on predicting the level of these values under given restrictions.
Marginal analysis serves to find the most profitable combinations between variable costs per unit of output, fixed costs, price and sales volume. Therefore, this analysis is impossible without the division of costs into fixed and variable.
The values of specific marginal income for each specific type of product are important for the manager. If this indicator is negative, then the proceeds from the sale of the product do not even cover variable costs. The calculation of marginal income allows you to determine the impact of the volume of production and sales on the amount of profit from the sale of products, works, services and the volume of sales from which the company makes a profit.
The marginal analysis is based on the division of costs into variable and fixed.
In practice, the set of criteria for classifying an article as a variable or constant part depends on the specifics of the organization, the adopted accounting policy, the goals of the analysis, and the professionalism of the relevant specialist.
Practice shows that, as a rule, enterprises of the industry are not limited to single-product production, and therefore, it becomes necessary to conduct marginal analysis in a multi-product production environment.
Margin analysis of activity
Due to the fact that different types of products are sold at different prices, have different costs and profit margins with a multi-product output, marginal analysis becomes more complicated. The solution to this problem is possible in various ways, including a separate analysis of the range of manufactured products with the determination of individual break-even points according to the equation that is used in the analysis of a single product. In this case, it is advisable, along with direct variable costs, to attribute direct fixed costs directly to a specific type of product (which are clearly related to this type of product and disappear when it is discontinued).
The result of the break-even analysis largely depends on the cost structure, i.e., on the ratio of variable and fixed components in total costs. The theory of marginal analysis does not give an unambiguous answer to the question of what should be the most optimal (profitable) ratio of variable and fixed costs.
At high fixed costs, a significant amount of sales is required to reach the break-even point, which can be associated with a long period of time. On the positive side, there is a high increase in profits after reaching the break-even point. However, organizations with these characteristics carry high risks.
Organizations with low fixed costs and high variable costs receive more stable profits, are less risky.
The minimization of entrepreneurial risks can be facilitated by the transfer of part of the fixed costs to the category of variables. Sometimes the enterprise has such an opportunity by replacing the time wages of the main workers with a piecework form of wages, linking the wages of the sales departments of the enterprise to the value of sales volumes, etc.
With the same amount of costs, a decrease in the share of fixed costs in it has a positive effect on the financial stability of the enterprise: the value of the break-even point and the strength of the operating leverage decrease, the margin increases financial strength. Production risks at the same time, they decrease, but the activity of the enterprise becomes less efficient.
It is rather difficult to give an unambiguous answer which option for the ratio of fixed and variable costs is better. Often technological process requires that fixed costs be high and variable costs low, in which case, while achieving large volumes of production and stable sales, it becomes possible to obtain high profits.
Margin analysis (break-even analysis) allows you to:
More accurately calculate the influence of factors on changes in the cost of products (services), the amount of profit, the level of profitability and, on this basis, more effectively manage the process of formation and forecasting of the cost and financial results;
Determine the critical levels of sales volume, variable costs per unit of output, fixed costs, prices for a given value of the relevant factors;
Establish a safety zone (break-even) of the enterprise and assess the degree of its sensitivity to changes in external and internal factors;
Calculate the required sales volume to obtain a given profit;
To substantiate the most optimal variant of management decisions regarding changes in production capacity, product range, pricing policy, equipment options, production technology, purchase of components and others in order to minimize costs and increase profits.
The most important disadvantage of using marginal analysis is the conditional nature of the division of costs into fixed and variable components, which entails inaccuracy in the results obtained. In addition, in multi-product production, the problem of dividing general variable costs between individual types of products arises.
The absence of a breakdown of costs as part of overhead costs in Form 2 “Profit and Loss Statement” into fixed and variable components significantly complicates the marginal analysis, which makes it necessary to use one of the methods that exist in the theory of economic analysis to solve this problem, for example :
Statistical Method correlations (graphical);
High and low point method;
Least square method.
Another disadvantage of applying marginal analysis is the problem of allocating indirect fixed costs related to the activities of the organization as a whole.
Perhaps it makes sense, when analyzing each specific product, not to allocate indirect costs, but to plan the release based on the optimal structural distribution of manufactured products with further analysis of the sufficiency of the received revenue to cover fixed costs.
The second possible solution may be the development of the previous version, i.e., the optimal structure of the ratio of manufactured products in the total volume of output is taken as a conditional single product (a package from a multi-product output). In the share ratio, the package price and variable costs are determined, fixed costs are known. A significant drawback of the method: the structure of the package is considered unchanged, which, under the conditions modern market unlikely. A possible solution is to conduct an analysis for several of the most probable share ratios of products in the package, taking into account possible changes pricing policy, expansion of production facilities, etc.
The main category of margin analysis is marginal income. Marginal income (profit) is the difference between sales proceeds (excluding VAT and excises) and variable costs.
Sometimes marginal income is also called the amount of coverage - this is the part of the proceeds that remains to cover fixed costs and generate profits. The higher the level of marginal income, the faster fixed costs are reimbursed and the organization has the opportunity to make a profit.
Marginal analysis of the enterprise allows the entrepreneur, the management of the enterprise to reliably assess the current situation and prospects. He must answer the question: what are the sources and amounts of funds that the company has, for what purposes and needs are they spent?
As part of the analysis, the effectiveness of the use of monetary resources and capital is evaluated. A mandatory section of the analysis is the study of the composition and sources of income and directions of the company's expenses, consideration of the volume of sales of goods and services, the cost of sales, with the allocation of gross, fixed and variable costs. Indicators of profit and profitability should be identified and evaluated, trends in their dynamics should be identified.
Marginal income
The term marginal income (MD), from English. marginal revenue is used in two ways:
Marginal income is the additional income received from the sale of an additional unit of goods;
Income received from sales after recovering variable costs. In this case, marginal income is a source of profit generation and covering fixed costs.
This discrepancy is due to the ambiguity of the English word marginal:
Ultimate, hence the words “marginal, marginal” - located on the border, at the limit of the generally accepted;
Change, difference, hence the word "margin" - the difference in interest rates, etc.
Thus marginal income is a fixed cost and profit. Often, instead of marginal income, the term "contribution to cover" is used: marginal income is a contribution to cover fixed costs and generate net profit.
The formula for calculating marginal income does not show its dependence on fixed costs, variable costs and prices. But in the examples of calculating marginal income, it is clear that this dependence exists.
Marginal income is especially interesting if the company produces several types of products and it is necessary to compare which type of product contributes more to the total income. To do this, calculate what part is the marginal income in the share of revenue (income) for each type of product or product.
Margin in exchange activity
The profit of participants in exchange trading depends on the difference between the sale and purchase prices of an exchange commodity, which are indicated in the exchange bulletin. In a broader sense, in exchange practice, the term "margin" is used to refer to the difference between the prices of securities.
Margin trading is conducting speculative trading operations using money and / or goods provided to the trader on credit against the security of a specified amount - margin. A margin loan differs from a simple loan in that the amount of money received (or the cost of the goods received) is usually several times greater than the amount of the collateral (margin). For example, for granting the right to enter into a contract for the purchase or sale of 100 thousand euros for US dollars, the broker usually requires a pledge of no more than 2 thousand dollars. This allows the merchant to increase the volume of transactions with the same capital. In addition, when trading on margin, it is usually allowed to sell the goods taken on credit with the expected subsequent purchase of a similar product and the return of the loan in kind (commodity) form. Such an operation is called a short position or selling short (bare selling). This mechanism provides technical capability make a profit when prices fall (examples are given below).
The margin principle is widely used in exchange trading with any instruments.
About margin trading
Margin trading involves the implementation of operations with assets received from a broker on credit. It can be both cash and tradable goods: for example, stocks, futures contracts. Margin lending has its own specifics. The following conditions are usually stipulated:
Getting a loan does not require prior approval and specific registration;
The loan is secured by cash and other assets placed on the relevant accounts;
The loan provides assets from the list of assets with which margin transactions can be made;
Credits during the trading session are provided free of charge;
In many cases, such as when trading stocks, a fee is charged for providing a loan for a period of more than a day. This is usually an agreed percentage of the loan amount or the market value of the assets being loaned. Usually, the interest rate depends on the type of asset provided on credit and is oriented to the existing interest rates of similar operations in "normal" interbank lending.
Margin requirements are highly dependent on the liquidity of the commodity being traded. In the foreign exchange market, the margin is usually 0.5-2%. On weekends, it can rise to 5-10%. In the US, UK, Germany, the margin on the stock market can be 20-50%. In Russia, for trading in certain shares for some traders, the Federal Financial Markets Service (until 2004 its functions were performed by the Federal Commission for the Securities Market) allows a margin of 25 - 50% of the contract amount (as of February 2007). The size of the margin may depend on the direction of the first transaction (buy or sell).
About derivatives margin trading
Regulatory authorities in crisis situations further limit the possibility of margin operations. To combat the panic and rumors engulfing Wall Street, the Securities and Exchange Commission urgently restricted short sales of 19 major securities from July 21, 2008. financial companies, and since September 19, 2008 this list has expanded to 799 financial companies. The UK Financial Conduct Authority (FSA) has imposed a temporary ban on "short selling" of shares on the London Stock Exchange from September 19, 2008 until January 16, 2009.
On September 17, 2008, the Federal Service for Financial Markets of Russia suspended trading in all securities on Russian stock exchanges. In a commentary by the head of the Federal Financial Markets Service of Russia, Vladimir Milovidov, this step is explained by the fact that "brokers continue to enter into margin transactions and open short positions, further destabilizing the situation."
The concept of margin trading
Margin trading always assumes that the trader will definitely carry out the opposite operation for the same volume of goods after some time. If the first was a purchase, then a sale will follow. If the first was a sale, then a purchase is expected. After the first operation (opening a position), the trader is usually deprived of the opportunity to freely dispose of the purchased goods or the funds received from the sale. He also pledges part of own funds within the agreed margin. The broker closely monitors open positions and controls the size of the possible loss. If the loss reaches a critical value (for example, half of the margin), the broker can turn to the trader with an offer to pledge additional funds. This appeal is called a margin call - from the English. Margin call (literal translation - margin requirement). If funds are not received, and the loss continues to grow, the broker will forcibly close the position on its own behalf. After the second operation (closing the position), the financial result is formed in the amount of the difference between the purchase and sale prices, and the margin is released, to which the result of the operation is added. If the result is positive, the trader will receive back more funds by the amount of profit than he pledged. If the result is negative, the loss will be deducted from the deposit and only the remainder will be returned. In the worst case, there will be nothing left of the deposit.
The trader does not bear any additional financial obligations to the broker for the received loan, except for the provision of margin. Normally, a broker cannot claim additional funds on the basis that a position was closed at a loss that exceeded the amount of margin provided. This situation can occur at the opening of a new trading day, when trading starts with a strong margin from the previous day's quotes. In this case, the risk of additional losses lies with the broker. This is the fundamental difference between margin trading and trading using conventional credit. In this, margin trading is similar to gambling, where the risk is usually limited by the size of the bet.
Margin trading in the foreign exchange market
In order to be able to conduct margin trading, the broker usually does not provide the trader with full ownership of the instruments traded or requires the execution of a special pledge agreement. The trader should not be able to prevent the forced closing of positions by the broker. Very often, the goods and/or proceeds from the sale are not transferred to the ownership of the merchant at all. Only his right to give an order to buy/sell is taken into account. As a rule, this is enough for transactions of a speculative nature, when the trader is not interested in the object of trade, but only in the opportunity to earn on the difference in price. Such trading without real delivery reduces the overhead costs of the speculator.
To quickly determine the intermediate profit, the price of a point is usually calculated - the change in the result with a minimum change in the quote (by one point). Subsequently, the price of a point is simply multiplied by the number of points for changing the quote.
What is margin trading
Alternative names for margin trading
There are other names for margin trading.
Trading with leverage
Leverage is the ratio between the amount of collateral and the borrowed capital allocated for it. Instead of indicating the size of the margin, the size of the leverage (lever) is indicated in the form of a coefficient that shows the ratio of the amount of collateral to the size of the loan provided. For example, a margin requirement of 20% corresponds to a leverage of 1:5 (one to five), and a margin requirement of 1% corresponds to a leverage of 1:100 (one to a hundred). In this case, the trader is said to receive 5 (or 100) times more funds for trading than the size of his security deposit.
Trade without delivery
This term emphasizes the specific feature of this type of operations, but does not give an idea of the real conditions of trade.
Profitability of margin trading
Profitability of margin trading for a trader:
Allows the merchant to multiply the volume of transactions without increasing the amount of required capital;
Allows the trader to conduct operations in capital-intensive markets even without having their own significant amounts of money;
Provides the technical ability to make a profit when prices fall.
Profitability of margin trading for a broker:
Additional income in the form of interest payments for the use of credit. Interest on a margin loan is often significantly higher than interest on bank deposits (it is more profitable for a broker to use funds for margin lending to clients than to place funds on bank deposits);
The client makes transactions for a larger volume, which leads to an increase in the broker's commission, including in the form of a spread with market maker brokers;
The broker expands the circle of potential clients by lowering the minimum threshold of capital sufficient to conduct transactions.
Risks of Margin Trading
The widespread use of margin trading increases the number and amount of transactions in the market. This leads to an increase in the rate of change in the result of a trading operation, to an increase in risks. An increase in the volume of transactions affects the nature of the market. A large number of chaotic small deals increases market liquidity, stabilizes it. On the other hand, if the trades are unidirectional, they can significantly increase price fluctuations.
The use of leverage proportionally increases the rate of income when the price moves towards an open position. However, if the price moves in the opposite direction, the rate of increase in losses increases to the same extent. This can lead to both very quick enrichment and a quick loss of capital. To find the optimal amount of leverage used, you need to pay attention to the average volatility of the quotes of the traded instrument. The higher the volatility, the more likely it is that the use of high leverage can lead to significant losses even from random market fluctuations.
Securities margin
For securities, the concept of margin is formed by three important components: margin loan, margin deposit and margin call. A margin loan is the amount of money an investor borrows from their broker to buy securities. A margin deposit is the amount of capital invested by an investor to purchase securities in a margin account. The margin requirement is the minimum amount that a client must deposit, usually expressed as a percentage of the current market value. The size of the margin deposit can be greater than or equal to the margin requirement.
Borrowing money to buy securities is called "buying on margin". When an investor borrows money from his broker to buy a stock, he must open a margin account with the broker, sign an appropriate agreement, and follow the broker's margin requirements. The credit on the account is secured by securities and the investor's money. In the event that the value of the share drops significantly, the investor will need to deposit additional funds into the account or sell part of the shares.
The Federal Reserve Board and self-regulatory organizations such as the New York Stock Exchange and FINRA set clear margin trading rules. In the US, Federal Regulation T allows investors to borrow up to 50 percent of the value of securities purchased on margin. The percentage of the purchase price of securities that the investor must pay is called the "initial margin". To buy securities on margin, an investor must first deposit a certain amount of cash or qualifying securities sufficient to meet the initial margin requirement for the purchase.
Under NYSE and FINRA rules, once an investor purchases shares on margin, a specified minimum amount of funds must be maintained in a client's margin account. These rules stipulate that investors must have funds on their account, the amount of which is at least 25 percent of the market value of the securities they own. This is called the "minimum margin" (maintenance margin). For market participants classified as Pattern Day Traders, the minimum margin requirement is $25,000 or 25% of the total market value of the securities, whichever is greater.
In the event that the margin account balance drops below minimum requirements, the broker has the right to liquidate the position or require the investor to increase the amount of collateral, i.e. depositing additional funds.
Brokers also set their own minimum margin requirements, the so-called. "local" requirements (house requirements). Some brokers offer softer lending conditions than others, which may also differ for different clients. Despite this, brokers are required to conduct their activities in accordance with the established requirements of regulatory organizations.
Not all securities can be purchased on margin. Buying on margin is a double-edged sword. As a result of such trading, you can either make big profits or suffer big losses. In a volatile market, investors who have borrowed from their brokers may need to deposit additional funds if the share price drops significantly (when buying on margin) or rises too high (when shorting a share). In such cases, brokers have the right to liquidate the position without even informing the investor. It is extremely important when shorting stocks and buying on margin to track positions in real time.
Commodity Margin
Commodity margin is the amount of funds invested by an investor to maintain a futures contract.
Margin requirements for futures or futures options are set by each exchange through a calculation algorithm known as "SPAN margining". SPAN (Standard Portfolio Analysis of Risk) assesses the overall risk of a portfolio by calculating the largest possible losses that the derivatives and physical instruments contained in this portfolio can cause within a certain time interval (usually one trading day). Valuation occurs by calculating profit and loss under different market conditions. The most important part of the SPAN methodology is the SPAN risk array, which is a set of numerical values that represent the increase and decrease in the value of a particular contract under various conditions. Each condition is called a risk scenario. The numerical value of each risk scenario reflects the increase and loss in the value of the contract with various combinations of price change (or underlying price), volatility, and as the expiration date approaches.
As with securities, there are initial and minimum margin requirements for commodities. These requirements are typically set by individual exchanges and are a percentage of the current value of a futures contract based on volatility and the price of the contract. The initial margin requirement for a futures contract is the amount of cash that must be deposited as collateral to open a position on the contract. In order to buy a futures contract, you need to meet the initial margin requirement, that is, transfer or already have the necessary amount of funds in your account.
The minimum margin for commodities is the amount of equity that must be maintained in an account in order to maintain a position in a futures contract. It represents the minimum level of the account balance, to which you can go down without the need to deposit additional funds. Market revaluation of commodity positions is made daily, and your account is adjusted for any resulting gains or losses. Since the prices of underlying commodities vary, there is a possibility that the value of an exchange commodity may drop to a level where your account balance is below the minimum margin requirements. If this happens, then the broker will most likely require to increase the amount of collateral (margin call). In this case, you will have to deposit additional funds to meet the margin requirement.
Initial Margin
The initial margin is the amount of money that must be on the client's trading account in order for him to be able to open a position. If there is less than the specified level on the account, the transaction with the futures will fail. This amount is indicated for one futures contract, it must be multiplied by their number in the transaction. The profit received from the change in the price of these contracts is added to the client's account balance at the end of the trading day. Similarly, the loss is deducted from it, but only until a certain level is reached.
About Initial Margin
Maintenance Margin
The maintenance margin is the very level of funds below which the trading account cannot fall if there are open positions on it. If, as a result of a change in the price on the exchange, the client suffers losses, the amount on his account may fall below the maintenance margin level. The same situation may arise if the margin levels were raised by the exchange, and there was not enough free money on the account to meet the new requirements. In this case, the client receives a call from the broker, who tells him about the lack of funds. Such a message from a broker is known among traders as a "margin call". There are two ways to resolve this situation - either add additional funds to the trading account, or close some of the existing positions in order to release some of the funds used as margin collateral. If the client has not taken any action within the established time frame, the broker can protect himself by independently closing client positions at the prices available on the market.
The concept of maintenance margin
Quoted Margin
The quoted margin is the difference between two levels of return, or between a benchmark index and a stock's price.
Additional margin
Additional margin refers to the obligation to deposit additional collateral.
A margin call is one option where brokers require additional cash or collateral when their securities are partially worthless.
Deposit margin
The deposit margin is an instrument used in trading with leverage on futures exchanges. The “leverage effect” is explained by the fact that in order to purchase a futures, it is required to have on the brokerage account only the amount corresponding to the collateral (GA), that is, 1-20% of the value of the underlying asset. This amount, which is frozen in your account when you open positions, is called the deposit margin. You can buy futures on it with a total value of 5-100 times the contents of your deposit account.
The Exchange has the right to change the margin rates (GA). It is interesting to note that this can affect the value of the contracts themselves on the exchange. Thus, an increase in the GO rate can lead to a decrease in the value of a futures contract. This happens due to a lack of funds to cover the deposit margin of small market participants. They begin to close positions, which leads to an avalanche of price reduction.
Variation margin
The variation margin is the amount paid/received by a bank or a trading participant on the stock exchange in connection with a change in the monetary obligation for one position as a result of its market adjustment.
For futures contracts, the variation margin is determined in the following order:
On the day of the conclusion of the futures contract - as the difference between the price at which this contract was concluded and the settlement price of the relevant futures contracts, established by the results of trading at the end of the day of its conclusion;
On the day between the day of conclusion and the day of termination of the futures contract - as the difference between the previous settlement price of the relevant futures contracts and the last settlement price;
On the date of termination of the futures contract - as the difference between the previous settlement price of the relevant futures contracts and the price at which this contract is terminated.
What is variation margin
Variation margin on the stock exchange is a concept that is related primarily to futures trading. In this case, it is called variational because of the constant change. It is calculated from the moment the position is opened. Let's say we bought a futures contract for the RTS index at a price of 150,100 points, and ten minutes later the price rose to 150,200 points. In this case, the size of the variation margin was 100 points, but, of course, this parameter is measured not in points, but in rubles (that is, approximately 67 rubles). If we do not take profit, but simply continue to keep the position open, then at the end of the trading session (that is, in the evening clearing), the variation margin goes into the accumulated income column and on the new trading day, the margin will begin to be accrued again.
Simply put, if we kept the position open during one trading session, then the profit and loss on the transaction will be equal to the margin value, and if the position was open for several sessions, then its total is the sum of the margin values for each day. A positive margin value indicates a profit on a given time interval (that is, we have correctly determined the direction of price movement), a negative one indicates losses on our trading account.
Definition of variation margin
Forward margin
The forward margin is the difference (discount or premium) between the exchange rate for transactions for cash (spot) and for transactions for the term. The forward margin is based on the interest parity rule, which states that the forward rate tends to be as many pips higher than the spot rate as the percentage rate of one currency country is lower than the interest rates of the other currency country, and vice versa.
Forward margins, like foreign exchange rates, are shown as a two-sided quote: the buyer's margin and the seller's margin. Since the bid rate (whether spot or forward) must always be lower than the bid rate (and the margin between the forward bid and offer rates must be greater than the margin between the spot bid and ask rates), in the event of a discount, a large figure is subtracted from the bid rate spot, and the smaller one is from the spot selling rate. In the case of a premium, on the contrary, a smaller figure is added to the spot buying rate, and a larger figure is added to the spot selling rate.
Forex margin
Bookmaker margin
The bookmaker is entity, whose activity is to accept bets from their customers on various events. In the case of a correctly predicted outcome, the player receives a win. In case of an incorrect amount of his bet, the office gets it. The business plan of the office provides for regular monitoring public opinion for various events, and therefore, regardless of the outcome of the matches, the bookmaker always has a guaranteed profit. The size of this profit is called the margin.
After registering with the bookmaker, the player has access to a rich list of sporting events, the so-called "line". The player's task is simple to choose the match he likes and correctly predict its outcome. And in the case of a correctly predicted outcome, the bookmaker replenishes the player's account with the amount of winnings. But the probability of outcomes of an event, as we know, is not the same.
About betting margin
Each bookmaker has its own margin. The larger the office, the more extensive its list of client-players, the lower the margin provides a good profit. Large offices that have already earned a name on the world market with a large turnover of funds are quite enough with 5%. In small offices, the margin ranges from 10% to 20%, which affects the attractiveness of the coefficients.
Bank margin
Bank margin is the difference between lending and deposit interest rates, between lending rates for individual borrowers, between interest rates on active and passive operations.
Interest margin
Interest margin - the difference between interest income and expenses of a commercial bank, between interest received and paid. It is the main source of the bank's profit and is designed to cover taxes, losses from speculative transactions and the so-called "burden" - the excess of interest-free income over interest-free expenses, as well as banking risks.
The size of the margin can be characterized by an absolute value in rubles and a number of financial ratios.
The absolute value of the margin can be calculated as the difference between the total amount of interest income and expenses of the bank, as well as between interest income on certain types active transactions and the percentage expense associated with the resources that are used for these transactions. For example, between interest payments on loans and interest expense on credit resources.
The dynamics of the absolute value of the interest margin is determined by several factors:
The volume of credit investments and other active operations that generate interest income;
Interest rate on active operations of the bank;
Interest rate on passive operations of the bank;
The difference between interest rates on active and passive operations (spread);
Share of interest-free loans in the bank's loan portfolio;
The share of risky active operations that generate interest income;
The ratio between own capital and attracted resources;
The structure of attracted resources;
Method of accrual and collection of interest;
The system of formation and accounting of income and expenses;
The rate of inflation.
There are differences between domestic and foreign standards for accounting for interest income and expenses of the bank, which affect the size of the interest margin.
There are two methods of accounting for transactions related to the allocation of the amounts of accrued interest on attracted and placed funds to the bank's expense and income accounts: the cash method and the "accrual" ("accumulation") method.
Net interest margin (NIM) is one of the key performance indicators of the bank, reflecting the effectiveness of active operations conducted by the bank. It is defined as the ratio of the difference between interest (fee) income and interest (fee) expenses to the bank's assets.
Bank profitabilityLoan margin
The loan margin is the difference between the cost of borrowed funds of the bank and the income from lending.
Credit margin
It's no secret that banks do not issue loans to their customers at cost. Banks increase the interest rate by a certain percentage depending on the degree of risk. This difference between the value of the goods, according to the loan agreement and the amount of the loan for the purchase of goods, is called the loan margin. Among all credit products, the highest credit margin is in card lending, slightly less in POS lending (the so-called store loans), and even less in consumer lending (loans issued in cash). The lowest loan margin in mortgage lending and car loans.
According to the existing financial law, the high risk associated with the provision of a loan must be accompanied by a high profitability of the operation (risk premium) and vice versa. Therefore, loans issued against liquid collateral (mortgage, car loans) are less risky and bring less income to the bank than consumer loans or card loans. The largest credit margin is in card lending, as it is the most risky; in fact, funds are provided as a loan against the borrower's turnover on the account without any collateral. The margin in such lending can be more than 10%. Approximately the same loan margin is included by banks in the cost of the loan when applying for consumer loans. This is due to the fact that loans are provided without collateral, which means that they are the most risky for the bank. Today, many banks that are actively involved in providing card and consumer loans alone have losses of 15-20%, so risks are included in the credit margin.
Recently, banks have slightly reduced the number of cash loans, reduced margins, and accordingly lowered rates. In return, the prospective borrowers received requirements for additional security for repayment of the loan: life insurance, the provision of a guarantee of one or two persons, mandatory employment. Both the first and the second reduce banking risks, hence margins and rates. Now the undisputed leaders in terms of high cost are card loans. As for mortgage loans, the margin on them is a few percent per annum, since they are less risky, the risk is almost zero. In car loans, the risk is reduced by collateral.
In car loans and mortgages, the most low level interest rates: about 13% in car loans, 14% in mortgage lending, and 21-25% in consumer lending. It is worth noting that not all profits go into the bankers' pockets. The margin should not be confused with the income that the bank receives from providing a loan, because due to high risks and losses, the income can be small, and the margin is high. The margin includes not only income, but also expenses, losses, required reserves and the cost of liabilities. AT various types lending uses different sources of liabilities that have different levels of risk, so the level of income is approximately the same even at different rates.
Solvency margin
Solvency margin is the solvency of the insurance company. It is calculated as the difference between the insurer's assets and its liabilities.
Assessment and control of the solvency of an insurance company is important for each insurance organization, and for the entire insurance market. Insurance supervisory authorities develop requirements for solvency and establish restrictive measures for those insurance companies that do not meet these requirements. One of the requirements for insurance organizations is the establishment of a minimum level of solvency margin, which is determined through the normative ratio of assets and liabilities of the insurer.
The normative ratio between the assets and liabilities of the insurer is understood as the value (solvency margin), within which the insurer must have equity capital free from any future liabilities, with the exception of the rights of claim of the founders, reduced by the value of intangible assets and receivables, the maturity of which has expired.
Developed and approved by the Ministry of Finance of the Russian Federation, the Regulation on the procedure for calculating by insurers the normative ratio of assets and insurance liabilities assumed by them establishes the methodology for calculating the solvency margin. Insurance companies in accordance with this Regulation, on the basis of accounting and reporting data, each quarter analyze their financial position, including calculating the solvency margin.
Solvency margin control is reduced to the calculation of the standard solvency margin and the actual solvency margin. It is considered that an insurance organization meets the solvency requirements if the actual solvency margin is greater than or equal to the normative solvency margin.
dumping margin
Dumping margin - in foreign trade activity, the ratio of the normal value of a product (the price of a similar or directly competing product in the state of the producer or exporter (union of foreign states) of the product in the normal course of trade in such a product, minus the export price of such a product, to its export price. In accordance with the Federal Law " On measures to protect economic interests Russian Federation in the implementation foreign trade goods” (Article 8), the dumping margin is determined on the basis of a comparison of the normal value of the product that is the subject of an anti-dumping investigation in the country of the exporter and the export price of the specified product. The minimum allowable margin is 2%.
Sources and links
Sources of texts, pictures and videos
wikipedia.org - the free encyclopedia Wikipedia
bizkiev.com- electronic journal about business
marketch.ru - information site about marketing
finansiko.ru - website about finance and earnings
dic.academic.ru - dictionaries and encyclopedias on Academician
prostobiz.ua - information site about business and finance
offisny.ru - information site to help the merchant
s-tigers.com.ua - site about trade and management
ru.bforex.com - site about trading in the forex market
probukmeker.ru - site about bookmakers and rates
interactivebrokers.com - stock trading website
emagnat.ru - business and finance magazine
signaliforex.ru - site about trading in the foreign exchange market
forexarena.ru - site about trading in the forex market
zhuk.net - site about company management
btimes.ru - magazine about business in Russia and abroad
banki.ru - a site about banks and banking
banki-delo.ru - website about banks and finance
programma-avtokreditovaniya.ru - information site about car loans
vedomosti.ru - information and news portal Vedomosti
finances-analysis.ru - website about financial analysis
moneytimes.ru - online magazine about finance
ngpedia.ru - electronic encyclopedia of oil and gas
iknowit.ru - online magazine How things work
futures101.ru - blog about futures and derivatives market
allfi.biz - information portal about investments
aup.ru - administrative and management portal
pravoteka.ru - legal aid portal Pravoteka
mrcmarkets.ru - Forex trading site
macd.ru - website about finance and stock quotes
afdanalyse.ru - site about methods financial analysis
lawmix.ru - information site about business
msfo-dipifr.ru - a site about IFRS and the Dilipr exam
Links to internet services
forexaw.com - information and analytical portal for financial markets
google.ru - the largest search engine in the world
video.google.com - search for videos on the Internet using Google
translate.google.ru - translator from the Google search engine
yandex.ru - the largest search engine in Russia
wordstat.yandex.ru - a service from Yandex that allows you to analyze search queries
video.yandex.ru - search for videos on the Internet through Yandex
images.yandex.ru - search for images through the Yandex service
Links to application programs
windows.microsoft.com - the site of Microsoft Corporation, which created the Windows operating system
office.microsoft.com - website of the corporation that created Microsoft Office
chrome.google.ru - a commonly used browser for working with sites
hyperionics.com - site of the creators of the HyperSnap screen capture program
getpaint.net - free software for working with images
etxt.ru - site of the creators of the eTXT program Anti-plagiarism
Article Creator
vk.com/panyt2008 - Vkontakte profile
odnoklassniki.ru/profile513850852201 - Odnoklassniki profile
facebook.com/profile.php?id=1849770813- facebook profile
twitter.com/Kollega7- Twitter profile
plus.google.com/u/0/ - Google+ profile
livejournal.com/profile?userid=72084588&t=I - blog in LiveJournal
The main rule of business activity is its profitability. That is, the produced goods must be sold at a price that justifies the costs associated with its production and sale. In this regard, it is extremely important to take into account such an indicator as the margin of goods, which shows the prospects of a particular business.
Marginality as a measure of business
Marginality (margin) is an economic term that shows the difference between production costs (cost) and the price that a consumer is willing to pay for a product. Margin often means the profit received from each sold product and the profitability ratio. It is expressed as a percentage, and the final price of the goods is 100%.
The profitability ratio is the main indicator of business success, so marginality is necessarily taken into account in the analysis entrepreneurial activity. After all, it does not matter how much the product costs and how much money is invested in its creation, if in the end the profitability only partially or barely covers the costs.
By correctly calculating the margin, you can assess how promising it is to produce a product, how long it will bring profit, and whether it is necessary to work with it at all.
This means that unprofitable goods and products that carry a small profit should not be produced.
Margin Calculation Formula
The way margin is calculated is different because the term can mean both net income and its ratio. But both methods are accurate in estimating the level of profitability of a new product, which allows us to accept correct solution regarding its production.
- where M is the margin;
- D - income;
- And - costs.
The margin ratio is calculated using a different formula:
- where k is the margin ratio;
- P - profit from one unit of goods;
- C - the selling price of a unit of goods.
The minimum coefficient is considered to be more than 20%, a good indicator is a coefficient of 30-40%.
That is, the higher the numbers, the more profitable the product will be, which means that the enterprise will quickly become profitable.
This formula is best used by enterprises planning to produce several varieties of products. The results will show which goods should be produced, and which should be abandoned, as well as determine the volume of production.
Gross margin
Profitability can be expressed in gross margin, but the European and Russian understanding of this term is different. So, in Russia, gross margin determines the amount of profit from goods sold, from which the costs of their creation, which are of a variable nature, are deducted, that is, it shows how the company takes into account and covers costs.
In European economic theory, the gross margin is calculated as a percentage of the profitability (after deducting the cost of production) that is obtained after the sale of the goods.
The difference between approaches is of fundamental importance - in Russia it is money, in Europe it is interest.
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
Let's 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 the 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 for himself “not to lose face”.
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 transformation of income into profit.
Margin is a relative indicator, it is expressed as a percentage.
Margin=Profit/Revenue*100.
The formula is quite simple, but in order not to get confused at the very beginning of studying 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 the 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. is created at the expense of 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 such an indicator 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 is used to form enterprises, and later 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 margin
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:
The ability to trade on financial markets without having sufficiently large 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 with a decrease in the market value of shares (in cases where the client borrows securities from a broker).
To trade in different currencies, it is not necessary to have funds in these currencies on your deposit.
The credit margin is directly related to work under loan agreements, it is defined as the difference between the amount indicated in the document and the amount actually given out.
Bank 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 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 both all the bank's assets, and only those involved in the work at the moment.
The margin is the difference between the assessed value of the collateral and the amount given 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 one and the same state, everything is 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 should be noted 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 differs little from the principle of using the term in everyday life.
How is margin different from trading margin?
There are a number of common misconceptions about the term "margin". Some of them have already been described, but we have not touched on the most common 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.
An illustrative example will help dispel any doubts that have arisen.
Suppose a company bought a product for 100 rubles, and sold it for 150.
Let's 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 it 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 in the stock markets
Exchange 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. The margin on the stock markets becomes a kind of collateral for 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 his broker, and only a small deposit is deducted 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.
Benefits of margin trading
By participating in margin transactions, investors receive a number of advantages:
Management of risks
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 - the investor's funds deposited;
SA - the value of the investor's shares and other securities accepted by the broker as collateral;
ZI - the investor's debt to the loan broker.
It is possible to carry out a trace only if the margin level is at least 50%, and if otherwise is not 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.
It is quite difficult to understand all the variety of the term "margin" in a short time. Unfortunately, in one article it is impossible to tell about all areas of its application. In the above reasoning, only the key points of its use are indicated.
