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

Often economic terms are ambiguous and confusing. The sense embedded in them is intuitively understandable, but to explain it in words that are generally available, without any preliminary preparation, rarely from anyone. But in this rule there are exceptions. Sometimes, the term is familiar, and with its in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.

Heard all, but few know

Take for example the term "margin". The word is simple and, one might say, ordinary. Very often it is present in the speech of people far from the economy or exchange trade.

Most believe that margin is the difference between any uniform indicators. In daily communication, the word is used in the process of discussing commercial profits.

Few people know absolutely all the implications of this rather broad concept.

However, a modern person needs to understand all the senses of the term, in order to "not hit his face in the dirt" at an unexpected moment.

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 activities of the enterprise contribute to the transformation of income into profit.

The margin is a relative indicator, expressed in percent.

Let's figure out how to calculate the margin:

Margin = Profit / Income * 100.

The formula is simple enough, but in order not to get confused at the very beginning of the study of the term, consider a simple example. The company operates with a margin of 30%, which means that in each of the ruble, 30 kopecks make up net profit, and the remaining 70 kopecks - expenses.

Gross Margin

In the analysis of the profitability of the enterprise, the main indicator of the result of the conducted activity is 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 for the production of these products.

Only the level of gross margin does not allow a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze certain aspects of its activities. This is an analytical indicator. He demonstrates how successful the company as a whole. Gross margins are created at the expense of the labor of employees of the enterprise spent for the production of products or services.

It is necessary to note one more nuance, which must be taken into account when calculating such an indicator as "gross margin". The formula can also take into account revenues outside the realization of the economic activities of the enterprise. These include the cancellation of receivables and payables, the provision of non-industrial services, income from the management of housing and communal services, and so on.

For the 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 also the development funds.

In economic analysis, there is another concept similar to the gross margin, it is called the "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 expect as many as four different types of margin:

• The credit margin is directly related to the work under the loan agreements, is defined as the difference between the amount specified in the document and actually issued in the hands.

• Banking margin is calculated as the difference between interest rates on loans and deposits.

• Net interest margin is the key indicator of the effectiveness of banking activities. The formula for calculating it looks like the ratio of the difference between commission income and expenses for all operations to all of the bank's assets. Net margin can be calculated on the basis of both all the bank's assets, and only from those involved in the work at the moment.

• Guarantee margin is the difference between the estimated value of collateral and the amount given to the borrower.

Such different values

Of course, the economy does not like discrepancies, but in the case of understanding the meaning of the term "margin" this happens. Of course, in the territory of the same state, all analytical reports fully correspond to 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 the profit from the sale of goods to its selling price. In this case, the margin in percent is expressed. Apply this value for a relative assessment of the effectiveness of the company's trading activities. It is worth noting that the European attitude to the calculation of margin fully corresponds to the basics of economic theory, which was written above.

In Russia, this term is understood as the net profit. That is, making calculations, simply substitute one term for another. For the majority of our compatriots, margin is the difference between the proceeds from the sale of goods and the overhead costs for its production (purchase), delivery, sale. It is expressed in rubles or other currency convenient for settlement. You can add that the attitude to the margin among professionals is slightly different from the principle of the term in use.

What is the difference between margins and trading margins?

Regarding the term "margin", there are a number of common misconceptions. Some of them have already been described, but the most common we have not yet touched.

Most often, the margin is confused with the trade margins. To determine the difference between them is very simple. The mark-up is the ratio of profit to cost. We already wrote about how to calculate the margin.

A clear example will help to dispel the doubts that have arisen.

Suppose a company bought a product for 100 rubles, and sold it for 150 rubles.

We calculate the trading margin: (150-100) / 100 = 0.5. The calculation showed that the mark-up 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 its competent interpretation. It is a difficult job that requires
Great experience.

Why is it so important?

Financial indicators are rather arbitrary. They are influenced by assessment methods, accounting principles, conditions in which the enterprise operates, changes in the purchasing power of a currency, etc. Therefore, the result of calculations can not be immediately interpreted as "bad" or "good". Always perform additional analysis.

Margin in the stock markets

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

The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the full amount of the contract in full, he uses the borrowed funds of his broker, and from his own account only a small margin is debited. If the outcome of the transaction conducted by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, profits are credited to the same deposit.

Marginal transactions provide an opportunity not only to make purchases at the expense of borrowed funds from a broker. The client can also sell borrowed securities. In this case, the debt will be repaid with the same securities, but the purchase takes place a little later.

Each broker gives its investors the right to make margin transactions themselves. At any time, he may refuse to provide such a service.

Advantages of margin trading

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

• The ability to trade in financial markets without having large amounts on the account. This makes margin trading in a highly profitable business. However, participating in operations, do not forget that the level of risk is also not small.

• The opportunity to receive additional income while reducing the market value of shares (in cases where the client holds securities from a broker).

• To trade in different currencies, it is not necessary to have funds on these deposits in these currencies.

Management of risks

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

YpM = (DC + CA-ZI) / (DC + CA), where:

DC - investor's money deposited on the deposit;

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

ZI - the debt of the investor before the broker for the loan.

The investigation is possible only if the margin level is at least 50%, and if the other is not stipulated in the agreement with the client. According to general rules, a broker can not enter into transactions that will lead to a lower margin level below the established limit.

In addition to this requirement, a number of conditions are put forward for conducting marginal transactions in the stock markets, designed to streamline and secure the relations of the broker and investor. The maximum amount of the loss, the terms of the debt repayment, the terms of the contract change and much more are stipulated.

To understand all the variety of the term "margin" in a short time is quite difficult. Unfortunately, in one article it is impossible to tell about all spheres of its application. In the above arguments, only the key points of its use are indicated.