Margin

Financial Dictionary -> Investing -> Margin

In business and finance there are many types of margin. It simply means the distance between one financial point and another financial point; usually the higher the margin, the better. The most common type of margin revolves around profit and is known as the 'margin of safety' or simply 'profit margin'.

In a business you have direct and indirect costs. These can be things like machinery, raw materials, wages, production costs etc. The aim of all business is to make money. A simple example would be a business that makes and sells tables. Whenever a table is sold the business brings in revenue.

When the money coming in exactly covers the costs, this is known as the breakeven point, because your costs are now even to your revenue. Once the revenue begins to surpass the costs, this is called profit, and the distance between the breakeven point and the profit is known as the margin of safety. This is because in theory you are financially safe and making a profit until revenue decreases and you hit the breakeven point all fall back bellow it. The process of analyzing this margin is called 'break even analysis'.

A very similar calculation to find out the net profit margin is shown below:

Net Profit / New Revenue = Net Profit Margin

Basically the higher the profit margin or margin of safety of a company, the more efficient they are at turning revenue in to profit. In the planning stages of a business if you can predict that there will be a high margin of profit then it is a very viable business idea. This generally means that costs are low but you can sell the products at a high price. The designer clothing industry has huge profit margins.

The term margin is also used to refer to a brokerage account used to buy financial securities.