Market margin. What is margin in simple words with examples
Today, the term "margin" is widely used in the exchange, trading, and banking. Its main idea is to indicate the difference between the selling price and the cost per unit of product, which can be expressed either as profit per unit of production or as a percentage of the selling price (profitability ratio). What is marginality? In other words, this is the return on sales. And the coefficient presented above serves as the main indicator, because it determines the profitability of the enterprise as a whole.
What is the commercial meaning and significance of this term? The higher the ratio, the more profitable the company. This means that the success of a particular business structure is determined by its high margins. That is why it is advisable to base all decisions in the field of marketing strategies, which, as a rule, are made by managers, on the analysis of the indicator in question.
What is marginality? It should be remembered: margin also serves as a key factor in predicting the profitability of potential clients, development pricing policy and, of course, the profitability of marketing in general. It is important to note that in Russia marginal profit is often called gross profit. In any case, it represents the difference between the profit from the sale of the product (without excise taxes and VAT) and the costs of the production process. Coverage amount is the second name of the concept being studied. It is defined as the portion of revenue that goes directly to generating profit and covering costs. Thus, the main idea is to increase the profit of the enterprise in direct proportion to the rate of recovery of production costs.
To begin with, it should be noted that the calculation of marginal profit is made per unit of manufactured and sold product. It is he who makes it clear whether we should expect an increase in profit due to the release of the next product unit. The marginal profit indicator is not a characteristic of the economic structure as a whole, but it allows one to identify the most profitable (and most unprofitable) types of product in relation to the possible profit from them. Thus, marginal profit depends on price and variable production costs. To achieve the maximum indicator, you should either increase the markup on products or increase sales volumes.
So, the marginality of a product can be calculated by using the following formula: MR = TR - TVC (TR is the total profit from the sale of the product; TVC is variable costs). For example, the production volume is 100 units of goods, and the price of each of them is 1000 rubles. In turn, variable costs, including raw materials, wages to employees and transportation, amount to 50,000 rubles. Then MR = 100 * 1000 – 50,000 = 50,000 rubles.
To calculate additional revenue, you need to apply another formula: MR = TR(V+1) - TR(V) (TR(V) – profit from sales of products with a production volume of this moment; TR(V+1) – profit in case of increasing output by one unit of goods).
Marginal profit and break-even point
It is important to note that the margin (formula presented above) is calculated in accordance with the division of fixed and variable costs in the pricing process. Fixed costs are those that would remain the same even if there was zero output. This should include rent, some tax payments, salaries of employees in the accounting department, human resources department, managers and maintenance personnel, as well as repayment of loans and borrowings.
The situation in which the contribution to the covering is equal to the amount of fixed costs is called the break-even point.
At the break-even point, the volume of sales of goods is such that the company has the opportunity to fully recoup the costs of producing the product without making a profit. In the figure above, the break-even point corresponds to 20 units of product. Thus, the income line crosses the cost line, and the profit line crosses the origin and moves into a zone where all values are positive. In turn, the marginal profit line crosses the line of fixed production costs.
Methods for increasing marginal profit
The question of what marginality is and how to calculate it is discussed in detail. But how to increase marginal profit and is it a priori possible? Methods for raising the MR level are mostly similar to methods for increasing the overall level of income or direct profit. These include participation in tenders of various types, increasing production output to distribute fixed costs between large volumes of product, studying new market sectors, optimizing the use of raw materials, searching for the cheapest sources of raw materials, as well as an innovative advertising policy. It should be noted that, in general, the fundamentals of the marketing industry do not change. But the advertising industry is constantly undergoing some changes, but the main reason for its existence and application remains the same.
No business will survive long if it does not generate enough income for its owner to at least stay afloat.
In order not to lose your money, you need to assess possible risks and expected margins both before starting a new business and periodically during its implementation. The more often you do this, the more objective your understanding of monetary growth will be and, accordingly, the more successful your activities will be.
Margin - what is it? This term is widely used in various financial fields. Moreover, when using it, investors, bankers, businessmen and traders mean different things.
How not to get confused in such diversity? Let's figure out the value and nuances of this concept.
Margin - in simple words
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, rates valuable papers, interest rates and other indicators. This difference can be expressed as absolute values(for example, ruble, dollar, euro), and as a percentage (%).
In simple words, margin in trade is the difference between the cost of a product (the cost of its manufacture or purchase price) and its final (selling) price. Those. this is some kind of performance indicator economic activity a specific 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%,
where P is profit, which is determined by the formula: P = selling price - cost;
D - income (selling price).
In industry, the margin rate is 20%, and in trade - 30%.
However, I would like to note that the margin in our and Western understanding is very different. For European colleagues, it is the ratio of profit from the sale of a product to its selling price. For our calculations, we use net profit, namely (selling price - cost).
Kinds
- Gross (gross) margin. Gross margin is the percentage of a company's total revenue that it retains after incurring direct costs associated with the production of its goods and services.
- Profit margin.
- Variation margin.
- Net interest margin (bank interest margin).
- Guarantee margin.
- Credit margin.
- Bank margin.
- Front and back margin.
Gross margin is calculated using the following formula:
VM = (VP/OP)*100%,
where VP is gross profit, which is defined as:
VP = OP - SS,
where OP is sales volume (revenue);
CC - cost of goods sold.
Thus, the higher the company’s VM indicator, the more funds the company saves for each ruble of sales to service its other expenses and obligations.
The ratio of VM to the amount of revenue from the sale of goods is called the gross margin ratio.
This indicator determines the profitability of sales, i.e. share of profit in the company's total revenue.
Variation margin is the amount paid/received by a bank or a participant in trading on an exchange in connection with a change in the monetary obligation for one position as a result of its adjustment by the market. This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate margin. You can easily find them on the Internet using this search query.
Net interest margin is one of the key indicators for assessing the efficiency of banking activities. NIM is defined as the ratio of the difference between interest (commission) income and interest (commission) expenses to the assets of a financial organization.
The formula for calculating net interest margin is as follows:
NPM = (DP - RP)/BP,
where DP is interest (commission) income;
RP - interest (commission) expenses;
AD - income-generating assets.
As a rule, NIM indicators of financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial organization when opening an account with it.
The guarantee margin is the difference between the value of the collateral and the amount of the loan issued.
Credit margin is the difference between the estimated value of a product and the amount of credit (loan) issued by a financial institution for the purchase of this product.
Bank margin is the difference between lending and deposit interest rates, lending rates for individual borrowers, or interest rates on active and passive transactions. The BM indicator is influenced by the terms of loans issued, the shelf life of deposits (deposits), as well as interest on these loans or deposits.
These two terms should be considered together because they are connected. Front margin is the profit from markups, and back margin is the profit received by the company from discounts, promotions and bonuses.
Margin and profit
Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice these concepts are different from each other. Margin is the difference between indicators, and profit is the final financial result.The profit calculation formula is given below:
Profit = B – SP – CI – UZ – PU + PP – VR + VD – PR + PD,
where B is revenue; SP - cost of production;
CI - commercial costs;
LM - management costs;
PU - interest paid;
PP - interest received;
VR - unrealized expenses;
UD - unrealized income;
PR - other expenses;
PD - other income.
After this, income tax is charged on the resulting value. And after deducting this tax, you get net profit. To summarize all of the above, we can say that when calculating the margin, only one type of cost is taken into account - variable costs, which are included in the cost of production.
And when calculating profit, all expenses and income that the company incurs in the production of its products (or provision of services) are taken into account.
Margin and markup
Very often, margin is mistakenly confused with trading margin. Markup is the ratio of profit from the sale of a product to its cost. To avoid any more confusion, remember one simple rule:
Margin is the ratio of profit to price, and markup is the ratio of profit to cost.
Let's try to determine the difference using a specific example. Suppose you purchased a product for 1000 rubles and sold it for 1500 rubles. Those. the size of the markup in our case was:
H = (1500-1000)/1000 * 100% = 50%
Now let's determine the margin size:
M = (1500-1000)/1500 * 100% = 33.3%
For clarity, the relationship between margin and markup indicators is shown in the table below:
The trading margin is very often more than 100% (200, 300, 500 and even 1000%), but the margin cannot exceed 100%.
As you can already understand, margin is an analytical tool for assessing the performance of a company (with the exception of stock trading). And before increasing production or introducing a new product or service to the market, it is necessary to estimate the initial value of the margin.
If you increase the selling price of a product, but the margin does not increase, then this only means that the cost of its production is also increasing. And with such dynamics, there is a risk of being at a loss.
Source: "zakupkihelp.ru"
What is margin and how is it related to profitability?
Margin is one of the determining factors in pricing. Meanwhile, not every aspiring entrepreneur can explain the meaning of this word. Let's try to rectify the situation.
The concept of “margin” is used by specialists from all spheres of the economy. This is usually a relative value that is an indicator of profitability. In trade, insurance, and banking, margin has its own specifics.
How to calculate
Economists understand margin as the difference between the cost of a product and its selling price. It serves as a reflection of business performance, that is, an indicator of how successfully a company converts revenues into profits.
Margin is a relative value expressed as a percentage.
The margin calculation formula is as follows:Profit/Revenue*100 = Margin
Let's give a simple example. It is known that the enterprise margin is 25%. From this we can conclude that every ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks relate to expenses.
What is gross margin
When assessing the profitability of a company, analysts pay attention to gross margin - one of the main indicators of a company's performance. Gross margin is determined by subtracting the cost of manufacturing a product from the revenue from its sale.
Knowing only the size of the gross margin, one cannot draw conclusions about the financial condition of the enterprise or evaluate a specific aspect of its activities. But using this indicator you can calculate other, no less important ones. In addition, gross margin, being an analytical indicator, gives an idea of the company's efficiency.
The formation of gross margin occurs through the production of goods or provision of services by the company's employees. It is based on work.
It is important to note that the formula for calculating gross margin takes into account income that does not result from the sale of goods or the provision of services.
Non-operating income is the result of:
- writing off debts (receivables/creditors);
- measures to organize housing and communal services;
- provision of non-industrial services.
Once you know the gross margin, you can also know the net profit. Gross margin also serves as the basis for the formation of development funds. When talking about financial results, economists pay tribute to the profit margin, which is an indicator of the profitability of sales. Profit margin is the percentage of profit in a business's total capital or revenue.
In banking
Analysis of the activities of banks and the sources of their profits involves the calculation of four margin options. Let's look at each of them:
- Bank margin, that is, the difference between loan and deposit rates.
- Credit margin, or the difference between the amount fixed in the contract and the amount actually issued to the client.
- Guarantee margin is the difference between the value of the collateral and the amount of the loan issued.
- Net interest margin (NIM) is one of the main indicators of the success of a banking institution.
To calculate it, use the following formula:
NIM = (Fees and Fees) / Assets
When calculating the net interest margin, all assets without exception can be taken into account or only those that are currently in use (generating income).
Margin and trading margin: what is the difference
Oddly enough, not everyone sees the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let’s remember the formula for calculating margin:
Profit/Revenue*100 = Margin or (Sale Price – Cost)/Revenue*100 = Margin
As for the formula for calculating the markup, it looks like this: (Selling price – Cost)/Cost*100 = Trade markupFor clarity, let's give a simple example. The product is purchased by the company for 200 rubles and sold for 250.
So, here is what the margin will be in this case: (250 – 200)/250*100 = 20%.
But what will be the trade margin: (250 – 200)/200*100 = 25%.
The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what is received and what is given. However, margin is not the only parameter used to determine efficiency. By calculating the margin, you can find out other important indicators of the enterprise’s economic activity.
Source: "temabiz.com"
Margin calculation
Margin is a special term that reflects the difference between indicators such as income from sold products (services) and variable costs. This term is necessary for high-quality and efficient business. If a manager is not familiar with or does not use margin, then it will be really difficult for him to make marketing decisions.
The main purpose for which the term “margin” is used is to calculate sales growth indicators and determine the direction of product promotion.
Gross profit is indispensable in many areas of economic activity, especially in insurance, trading and banking practices.
Gross profit represents the main success factor for the following processes:
- Calculations of return on marketing costs.
- Income forecasting.
- Analysis of how profitable a business is.
- Pricing.
Marginality (TRm) = Tr / Tvc,
where TRm is marginal profit
Tr - revenue (total revenue)
Tvc - variable costs (total variable cost)
This calculation will be really necessary in the case when the company’s assortment consists of several types of different products. Using the above formula, you can determine which type of goods brings the greatest profit for the company, thereby not wasting financial resources on the production of unprofitable goods.
Marginal profit indicators will also help you decide in what volumes each product should be produced. This issue is especially relevant if the company uses the same technologies and materials to produce its product range. Using margin, you can determine how profitable it is to sell products.To calculate the profitability indicators of the entire company as a whole, you should calculate the marginality ratio. It is worth noting that the higher the coefficient, the more profitable the company is considered. Thus, the success of entrepreneurial activity can be determined by a high level of marginality.
Before making any decision in the field of marketing strategies, top managers of companies must conduct the above analysis in order to achieve the desired results.
Gross
The term "gross margin" refers to the overall return on sales as a percentage, minus the price of products sold, divided by total revenue.
It is worth considering that in the European and Russian accounting systems it is understood differently:
- Gross margin for Russia.
- Gross margin for Europe.
This term is defined as the difference between the amount of revenue from goods sold and variable costs for the manufacture of products. This is a calculated indicator that reflects the company’s contribution to solving issues of not only generating income, but also covering costs.
Gross margin is used in many calculations, but you cannot judge the financial health of a company using the value itself.
Gross margin represents the percentage of total revenue generated by sales. The income that the enterprise leaves after the direct costs incurred for the production of sold products is taken into account. Thus, the fundamental difference between accounting systems is that in Europe the gross mark is calculated as a percentage, while in Russia it is understood specifically as profit.
Free
Most often, this term can be found when studying the basics of Forex trading. In such a context, the meaning of the concept in question comes down to the difference between funds (assets) and collateral (liabilities).
In general, the following formula is used to calculate the value of the free margin indicator:
Free margin = Equality - Margin
Simply put, free margin is the total amount of funds that are in the account, but are not related to obligations. These are the funds that the player can freely dispose of.
In the event, for example, that the player's funds are not subject to any obligations, the entire amount in the account will represent free margin. These funds can be used in the process of carrying out various operations, for example, to open positions.
An example of calculating free margin. Let's assume that the player has $7,000 in his account. At the same time, he has several positions open with a total amount of $400, bringing in $100. arrived. In accordance with the above formula, we will carry out a series of sequential calculations:
Equity = $7,000 + 100 USD = 7.100 USD
Free margin = 7.100 USD – 400 = 6.700 USD
In this case, the value of the free margin indicator will be 6,700 USD.
Clean
Net margin is a relative analogue of net profit. The meaning of this term is expressed as a percentage, and this is the key difference between net margin and net profit.
In English-language sources this definition corresponds to the term “net profit margin percentage”, and in the Russian-language literature you can find an absolutely similar definition of this term - net profit margin.
As an absolute indicator reflecting the efficiency of the enterprise, the net profit indicator is used. It is expressed in terms of value. At the same time, net margin is relative indicator, which is used to compare the values of net profit and income.
You can make up simple diagram, which will be useful to constantly keep in mind in order to clearly understand the essence and differences of similar terms:
- Net profit is an absolute indicator expressed in monetary terms.
- Net margin is a relative indicator expressed as a percentage.
You can often come across such a term as return of sales (ROS). This definition is used interchangeably with the term net margin.
For a more clear understanding of the essence of the analyzed indicator, let’s consider a simple example. It will be necessary to perform only one action, but for a general understanding of the essence of the term this will be enough.So, let’s assume that the company, based on the results of its activities in the reporting period, has the following indicators: Net profit = 1,000 cu, Income = 15,000 cu.
In this case, to calculate the net margin indicator, you must perform the following action:
The key indicator that influences the value of the final net margin indicator is the industry in which the enterprise operates:
- Thus, for firms operating in the retail industry, the net margin will generally be very low.
- At the same time, for large enterprises of the industrial complex, net margin indicators will be very high.
As basic indicators for comparing actual net margin indicators, it is customary to use either the values of a similar indicator for previous periods, or the same indicator for enterprises operating in the same industry.
Interest
The concept of interest margin is widely used in the banking sector as one of the key indicators for assessing the success of commercial activities. This indicator serves as the main source of profit for almost any banking institution. The exception is banks whose main activities are related to non-interest income transactions.
In the simplest sense, the essence of interest margin can be illustrated by the following formula:
Interest margin = amount of interest income - amount of interest expenses
Thus, the interest margin reflects the balance formed when comparing interest received and interest paid.
The value of the interest margin indicator can be presented in both absolute and relative terms:
- In the first case we're talking about about presentation in monetary terms,
- in the second – in the values of the coefficients.
Among this kind of coefficients, it is customary to distinguish indicators characterizing the actual level, as well as the level determined as sufficient for the bank at a particular point in time. Thus, the interest margin can act as a guideline for further development, or as a standard to which it is necessary to focus in the process of operational activities.
In the process of calculating the interest margin indicator, it is necessary to pay attention to the main purpose of the analysis. It is the goal that will determine the quantities used in the calculation.
So, for example, to calculate the actual level of interest margin, it is necessary to present the size of the actual margin for a specific period in the numerator. This part of the expression will be a constant. However, if we are talking about the denominator, it can express different indicators.The average balance of all bank assets for a specific period, the balance of assets that generate income, the average balance of debt on loans - which indicator to choose for calculation depends solely on the purposes of the analysis.
Accordingly, if you are given a value for an interest margin indicator, analyze the context in which this indicator is applied, and only then proceed to analyze the meaning of the indicator itself. Otherwise, you may come to erroneous conclusions.
Source: "marketing-now.ru"
Gross profit
Margin (gross profit, return on sales) is the difference between the selling price of a commodity unit and the cost of a commodity unit. This difference is usually expressed as profit per unit or as a percentage of the selling price (profitability ratio).
In general, margin is a term used in trading, exchange, insurance and banking practice to denote the difference between two indicators:
- profitability ratio,
- profit per unit of production.
When marketers and economists talk about margins, it is important to keep in mind the difference between profitability ratio and profit per unit on sales.
This difference is easy to reconcile, and managers must be able to switch from one to the other.
The marginality ratio (profitability ratio) is calculated using the formula:
Margin ratio (KP) = PE / OC,
where KP is the profitability ratio in %;
PE – profit per unit of production;
OTs – selling price per unit of production.
Profit per unit:
Margin (PE) = OT - SS,
where PE is profit per unit of production;
OTs – selling price;
CC – cost per unit of production.
Managers need to know margins to make almost any marketing decision. Margin is a key factor in pricing, return on marketing spend, profitability forecasting, and customer profitability analysis.
In Russia
In Russia, gross margin is understood as the difference between an enterprise’s revenue from sales of products and variable costs:
Gross margin = BP – Zper,
where VR is revenue from product sales;
Zper – variable costs for manufacturing products.
Gross margin is a calculated indicator that does not in itself characterize the financial condition of the enterprise or any aspect of it, but is used in the calculation of a number of financial indicators. The amount of marginal income shows the enterprise’s contribution to covering fixed costs and making a profit.
In Europe
There are discrepancies in the understanding of gross margin that exists 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 is the percentage of total sales revenue that a company retains after incurring direct costs associated with the production of the goods and services sold by the company.
Gross margin is calculated as a percentage. These differences are fundamental to the accounting system. Thus, Europeans calculate gross margin as a percentage, while in Russia “margin” is understood as profit.
The average marginal income is the difference between the product price and average variable costs. The average marginal income reflects the contribution of a unit of product to covering fixed costs and making a profit.
The rate of marginal income is the share of the marginal income in sales revenue or (for an individual product) the share of the average marginal income in the price of the product.
The use of these indicators helps to quickly solve some problems, for example, determining the amount of profit at various output volumes. The amount of marginal income shows the enterprise’s contribution to covering fixed costs and making a profit.
Source: "marketch.ru"
Margin on Forex
Margin is an amount that acts as insurance coverage for a position opened using borrowed money broker. In other areas of economics, this term is analogous to the concept of profit, since it is based on the French word “marge”, meaning a difference or advantage in something.
At the same time, the literal translation English word“margin” sounds like a reserve, edge or limit, which is closer to the concept of margin in Forex.
The funds required to secure the collateral are not debited in full, but are automatically “frozen” in the trader’s current account at the time the transaction is opened. For example, you have $1,000 in your trading account and you open a trade that requires $300 in collateral.
After opening an order, the account balance will still be the same $1000 (not taking into account the current profit or loss), but $300 of it will become unavailable for opening other positions. Blocked funds become available only after the current transaction is closed. If the trader’s position turns out to be unprofitable, the margin amount is transferred to the broker as a guarantee of securing the issued loan funds.
There is the concept of free margin, which means the difference between the size of collateral obligations and the deposit balance. If, as a result of losses, the free margin value decreases and reaches a critical value, then the broker forcibly closes current positions.
You can find out the current account status, as well as the value of the deposit and available funds in the special information field of the MetaTrader trading terminal, which is formed when opening a position. It displays data on the initial and current balance, margin, free margin and its level as a percentage.
Margin trading
Forex trading has not always been accessible to a wide audience. The rapid growth in the number of brokerage companies stimulated competition between them, as a result of which each of them sought to offer the most favorable conditions.
Leverage has become the most powerful and effective tool for attracting clients. Now you don’t need to have huge amounts of money in your trading account to open a trade. To open an order, you only need to provide sufficient collateral, which can be hundreds or even thousands of times less than the value of the position itself, and the brokerage company will provide the remaining funds.
Thanks to this, capital requirements for traders have been reduced, which has allowed dealing centers to attract a huge number of clients.
Trading using leverage (margin trading) has become widespread. At the same time, the size of the dealing leverage increases every year, which further lowers the starting bar for a trader.A few years ago, a leverage of 1:100 was considered high, but now many companies use a value of 1:1000, and this is not something outstanding.
But how does margin relate to leverage? Margin can be called a direct expression of the conditions for obtaining a loan to open a transaction. The higher the leverage, the lower the collateral value will be. Conversely, a small leverage will require a larger margin to open an order.
Here it is worth paying attention to the risks that arise when using margin trading. The concept of risk is a voluminous topic that requires more detailed consideration in a separate article. In short, margin and leverage are a bit of a draw for many traders.
For beginners, the opportunity to work with an amount hundreds or thousands of times more than they have at their disposal is associated only with obtaining significantly greater profits. But often this understanding misses the most important aspect - a big profit can turn into an equally big loss if the market goes against the trader.
The small amount of collateral required by the broker becomes a kind of key that opens the door to a world of big risks. In the absence of strict money management rules, such a gift, presented in the form of a small margin and the prospect of high profits, most often results in a complete loss of the trader’s funds.
Calculation
When using high leverage, it is especially important to correctly distribute funds in the account. You can open just one transaction with the maximum available volume, using almost all the funds available on the deposit, and, even if you are right in choosing the direction of price movement, you will still lose your money.
Often, before starting a long movement in one direction, the price can move quite significantly in the opposite direction.
And if the free funds remaining after the formation of the collateral are not enough to withstand short-term losses, then your transaction will automatically close, and after some time you will watch from the outside as the price turns around and goes in your direction.
As mentioned above, the size of the margin depends on the leverage. At the same time, to accurately calculate the value of the collateral, two more parameters will be required - the transaction volume and the exchange rate of the currency pair. General formula for the calculation looks like this (remember that mathematical operations in this case are performed sequentially, from left to right):
Margin = Transaction Volume / Leverage * Rate
It is worth noting that the volume in this formula must be indicated in units, not lots. For example, you want to purchase 0.5 standard lot of the EUR/USD pair at a price of 1.24 with a leverage of 1:1000.
We get the following calculation: 50,000 / 1000 * 1.24 = $62. With a leverage of 1:500, the collateral amount will be $124.
Many large brokerage companies provide special services and applications with which you can quickly and easily calculate a whole range of values, including margin. But even if your broker does not have similar products, then calculating the margin using the above formula will not be difficult.Lowering the bar for entering the Forex market through margin trading has opened the doors to this financial world for a huge number of traders around the world. By leaving a very small amount as collateral, you can manage significant funds and achieve amazing results. But we should not forget about the risks that are an integral part of such opportunities.
You can give an analogy with the all-familiar attraction, where you need to hit a special platform with a hammer as hard as possible. You may remember this better than various numbers. In pursuit of the desire to get the best result possible, you pay a small amount and get a big hammer, but whether you hit it exactly in the center of the site or also exactly on your feet is up to you.
If you had a smaller hammer, it wouldn't hurt as much if you missed, but if you succeeded, the results would also be smaller? Therefore, determine for yourself the relationship between risk and reward, monitor your margins, soberly assess your skills and use all the opportunities that are available to you wisely, without going from one extreme to another.
In the economic sphere, there are many concepts that Everyday life rarely meets people. Sometimes we come across them while listening to economic news or reading a newspaper, but we only imagine the general meaning. If you have just started your entrepreneurial activity, you will have to familiarize yourself with them in more detail in order to correctly draw up a business plan and easily understand what your partners are talking about. One such term is the word margin.
In trade "Margin" expressed as the ratio of sales proceeds to the cost of the product sold. This is a percentage indicator, it shows your profit when selling. Net profit is calculated based on margin indicators. It’s very easy to find out the margin indicator
Margin=Profit/Sales Price * 100%
For example, you bought a product for 80 rubles, and the selling price was 100. The profit is 20 rubles. Let's do the calculation
20/100*100%=20%.
The margin was 20%. If you have to work with European colleagues, it is worth considering that in the West the margin is calculated differently than in our country. The formula is the same, but net income is used instead of sales proceeds.
This word is widespread not only in trade, but also on stock exchanges and among bankers. In these industries, it means the difference in securities prices and the bank’s net profit, the difference in interest rates on deposits and loans. For various sectors of the economy, there are different types margin.
Margin at the enterprise
The term gross margin is used in businesses. It means the difference between profit and variable costs. It is used to calculate net income. Variable costs include equipment maintenance costs, labor costs, and utilities. If we are talking about production, then gross margin is the product of labor. It also includes non-operating services that are profitable from outside. This is an identifier of a company's profitability. From it various monetary bases are formed to expand and improve production.
Margin in banking
Credit margin– the difference between the commodity value and the amount allocated by the bank for its purchase. For example, you take out a table worth 1000 rubles on credit for a year. After a year, you pay back 1,500 rubles in total with interest. Based on the formula above, the margin on your loan for the bank will be 33%. Credit margin indicators for the bank as a whole affect the interest rate on loans.
Banking– the difference between the interest rate coefficients on deposits and issued loans. The higher the interest rate on loans and the lower the interest rate on deposits, the greater the bank margin.
Net interest– the difference between interest income and expense in a bank in relation to its assets. In other words, we subtract the bank's expenses (paid loans) from income (profit on deposits) and divide by the amount of deposits. This indicator is the main one when calculating the bank’s profitability. It defines stability and is freely available to interested investors.
Warranty– the difference between the probable value of the collateral and the loan issued against it. Determines the level of profitability in case of non-return of money.
Margin on the exchange
Among traders participating in exchange trading, the concept of variation margin is widespread. This is the difference between the prices of the purchased futures in the morning and in the evening. A trader buys futures for a certain amount in the morning at the beginning of trading, and in the evening, when trading closes, the morning price is compared with the evening price. If the price has increased, the margin is positive; if it has decreased, the margin is negative. It is taken into account daily. If analysis is needed over several days, the indicators are added up and the average value is found.
The difference between margin and net income
Indicators such as margin and net income are often confused. To feel the difference, you should first understand that margin is the difference between the values of purchased and sold goods, and net income is the amount from sales minus consumables: rent, equipment maintenance, utility bills, wages, etc. If we subtract the tax from the resulting amount, we get the concept of net profit.
Margin trading is a method of buying and selling futures using borrowed funds against certain collateral - margin.
The difference between margin and “cheat”
The difference between these concepts is that the margin is the difference between the sales profit and the cost of the goods sold, and the markup is the profit and the cost of the purchase.
In conclusion, I would like to say that the concept of margin is very common in the economic sphere, but depending on the specific case, it affects different indicators of the profitability of an enterprise, bank or stock exchange.
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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 expenses of the company.
Often, various pricing factors are called profit in the same word and lumped together. Let's take a closer look at two such coefficients - 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 their indicators. Our article will help you understand the difference between markup and margin.
Margin
Economics textbooks present several definitions of margin, 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.
Expressed as a percentage of the final price for which the product was sold or as the difference in profit per unit of product. First of all, margin is an indicator of profitability.
This term is used not only in trading, but also in stock exchange, banking and insurance practice.
In general usage, the word margin refers to the difference between indicators.
In order to obtain data on the financial activities of an enterprise, the following concepts are calculated:
Marginal income is one of the types of profit that shows the difference between revenue and variable costs. Necessary for drawing conclusions about the share of variable costs in revenue.
Gross margin is the ratio of revenue and fixed or variable costs. Used to analyze profits taking into account costs.
The concept of gross margin differs in Russia and Europe, due to the characteristics of 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 sales of products – Costs of production, storage, etc.
To obtain information about the current financial condition of organizations, this indicator is calculated.
In European countries, gross margin is the percentage of the company's total profit from sales of products, after paying all mandatory cash costs.
Interest margin is the ratio of general and variable costs to revenue.
Margin is usually calculated at the end of the reporting period - month or quarter. Companies that are confident in the market make payments once at the end of the year.
The profitability of a product is reflected by such an indicator as margin. It is calculated to determine the magnitude of sales growth and for the most effective pricing management.
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Extra charge
Let's move on to defining the markup. It is used to name several quantities:
- The amount added to the original cost of a product when it is sold.
- Retailer profit.
- The difference between the retail and wholesale cost of products.
The markup can be specified in the contract if the supplier (manufacturer) agrees to additional conditions of the intermediary (buyer).
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 level of demand for the products sold.
It is important to consider the competitive advantages of both the product on the market and the selling organization.
To determine the correct markup, carefully calculate the costs your company incurs. Consider everything: costs of raw materials, production, storage, delivery of goods, and remuneration of employees.
Depending on the sales volume, the markup may vary: for large volumes, the final price is low, for small volumes, the final price is high. To obtain the greatest profit, it is necessary to determine the added value of products that helps maintain a balance between sales volume and product prices.
Correctly established added value covers the funds spent on a unit of goods and brings profit above 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 allows the company to determine this indicator itself.
These are food products for children, medical products, medications, 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
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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 a clear example:
The cost of the product is 50.
The final price of the product is 80.
We get:
Margin = (80 – 50) / 80 * 100% = 37.5%
Markup = (80 – 50) / 50 * 100% = 60%
From the calculations it follows that the margin is the company’s total profit after deducting all necessary costs, and the markup is the added cost 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 a margin equal to 25 as a condition, and a markup of 20, it turns out:
Markup = 20 / (100 – 20) * 100% = 25
Margin = 25 / (100 + 25) * 100% = 20
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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. Markup is an additional price for a product.
The calculation of the margin depends on the total profit of the enterprise, and the markup - on the original 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 an enterprise is the most important element of its existence.
It is necessary to carry out all the calculations that will help find weak spots in the budget and take the right path in pricing.
It is important to know what margin and markup are and how they differ from each other. These indicators are an effective tool for analyzing the financial condition of an enterprise.
Now you know, if your competitors say: “Our company operates with 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? 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 has different meanings depending on the area in which it is used.
Therefore, in this article we will look at the most common types of margin and dwell in detail on margin in trading, because It is this that is of greatest interest to suppliers participating in government and commercial tenders.
1. What is margin in simple words?
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 values (for example, ruble, dollar, euro) and in percentages (%).
In simple words, margin in trade is the difference between the cost of a product (the cost of its manufacture or purchase price) and its final (selling) price. Those. this is a certain indicator of the effectiveness of the economic activity of a 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 = selling price - cost
D - income (selling price).
In industry, the margin rate is 20% , and in trade – 30% .
However, I would like to note that the margin in our and Western understanding is very different. For European colleagues, it is the ratio of profit from the sale of a product to its selling price. For our calculations, we use net profit, namely (selling price - cost).
2. Types of margin
In this section of the article we will look at the most common types of margin. So let's get started...
2.1 Gross margin
Gross Margin Gross margin is the percentage of a company's total revenue that it retains after incurring direct costs associated with the production of its goods and services.
Gross margin is calculated using the following formula:
VM = (VP/OP) *100%,
VP - gross profit, which is defined as:
VP = OP - SS
OP - sales volume (revenue);
CC - cost of goods sold;
Thus, the higher the company’s VM indicator, the more funds the company saves for each ruble of sales to service its other expenses and obligations.
The ratio of VM to the amount of revenue 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 participant in trading on an exchange in connection with a change in the monetary obligation for one position as a result of its adjustment by the market.
This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate margin. You can easily find them on the Internet using this search query.
2.4 Net interest margin (bank interest margin)
Net interest margin- one of the key indicators for assessing the efficiency of banking activities. NIM is defined as the ratio of the difference between interest (commission) income and interest (commission) expenses to the assets of a financial organization.
The formula for calculating net interest margin is as follows:
NPM = (DP - RP)/BP,
DP - interest (commission) income; RP - interest (commission) expenses;
AD - income-generating assets.
As a rule, NIM indicators of financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial organization when opening an account with it.
2.5 Security margin
Guarantee Margin- this is the difference between the value of the collateral and the amount of the loan issued.
2.6 Credit margin
Credit margin- the difference between the estimated value of a product and the amount of credit (loan) issued by a financial institution for the purchase of this product.
2.7 Bank margin
Bank margin(bank margin) is the difference between credit and deposit interest rates, credit rates for individual borrowers, or interest rates on active and passive transactions.
The BM indicator is influenced by the terms of loans issued, the shelf life of deposits (deposits), as well as interest on these loans or deposits.
2.8 Front and back margin
These two terms should be considered together because they are connected to each other
Front margin is the profit from the markup, and back margin is the profit received by the company from discounts, promotions and bonuses.
3. Margin and profit: what's the difference?
Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice these concepts are different from each other.
Margin is the difference between indicators, and profit is the final financial result. The profit calculation formula is given below:
Profit = B – SP – CI – UZ – PU + PP – VR + VD – PR + PD
B - revenue; SP - cost of production; CI - commercial costs; LM - management costs; PU - interest paid; PP - interest received; VR - unrealized expenses; UD - unrealized income; PR - other expenses;
PD - other income.
After this, income tax is charged on the resulting value. And after deducting this tax it turns out - net profit.
To summarize all of the above, we can say that when calculating the margin, only one type of cost is taken into account - variable costs, which are included in the cost of production. And when calculating profit, all expenses and income that the company incurs in the production of its products (or provision of services) are taken into account.
4. What is the difference between margin and markup?
Very often, margin is mistakenly confused with trading margin. Extra charge- the ratio of profit from the sale of a product to its cost. To avoid any more confusion, remember one simple rule:
Let's try to determine the difference using a specific example.
Suppose you purchased a product for 1000 rubles and sold it for 1500 rubles. Those. the size of the markup in our case was:
H = (1500-1000)/1000 * 100% = 50%
Now let's determine the margin size:
M = (1500-1000)/1500 * 100% = 33.3%
For clarity, the relationship between 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 assessing the performance of a company (with the exception of stock trading).
And before increasing production or introducing a new product or service to the market, it is necessary to estimate the initial value of the margin.
If you increase the selling price of a product, but the margin does not increase, then this only means that the cost of its production is also increasing. And with such dynamics, there is a risk of being at a loss.
That's probably all. Hopefully, you now 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
Many people come across the concept of “margin,” but often do not fully understand what it means. We will try to correct the situation and answer the question of what margin is in simple words, and we’ll also look at what types there are and how to calculate it.
Margin concept
Margin (eng. margin - difference, advantage) is an absolute indicator that reflects how the business operates.
Sometimes you can also find another name - gross profit. Its generalized concept shows what the difference is between any two indicators.
For example, economic or financial.
Important! If you are in doubt about whether to write walrus or margin, then know that from a grammatical point of view you need to write it with the letter “a”.
This word is used in a variety of areas. It is necessary to distinguish 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. Let's look at the most widely used ones.
Gross Profit Margin
Gross or gross margin is the percentage of total revenue remaining after variable costs.
Such costs may be the purchase of raw materials for production, payment of wages to employees, spending money on marketing goods, etc.
It characterizes the overall operation 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 income. 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 indicators indicate good performance of the company. But be on the lookout because these numbers can be manipulated.
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 enterprise receives from one monetary unit revenue. After calculating it, it becomes clear how successfully the company copes with its expenses.
It should be noted that the value of the final indicator is influenced by the direction of the enterprise. For example, firms operating in the retail trade usually have fairly small numbers, while large manufacturing enterprises have fairly high numbers.
Interest
Interest margin is one of the important indicators of a bank’s performance; it characterizes the ratio of its income and expense parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.
This variety can be absolute or relative. Its value can be influenced by inflation rates, various types of active operations, the relationship between the bank’s capital and resources attracted from outside, etc.
Variational
Variation margin (VM) is a value that indicates the possible profit or loss on trading platforms. It is also the number by which the amount of funds taken as collateral during a trade transaction can increase or decrease.
If the trader correctly predicted the market movement, then this value will be positive. In the opposite situation it will be negative.
When the session ends, the running VM is added to the account or, vice versa, canceled.
If a trader holds his position for only one session, then the results of the trade transaction will be the same as the VM.
And if a trader holds his position for a long time, it will be added to daily, and ultimately its performance will not be the same as the outcome 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 the difference between them. However, even if it is insignificant, the difference is still present, and it is important to understand it, especially for people who use these concepts every day.
Recall that margin is the difference between a company'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 a company’s financial activities at the end of a certain 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 this way: subtract the cost of the product from the revenue. And when profit is calculated, in addition to the cost of the product, various costs, business management costs, interest paid or received, and other types of expenses are also taken into account.
By the way, such words as “back margin” (profit from discounts, bonuses and promotional offers) and “front margin” (profit from markups) 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 with the second it is not entirely clear.
The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: production, delivery, storage and sales.
Therefore, it is clear that the markup is an addition to the cost of production, and the margin does not take this cost into account during calculation.
- To make the difference between margin and markup more clear, let’s break it down into several points:
- Different difference. When calculating the markup, they take the difference between the cost of goods and the purchase price, and when calculating the margin, they take the difference between the company’s revenue after sales and the cost of goods.
- Maximum volume. The markup has almost no restrictions, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
- Basis of calculation. When calculating the margin, the company's income is taken as the base, and when calculating the markup, the cost is taken.
- Correspondence. 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 ordinary people in everyday life, and now you know what their main differences are.
Margin calculation formula
Gross Margin reflects the difference between revenue and total costs. The indicator is necessary for analyzing profit taking into account cost and is calculated using 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 gross margin to the amount of sales revenue:
KVM = GP / TR
Likewise Marginal Income Ratio equal to the ratio of marginal income to the amount of sales revenue:
KMD = CM/TR
It is also called the contribution margin rate. For industrial enterprises The margin rate is 20%, for trading – 30%.
Interest margin shows the ratio of total costs to revenue (income).
GP = TC/TR
or variable costs to revenue:
CM = VC/TR
Margin in various areas
As we already mentioned, the concept of “margin” is used in many areas, and this may be why it can be difficult for an outsider to understand what it is. Let's take a closer look at where it is used and what definitions it gives.
In economics
Economists define it as the difference between the price of a product and its cost. That is, this is actually its main definition.
Important! In Europe, economists explain this concept as the percentage rate of the ratio of profit to product sales at the selling price and use it to understand whether the company’s activities are effective.
In general, when analyzing the results of a company’s work, the gross variety is most 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 actually paid 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 as collateral and the amount of funds issued.
Almost all banks lend and accept deposits. And in order for the bank to make 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
On exchanges they use a variation 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 meaning.
It can be positive if the trades were profitable, 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 it using the formula different kinds, 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?
Let's look at it in a separate article.
Beneficiaries or true owners of the business, who are they?
Source: http://svoedelo-kak.ru/finansy/marzha.html
Margin is the difference between... Economic terms. How to calculate margin
Economic terms are often ambiguous and confusing.
The meaning contained in them is intuitive, but rarely does anyone succeed in explaining it in publicly accessible words, without prior preparation. But there are exceptions to this rule.
It happens that a term is familiar, but upon in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.
Everyone has heard, but few people 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 economics or stock trading.
Most believe that margin is the difference between any similar 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 to modern man It is necessary to understand all the meanings of this term, so that at an unexpected moment you “don’t lose face.”
Margin in economics
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.
Margin is a relative indicator and 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 operates with a margin of 30%, which means that in every ruble earned, 30 kopecks constitute net profit, and the remaining 70 kopecks are expenses.
Gross Margin
In analyzing the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for calculating it is the difference between revenue from sales of products during the reporting period and variable costs for the production of these products.
The level of gross margin alone 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 demonstrates how successful the company is as a whole.
Gross margin is created by the labor of the enterprise's employees spent on producing products or providing 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 operating economic activities of the enterprise.
These include writing off accounts receivable and payable, providing non-industrial services, income from housing and communal services, etc.
It is extremely important for an analyst to correctly calculate the gross margin, since this indicator forms the net profit of the enterprise, and subsequently 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
Bank profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to calculate as many as four different margin options:
- Credit margin is directly related to work under loan agreements and is defined as the difference between the amount specified in the document and the amount actually issued.
- 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 calculating it looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. Net margin can be calculated based on all the bank’s assets, or only on those currently involved in work.
- The guarantee margin is the difference between the estimated value of the collateral property and the amount issued to the borrower.
Such different meanings
Of course, economics 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 completely consistent with each other.
However, the Russian understanding of the term “margin” in trading is very different from the European one. In the reports of foreign analysts, it represents the ratio of profit from the sale of a product 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 company's trading activities.
It is worth noting that the European attitude towards calculating margins 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, margin is the difference between revenue from the sale of a product and overhead costs for its production (purchase), delivery, and sales. It is expressed in rubles or other currency convenient for settlements.
It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.
How does margin differ 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 yet touched on the most common one.
Most often, the margin indicator is confused with the trading margin. It's very easy to tell the difference between them. The markup is the ratio of profit to cost. We have already written above about how to calculate margin.
A clear example will help dispel any doubts that may arise.
Let’s say 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 markup is 50% of the cost 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 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 hard work which requires
great experience.
Why is this so important?
Financial indicators are quite conditional.
They are influenced by valuation methods, accounting principles, conditions in which the enterprise operates, changes in the purchasing power of the currency, etc.
Therefore, the obtained calculation result cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.
Margin on 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 was the case in all the cases described above.
Margin on stock markets becomes a kind of collateral when making transactions, and the service of such trading is called “margin trading”.
The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire contract amount in full, he uses borrowed funds from his broker, and only a small deposit is debited from his own account. If the outcome 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 the opportunity not only to make purchases using borrowed funds from the broker. The client may also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.
Each broker gives its investors the right to make margin trades independently. 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 benefits:
- The ability to trade on financial markets without having large enough amounts in your 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 various currencies, it is not necessary to have funds in these particular currencies on your deposit.
Management of risks
To minimize the risk when concluding margin transactions, the broker assigns each of its investors a collateral amount and a margin level.
In each specific case, the calculation is made individually.
For example, if after a transaction there is a negative balance in the investor’s account, the margin level is determined by the following formula:
UrM=(DK+SA-ZI)/(DK+SA), where:
DK – cash investor deposited;
CA - the value of shares and other investor securities accepted by the broker as collateral;
ZI is the debt of the investor to the broker for the loan.
It is possible to carry out an investigation only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to 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, for carrying out margin transactions on the stock markets, a number of conditions are put forward, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, debt repayment terms, conditions for changing the contract and much more are discussed.
It is quite difficult to understand all the diversity of the term “margin” in a short time. Unfortunately, it is impossible to talk about all areas of its application in one article. The above discussions indicate only the key points of its use.
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 has different meanings depending on the area in which it is used. Therefore, in this article we will look at the most common types of margin and dwell in detail on margin in trading, because It is this that is of greatest interest to suppliers participating in government and commercial tenders.
1. What is margin in simple words?
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 values (for example, ruble, dollar, euro) and in percentages (%).
In simple words, margin in trade is the difference between the cost of a product (the cost of its manufacture or purchase price) and its final (selling) price. Those. this is a certain indicator of the effectiveness of the economic activity of a 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 is profit, which is determined by the formula:
P = selling price - cost
D - income (selling price).
In industry, the margin rate is 20% , and in trade – 30% .
However, I would like to note that the margin in our and Western understanding is very different. For European colleagues, it is the ratio of profit from the sale of a product to its selling price. For our calculations, we use net profit, namely (selling price - cost).
2. Types of margin
In this section of the article we will look at the most common types of margin. So let's get started...
2.1 Gross margin
Gross Margin
Gross margin is the percentage of a company's total revenue that it retains after incurring direct costs associated with the production of its goods and services.Gross margin is calculated using the following formula:
VM = (VP/OP) *100%,
VP is gross profit, which is defined as:
VP = OP - SS
OP - sales volume (revenue);
CC - cost of goods sold;
Thus, the higher the company’s VM indicator, the more funds the company saves for each ruble of sales to service its other expenses and obligations.
The ratio of VM to the amount of revenue 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 participant in trading on an exchange in connection with a change in the monetary obligation for one position as a result of its adjustment by the market.This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate margin. You can easily find them on the Internet using this search query.
2.4 Net interest margin (bank interest margin)
Net interest margin
— one of the key indicators for assessing the efficiency of banking activities. NIM is defined as the ratio of the difference between interest (commission) income and interest (commission) expenses to the assets of a financial organization.The formula for calculating net interest margin is as follows:
NPM = (DP - RP)/BP,
DP - interest (commission) income;
RP - interest (commission) expenses;
AD - income-generating assets.
As a rule, NIM indicators of financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial organization when opening an account with it.
2.5 Security margin
Guarantee Margin
is the difference between the value of the collateral and the amount of the loan issued.2.6 Credit margin
Credit margin
- the difference between the estimated value of a product and the amount of credit (loan) issued by a financial institution for the purchase of this product.2.7 Bank margin
Bank margin
Bank margin is the difference between lending and deposit interest rates, lending rates for individual borrowers, or interest rates on active and passive transactions.The BM indicator is influenced by the terms of loans issued, the shelf life of deposits (deposits), as well as interest on these loans or deposits.
2.8 Front and back margin
These two terms should be considered together because they are connected to each other
Front margin is the profit from the markup, and back margin is the profit received by the company from discounts, promotions and bonuses.
3. Margin and profit: what's the difference?
Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice these concepts are different from each other.
Margin is the difference between indicators, and profit is the final financial result. The profit calculation formula is given below:
Profit = B – SP – CI – UZ – PU + PP – VR + VD – PR + PD
B - revenue;
SP - cost of production;
CI - commercial costs;
LM - management costs;
PU - interest paid;
PP - interest received;
VR - unrealized expenses;
UD - unrealized income;
PR - other expenses;
PD - other income.
After this, income tax is charged on the resulting value. And after deducting this tax it turns out - net profit .
To summarize all of the above, we can say that when calculating the margin, only one type of cost is taken into account - variable costs, which are included in the cost of production. And when calculating profit, all expenses and income that the company incurs in the production of its products (or provision of services) are taken into account.
4. What is the difference between margin and markup?
Very often, margin is mistakenly confused with trading margin. Extra charge- the ratio of profit from the sale of a product to its cost. To avoid any more confusion, remember one simple rule:
Margin is the ratio of profit to price, and markup is the ratio of profit to cost.
Let's try to determine the difference using a specific example.
Suppose you purchased a product for 1000 rubles and sold it for 1500 rubles. Those. the size of the markup in our case was:
H = (1500-1000)/1000 * 100% = 50%
Now let's determine the margin size:
M = (1500-1000)/1500 * 100% = 33.3%
For clarity, the relationship between margin and markup indicators is shown in the table below:
The trading margin is very often more than 100% (200, 300, 500 and even 1000%), but the margin cannot exceed 100%.Important point:
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 assessing the performance of a company (with the exception of stock trading). And before increasing production or introducing a new product or service to the market, it is necessary to estimate the initial value of the margin. If you increase the selling price of a product, but the margin does not increase, then this only means that the cost of its production is also increasing. And with such dynamics, there is a risk of being at a loss.
That's probably all. Hopefully, you now have the necessary understanding of what margin is and how it is calculated.
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