What is margin?

In finance, the margin is the collateral that an investor has to place with their broker or exchange to offset the credit risk the holder creates for the broker or the exchange. For example, an investor might generate credit risk if they borrow funds from the broker to buy financial instruments, borrow financial instruments to sell them short, or participate in a derivative transaction.

How to calculate margin?

A margin, or gross margin, illustrates the income you generate after paying COGS. To determine margin, start with your gross profit (Revenue – COGS). Then, find the percentage of the revenue that represents gross profit. You may calculate the proportion of revenue that is gross profit by dividing your gross profit by revenue. Or use these steps:

  • Find out your COGS (cost of goods sold). For example, $30.
  • Find out your income (how much you sell these things for, for example, $50).
  • Calculate the gross profit by subtracting the cost from the revenue. $50 – $30 = $20
  • Divide gross profit by revenue: $20 / $50 equals 0.4.
  • Express it as percentages: 0.4 * 100 = 40%.

Margin formula

The margin formula estimates how much of every dollar in sales you keep after paying expenditures. In the margin calculation example above, you retain every dollar you make. The bigger the margin, the greater the proportion of money you keep when you make a sale.

margin = 100 * (revenue – expenses) / revenue

Margin call

A margin call happens when the value of an investor’s margin account falls below the broker’s necessary amount. A margin call is frequently a signal that one or more of the securities held in the margin account has declined in value. When a margin call happens, the investor must either deposit additional money in the account or sell some of the assets held in their account.

Margin rate

The margin rate is the interest imposed by brokers when traders acquire financial assets like a stock on margin and keep it overnight. It may also refer to a cost levied above and beyond the broker’s call rate. In trading, it is typical for a trader to acquire shares of stock on margin, which implies they are borrowing money from the broker to purchase more shares than they usually would have been able to. 

Margin requirements

A margin requirement is the proportion of marginable securities that an investor must pay for with his/her funds. It may be further split down into Initial Margin Requirement and Maintenance Margin Requirement. According to Regulation T of the Federal Reserve Board, the Initial Margin requirement for stocks is 50%, and the Maintenance Margin Requirement is 30%. Still, greater requirements for both can apply for particular assets.

An Initial Margin Requirement refers to the proportion of equity required when an investor establishes a trade. For example, if you have $5,000 and would like to acquire stock ABC which has a 50% initial margin need.

Passive margin

Passive margins are locations where continents have rifted apart to become separated by an ocean. They tend to be abundant oil and gas producers and are the subject of much of today’s geological study. Passive margins (also known as rifted margins) represent the areas where continents have rifted apart to become separated by an ocean. At many edges, magmatic materials extruded during continental breakup occupy the outer regions of the margin.

Margin vs. markup

It’s a simple sales principle: to generate a profit, firms must price things high enough to pay costs. Although they’re not interchangeable, both “margin” and “markup” are connected to this notion since the definitions differ somewhat.

Here’s the fundamental difference between markup vs. margin:

·         Margin is equal to sales minus the cost of goods sold (COGS).

·         Markup is equivalent to a product’s selling price, less its cost price.

FAQ

What is margin in sales? 

The sales margin, also known as the contribution margin, is the amount a firm makes from selling a service or product.

What is a margin call?

A margin call happens when the value of assets in a brokerage account falls below a specific threshold, known as the maintenance margin, prompting the account holder to deposit extra cash or securities to fulfill the margin obligations.

What is gross margin?

The gross margin (sometimes referred to as gross profit) reflects each dollar of sales that the firm keeps after removing COGS.

What is a good profit margin?

A decent margin will vary. Substantial by industry and size, but as a general rule of thumb, a 10 percent net profit margin is regarded typical, a 20 percent margin is considered high (or “good”), and a 5 percent margin is poor.

What is margin stock?

Buying on margin means borrowing money from a broker to acquire shares. So you may think of it as borrowing from your brokerage.