Definition of Margin
This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).
The amount added to a lower figure to reach a higher figure, expressed as a percentage of the higher figure, e.g. the margin that profit represents as a percentage of selling price.
The ratio of net income to net sales.
The ratio of net income before taxes to net sales.
A transaction in which an investor borrows to buy additional shares, using the shares
themselves as collateral.
The difference between variable revenue and variable cost.
The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.
When buying securities on margin, the proportion of the total market value of
the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of
governors of the Federal Reserve the responsibility to set initial margin requirements, but individual
brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by
A sum, usually smaller than -but part of the original margin, which must
be maintained on deposit at all times. If a customer's equity in any futures position drops to, or under, the
maintenance margin level, the broker must issue a margin call for the amount at money required to restore the
customer's equity in the account to the original margin level. Related: margin, margin call.
A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.
A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.
The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.
The tax rate that would have to be paid on any additional dollars of taxable income earned.
The ratio of net operating income to net sales.
Net profit margin
Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.
Operating profit margin
The ratio of operating margin to net sales.
The margin needed to cover a specific new position. Related: margin, security deposit (initial)
Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
An additional required deposit to bring an investor's equity account up to the initial margin
level when the balance falls below the maintenance margin requirement.
The cost of producing one extra unit.
Margin of safety
A measure of the difference between the anticipated and breakeven levels of activity.
An intermediate measure of profit equal to sales revenue
minus cost-of-goods-sold expense and minus variable operating
expenses—but before fixed operating expenses are deducted. Profit at
this point contributes toward covering fixed operating expenses and
toward interest and income tax expenses. The breakeven point is the
sales volume at which contribution margin just equals total fixed
gross margin, or gross profit
This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.
The profit per unit sold of a product after deducting product
cost and variable expenses of selling the product from the sales price of
the product. Unit margin equals profit before fixed operating expenses
are considered and before interest and income tax are deducted. Unit
margin is one of the key variables in a profit model for decision-making
Profit Margin Ratio
A measure of how much profit is earned on each dollar of sales. It
is calculated by dividing the net income available for distribution to
shareholders by the total sales generated during the period.
the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits
contribution margin ratio
the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales
margin of safety
the excess of the budgeted or actual sales
of a company over its breakeven point; it can be calculated
in units or dollars or as a percentage; it is equal to
(1 - degree of operating leverage)
product contribution margin
the difference between selling price and variable cost of goods sold
product line margin
see segment margin
the ratio of income to sales
the excess of revenues over direct variable expenses and avoidable fixed expenses for a particular segment
total contribution margin
see contribution margin
The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed
Revenues less the cost of goods sold.
The incremental change in the unit cost of a product as a result of a
change in the volume of its production.
marginal tax rate
Additional taxes owed per dollar of additional income.
Marginal Propensity to Consume
Fraction of an increase in disposable income that is spent on consumption.
Marginal Propensity to Import
Fraction of an increase in disposable income that is spent on imports.
Marginal Propensity to Save
Fraction of an increase in disposable income that is saved.
Marginal Tax Rate
Percent of an increase in income paid in tax.
EBITDA divided by total sales or total revenue.
Gross Profit Margin
Gross profit divided by revenue.
Margin Tax Rate
The tax rate applicable to the last unit of income.
Adjustable rate mortgage. A mortgage that features predetermined adjustments of the loan interest rate
at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate
equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to perinterval
and to life-of-loan interest rate and/or payment rate caps.
Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call money rate plus a service charge.
Dupont system of financial control
Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.
Economies of scale
The decrease in the marginal cost of production as a plant's scale of operations increases.
Instruments exempt from the registration requirements of the Securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.
Futures commission merchant
A firm or person engaged in soliciting or accepting and handling orders for
the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection
with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades
or contracts. The FCM must be licensed by the CFTC. Related: commission house , omnibus account
The margin or difference between the actual market value of a security and the value assessed by the
lending side of a transaction (ie. a repo).
The balance of a margin account. Related: buying on margin, initial margin requirement.
Mortgage-Backed Securities Clearing Corporation
A wholly owned subsidiary of the Midwest Stock
Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed
MBSs transacted for forward delivery.
Ratios that focus on the profitability of the firm. Profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
Security deposit (initial)
Synonymous with the term margin. A cash amount of funds that must be deposited
with the broker for each contract as a guarantee of fulfillment of the futures contract. It is not considered as
part payment or purchase. Related: margin
Security deposit (maintenance)
Related: Maintenance margin security market line (SML). A description of
the risk return relationship for individual securities, expressed in a form similar to the capital market line.
A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.
Also called margin income, the difference between income and cost. For a depository
institution, the difference between the assets it invests in (loans and securities) and the cost of its funds
(deposits and other sources).
Target zone arrangement
A monetary system under which countries pledge to maintain their exchange rates
within a specific margin around agreed-upon, fixed central exchange rates.
A method of costing that is concerned with managing whole-of-life costs of a product/service during the product design phase – the difference between target price (to achieve market share) and the target profit margin.
The result of subtracting cost of goods sold from sales. Synonymous with gross margin.
The annual sales volume level at which total contribution
margin equals total annual fixed expenses. The breakeven point is only a
point of reference, not the goal of a business, of course. It is computed by
dividing total fixed expenses by unit margin. The breakeven point is
quite useful in analyzing profit behavior and operating leverage. Also, it
gives manager a good point of reference for setting sales goals and
understanding the consequences of incurring fixed costs for a period.
This is a key factor in the profit model of a business. Product
cost is the same as purchase cost for a retailer or wholesaler (distributor).
A manufacturer has to accumulate three different types of production
costs to determine product cost: direct materials, direct labor, and
manufacturing overhead. The cost of products (goods) sold is deducted
from sales revenue to determine gross margin (also called gross profit),
which is the first profit line reported in an external income statement
and in an internal profit report to managers.
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
This concept refers to a separate source of revenue and
profit within a business organization, which should be identified for
management analysis and control. A profit module may focus on one
product or a cluster of products. Profit in this context is not the final, bottom-
line net income of the business as a whole. Rather, other measures
of profit are used for management analysis and decision-making purposes—
such as gross margin, contribution margin, or operating profit
(earnings before interest and income tax).
Ratios based on sales revenue for a period. A measure of
profit is divided by sales revenue to compute a profit ratio. For example,
gross margin is divided by sales revenue to compute the gross margin
profit ratio. Dividing bottom-line profit (net income) by sales revenue
gives the profit ratio that is generally called return on sales.
a contract in which the customer agrees
to reimburse the producer for the cost of the job plus a
specified profit margin over cost
degree of operating leverage
a factor that indicates how a percentage change in sales, from the existing or current
level, will affect company profits; it is calculated as contribution
margin divided by net income; it is equal to (1 - margin of safety percentage)
model a model that indicates the return on investment
as it is affected by profit margin and asset turnover
variable cost ratio
the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)
a. An option to buy a certain quantity of a stock or commodity for a
specified price within a specified time. See Put.
b. A demand to submit bonds to the issuer for redemption before the maturity date.
c. A demand for payment of a debt.
d. A demand for payment due on stock bought on margin.
The sales level at which a company, division, or product line makes a
profit of exactly zero, and is computed by dividing all fixed costs by the average
gross margin percentage.
A financial report that summarizes a company’s revenue, cost of
goods sold, gross margin, other costs, income, and tax obligations.
Average Propensity to Consume
Ratio of consumption to disposable income. See also marginal propensity to consume.
Average Propensity to Save
Ratio of saving to disposable income. See also marginal propensity to save.
See marginal propensity to consume.
Indented bill of material
A bill of material reporting format under which successively
lower levels of components are indented farther away from the left
Net Present Value (NPV) Method
A method of ranking investment proposals. NPV is equal to the present value of the future returns, discounted at the marginal cost of capital, minus the present value of the cost of the investment.
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