What is margin: types of margin + how to earn
What is margin? Margin is a European term that has become widely used in the global economy. It is used by insurers, bankers, traders, economists of manufacturing industries.
Margin is the difference between the cost of a product and its final price. Also, this indicator can be called gross profit or margin. They are calculated in absolute terms (dollars, 🪙, euros) and as a percentage.
Calculation
The formula for calculating this indicator in the Western and state economies is different. In Europe, it is proposed to calculate the margin as follows:
M = Profit from sale / Selling price x 100%
Economists of the post-Soviet space put the cost value into the formula:
M u003d Selling price – Cost / Selling price x 100%
Attention: positive margin is 30% for industries with tangible goods. For the financial sector, the indicator is 20%.
Margin types
Numerous branches of trade have different definitions of the term.
But in order to understand what margin is and how the indicator differs for each specific business, let's look at the types of margin. There is nothing complicated here, so do not be alarmed in advance. We will explain literally on the fingers.
Gross or "Gross Profit Margin"
This view shows the company's income remaining after deducting the direct costs of production from total income.
M = Gross Profit/Revenue x 100%
Gross profit consists of revenue minus the cost of production.
Back margin
Back margin is the company's profit received from promotional, discount events and bonus programs.
That is, it is not a constant margin. It is spurred on by external factors and grows along with the company's profit. But this is a truly profitable way to develop a commodity business.
Variation margin
Exchange term – the amount received or spent by trading participants in accordance with market changes. Adjustment of the amount of monetary liabilities is calculated for only one position.
For a simple calculation of the indicator, ready-made online calculators are used. Received the maximum use in the Forex market.
Leverage in Forex
Forex brokers use the term margin trading. A trader operates on the market with borrowed funds, for which a security deposit is charged.
The difference from a simple loan is that the amount of the loan exceeds the collateral by 10-500 times.
Leverage reaches a ratio of 1:500. Online trading terminals offer two indicators that formulate a trader's future strategy: free margin, level. The first term refers to the free amount on the account available for opening new trading positions. The second is the ratio of the account amount in relation to the margin indicator. Calculated as a percentage.
Read also: How to increase income: TOP ways
Banking or "bank margin"
What is a bank-type margin, economists of credit departments know better. The term means the difference between the rates on active and passive operations.
Or between lending and deposit rates. Calculated as a percentage, depends on the loan terms, deposits and current interest rates.
Net interest
Beginners in the financial business often confuse it with banking. Represents the value of the efficiency of the bank. Data on the net interest margin amount are placed in the public domain on the websites of financial institutions and are used when making a decision to open new accounts. Calculated:
M = (fee and commission income – commission expenses) / earning assets of the bank
Operating or "Operating profit margin"
To calculate the profitability of production per one 🪙 (dollar, euro), the operating margin is used.
It is used to assess the economic profitability of a particular enterprise. Shows the ratio of operating profit to the company's income. Calculated as a percentage.
Attention: Skillful economists can easily manipulate operational indicators, hiding part of the costs and artificially inflating the margin indicator.
Other types
Dozens of variants of the term are used depending on the type of activity of the organization. For example, in the investment business there is margin lending.
Used to estimate future income in the field of innovation. Shows the relationship between the cost of a new product (estimated) and the amount of the desired loan. And the value of the margin guarantee shows the difference between the value of the collateral and the loan provided by the bank.
The difference between margin and profit
Similar concepts lead non-professional traders to a dead end. To understand the subtleties, it is necessary to remember that profit shows the end result of the organization's activities in the financial sector. Margin is just the difference between individual indicators.
The final profit takes into account all losses, unforeseen expenses incurred during the production, sale of goods. Margin is used to predict future earnings. The profit formula includes the following indicators:
Profit u003d revenue – cost – selling and administrative expenses – interest expenses – unrealized and other expenses + income at interest rates + other and unrealized income
What is the difference with markup?
The margin takes into account profit and cost, and the margin: profit and the price of the goods. For example, the purchase price of a particular product was 2000 rubles, and it was sold for 3000 rubles. The calculations will look like this:
H u003d (3000-2000) / 2000×100% u003d 50%
M u003d (3000-2000) / 3000×100% u003d 33.33%
Important: the value of the trade margin may exceed 100%, depending on the type of product/service/financial transaction. The margin indicator never exceeds 100%, otherwise the calculations were carried out incorrectly.
Conclusion
Margin in production is used to analyze the effectiveness of bringing a new product to market. If the expected sales revenues are high and the margin is low, the cost of production will "eat up" all the profits. There is no point in making new products.
If we are talking about exchange trading in Forex, this indicator will allow you to assess the risks of investing in a particular operation. For calculations, you should use stock calculators that take into account market fluctuations and possible risks.