Definition of Margin

Margin refers to the difference between revenue and costs or the amount of borrowed funds used in investment trading. In business, margin represents profitability, while in trading, it indicates the leverage used to buy securities.

For example, a retailer selling a product for $100 with a cost of $70 has a margin of $30, or 30 percent of the selling price. In trading, an investor buying stocks with a 50 percent margin borrows the remaining amount from a broker.

Purpose of Margin in Business and Investing

Margin plays a critical role in financial and investment decisions by:

• Measuring profitability in businesses and financial statements.
• Allowing investors to leverage their capital in margin trading.
• Helping companies assess pricing strategies and cost structures.
• Influencing financial analysis, investment decisions, and risk assessment.
• Providing insight into cash flow and earnings potential.

How Margin Is Calculated

Gross Margin Formula

Gross Margin = [(Revenue - Cost of Goods Sold) ÷ Revenue] × 100

Example Calculation

• A business generates $500,000 in sales.
• The cost of goods sold is $300,000.
• Gross Margin = [(500,000 - 300,000) ÷ 500,000] × 100 = 40 percent.

This means the company retains 40 percent of its revenue after covering production costs.

Margin in Trading

• Investors can trade on margin by borrowing money from a broker.
• Example: An investor deposits $5,000 and borrows $5,000 to purchase $10,000 in stocks, using a 50 percent margin.

Types of Margin

Gross Margin

• Represents the percentage of revenue remaining after direct costs.
• Example: A restaurant calculates its gross margin by subtracting food costs from sales.

Operating Margin

• Measures profitability after operating expenses but before taxes.
• Example: A manufacturing company subtracts rent, wages, and utility costs from revenue.

Net Margin

• The final percentage of revenue remaining after all expenses, taxes, and interest.
• Example: A retail store calculates net profit margin to assess overall business health.

Margin in Trading

• Refers to the amount of capital an investor must deposit when using borrowed funds.
• Example: A trader maintains a 50 percent margin requirement to hold leveraged positions.

Margin vs. Markup

Feature	Margin	Markup
Definition	The percentage of revenue retained after costs	The percentage added to the cost to determine the selling price
Calculation	(Revenue - Cost) ÷ Revenue	(Selling Price - Cost) ÷ Cost
Example	A company with a 30 percent margin retains 30 percent of revenue	A business with a 50 percent markup prices products 50 percent above cost

Example: A retailer selling a product for $100 with a $70 cost has a 30 percent margin but a 42.86 percent markup.

Advantages and Disadvantages of Margin

Advantages

• Helps businesses analyze profitability and financial health.
• Allows traders to increase purchasing power with leveraged investments.
• Assists in strategic decision-making for pricing and cost management.

Disadvantages

• In trading, margin amplifies losses in volatile markets.
• Requires careful monitoring to avoid financial risk and margin calls.
• Businesses with low margins may struggle to maintain profitability.

Related Terms

• Profit margin – The percentage of revenue remaining after expenses.
• Leverage – The use of borrowed capital to increase investment potential.
• Margin call – A broker’s demand for additional funds when equity falls below required levels.

Interesting Fact

During stock market crashes, margin debt levels often surge, leading to forced liquidations and increased volatility, as seen in the 2008 financial crisis.

Statistic

According to the Investment Industry Regulatory Organization of Canada (IIROC), over twenty percent of Canadian stock market trades involve margin accounts, highlighting the significance of leveraged investing.

Frequently Asked Questions (FAQ)

1. How is margin different from markup?

Margin refers to the percentage of revenue retained after costs, while markup is the percentage added to cost to set the selling price.

2. What is a good margin for a business?

It depends on the industry, but most businesses aim for a net margin above ten percent for healthy profitability.

3. How does margin trading work?

Investors use borrowed funds from a broker to trade securities, requiring a minimum deposit to maintain their positions.

4. What happens if a margin account drops below the required level?

A margin call is issued, requiring the investor to deposit more funds or sell assets to restore balance.

5. Can businesses survive with low margins?

Yes, but businesses with low margins must rely on high sales volume and cost-control strategies to remain profitable.