Financial Glossary
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After-Tax Profit Margin
- A financial performance ratio, calculated by dividing net income after taxes by net sales. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per dollar of sales. This ratio is interpreted in the same way as profit margin - the after-tax profit margin is simply more stringent because it takes taxes into account.
- A financial performance ratio, calculated by dividing net income after taxes by net sales. A company's after-tax profit margin is important because it tells investors the percentage of money a company actually earns per dollar of sales. This ratio is interpreted in the same way as profit margin - the after-tax profit margin is simply more stringent because it takes taxes into account.
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ARM Margin
- A fixed percentage rate that is added to an index value to determine the fully indexed interest rate of an adjustable rate mortgage (ARM). The margin is constant throughout the life of the mortgage, while the index value is variable. For example, the index might be the prime rate, which varies according to market conditions, and the margin might be 2%. If the prime rate were 5% and the margin 2%, then the fully indexed interest rate would be 7%. If the prime rate rises to 6% (the margin remains constant), the fully indexed interest rate would be 8%.
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Average Margin Per User - AMPU
- A widely used metric for gauging the success of businesses in the telecommunications industry. Average margin per user (AMPU) measures the margin made by the firm from each customer, typically measured as the revenue minus the costs and divided by the number of users.
- A widely used metric for gauging the success of businesses in the telecommunications industry. Average margin per user (AMPU) measures the margin made by the firm from each customer, typically measured as the revenue minus the costs and divided by the number of users.
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Buying On Margin
- The purchase of an asset by paying the margin and borrowing the balance from a bank or broker. Buying on margin refers to the initial or down payment made to the broker for the asset being purchased. The collateral for the funds being borrowed is the marginable securities in the investor’s account. Before buying on margin, an investor needs to open a margin account with the broker. In the U.S., the amount of margin that must be paid for a security is regulated by the Federal Reserve Board.
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Contribution Margin
- A cost accounting concept that allows a company to determine the profitability of individual products.
It is calculated as follows:
Product Revenue - Product Variable Costs
Product Revenue
The phrase "contribution margin" can also refer to a per unit measure of a product's gross operating margin, calculated simply as the product's price minus its total variable costs.
- A cost accounting concept that allows a company to determine the profitability of individual products.
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Cross Margining
- An offsetting position where market participants are able to transfer excess margin from one account to another account whose margin is under the required maintenance margin.
Also known as "spread margin".
- An offsetting position where market participants are able to transfer excess margin from one account to another account whose margin is under the required maintenance margin.
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Discount Margin - DM
- The return earned in addition to the index underlying the floating rate security.
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Forward Margin
- The difference between the spot rate and the estimated future rate for a certain commodity. The forward margin on foreign currency, for instance, would typically be specified as number of points over or under the spot rate.
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Gross Margin
- A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
- A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.
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Gross Margin Return On Investment - GMROI
- An inventory profitability evaluation ratio that analyzes a firm's ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost and is used often in the retail industry. To illustrate:
Gross margin return on investment is also know as the "gross margin return on inventory investment" (GMROII).
- An inventory profitability evaluation ratio that analyzes a firm's ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost and is used often in the retail industry. To illustrate:
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Gross Processing Margin - GPM
- The difference between the cost of a raw commodity and the income it generates once sold as a finished product.
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Gross Profit Margin
- A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
Also known as "gross margin".
Calculated as:
Where:
COGS = Cost of Goods Sold
- A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
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Initial Margin
- The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.
Also called the "initital margin requirement".
- The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities.
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Law of Diminishing Marginal Returns
- A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.
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Law of Diminishing Marginal Utility
- A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
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Maintenance Margin
- The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.
Also referred to as "minimum maintenance" or "maintenance requirement".
- The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and NASD, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account. Keep in mind that this level is a minimum, and many brokerages have higher maintenance requirements of 30-40%.
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Margin
- 1. Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".
2. The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
3. In a general business context, the difference between a product's (or service's) selling price and the cost of production.
4. The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.
- 1. Borrowed money that is used to purchase securities. This practice is referred to as "buying on margin".
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Margin Account
- A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.
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Margin Call
- A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when a you account value depresses to a value calculated by the broker's particular formula.
This is sometimes called a "fed call" or "maintenance call".
- A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when a you account value depresses to a value calculated by the broker's particular formula.
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Margin Debt
- 1. The dollar value of securities purchased on margin within an account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes.
2. The aggregate value of all margin debt in a nation or across an exchange.
- 1. The dollar value of securities purchased on margin within an account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes.
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Margin Loan Availability
- 1. The dollar amount in an existing margin account that is currently available for purchasing securities. For new accounts, this represents the percentage value of the current balance that is available for future margin purchases.
2. The dollar amount available for withdrawal from an account with existing marginable positions being used as collateral.
- 1. The dollar amount in an existing margin account that is currently available for purchasing securities. For new accounts, this represents the percentage value of the current balance that is available for future margin purchases.
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Margin Of Safety
- A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.
The term was popularized by Benjamin Graham (known as "the father of value investing") and his followers, most notably Warren Buffett. Margin of safety doesn't guarantee a successful investment, but it does provide room for error in an analyst's judgment. Determining a company's "true" worth (its intrinsic value) is highly subjective. Each investor has a different way of calculating intrinsic value which may or may not be correct. Plus, it's notoriously difficult to predict a company's earnings. Margin of safety provides a cushion against errors in calculation.
- A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.
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Margin Pressure
- A finanicial term for the effect of certain internal or market forces on a company's gross, operating or net margins. If something happens to make a company's costs rise or revenues fall, margins will become compressed, reducing net earnings.
Things that can cause margin pressure include:
1. When a new competitor enters the business and increases its product offering or lowers its costs
2. When commodity costs rise or other costs within the supply chain are rising
3. When increased regulatory controls are imposed on the company or industry
4. When new legislation is introduced that fundamentally changes the markets in which the company competes
5. When internal production problems or delays arise
6. When rising selling, general and administrative expense (SG&A) costs occur without a proportional rise in revenue
- A finanicial term for the effect of certain internal or market forces on a company's gross, operating or net margins. If something happens to make a company's costs rise or revenues fall, margins will become compressed, reducing net earnings.
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Marginal Benefit
- The additional satisfaction, or utility, that a person receives from consuming an additional unit of a good or service. A person’s marginal benefit is the maximum amount they are willing to pay to consume that additional unit of a good or service. In a normal situation, the marginal benefit will decrease as consumption increases.
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Marginal Cost Of Funds
- The incremental cost of borrowing more money to fund additional asset purchases or investments. In its simplest calculation, the marginal cost of funds is simply the interest rate on the new loan balance. Marginal cost of funds is often confused with the average cost of funds, which would be calculated by computing a weighted-average of all the combined loans’ interest rates.
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Marginal Cost Of Production
- The change in total cost that comes from making or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level.
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Marginal Propensity To Consume - MPC
- A component of Keynesian theory, MPC represents the proportion of an aggregate raise in pay that is spent on the consumption of goods and services, as opposed to being saved.
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Marginal Rate of Substitution
- The rate at which an individual must give up “good A” in order to obtain one more unit of “good B”, while keeping their overall utility (satisfaction) constant. The marginal rate of substitution is calculated between two goods placed on an indifference curve, which displays a frontier of equal utility for each combination of “good A” and “good B”.
As such, the marginal rate of substitution is always changing for a given point on the indifference curve, and mathematically represents the slope of the curve at that point.
- The rate at which an individual must give up “good A” in order to obtain one more unit of “good B”, while keeping their overall utility (satisfaction) constant. The marginal rate of substitution is calculated between two goods placed on an indifference curve, which displays a frontier of equal utility for each combination of “good A” and “good B”.
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Marginal Rate Of Transformation
- The rate at which one good must be sacrificed in order to produce a single extra unit (or marginal unit) of another good, assuming that both goods require the same scarce inputs. The marginal rate of substitution is tied to the production possibilities frontier (PPF), which displays the output potential for two goods using the same resources. To produce more of one good means producing less of the other because the resources are efficiently allocated.
The marginal rate of transformation is the absolute value of the slope of the production possibilities frontier. For each point on the frontier (which is displayed as a curved line), there is a different marginal rate of substitution, based on the economics of producing each product individually.
- The rate at which one good must be sacrificed in order to produce a single extra unit (or marginal unit) of another good, assuming that both goods require the same scarce inputs. The marginal rate of substitution is tied to the production possibilities frontier (PPF), which displays the output potential for two goods using the same resources. To produce more of one good means producing less of the other because the resources are efficiently allocated.
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Marginal Social Cost - MSC
- The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.
Calculated as:
Where:
MSC = Marginal Social Cost
MPC = Marginal Private Cost
MEC = Marginal External Cost
- The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.
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Marginal Tax Rate
- The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate.
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Marginal Utility
- The additional satisfaction a consumer gains from consuming one more unit of a good or service.
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Marginalism
- The study of marginal theories and relationships within economics. The key focus of marginalism is how much extra use is gained from incremental increases in the quantity of goods created, sold, etc. and how those measures relate to consumer choice and demand.
Marginalism covers such topics as marginal utility, marginal gain, marginal rates of substitution, and opportunity costs, within the context of consumers making rational choices in a market with known prices.
- The study of marginal theories and relationships within economics. The key focus of marginalism is how much extra use is gained from incremental increases in the quantity of goods created, sold, etc. and how those measures relate to consumer choice and demand.
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Minimum Margin
- The initial amount required to be deposited in a margin account before trading on margin or selling short. For example, the NYSE and the NASD require investors to deposit a minimum of $2,000 in cash or securities to open a margin account. Keep in mind that this amount is only a minimum - some brokerages may require you to deposit more than $2,000.
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Net Interest Margin
- A performance metric that examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments.
Calculated as:
- A performance metric that examines how successful a firm's investment decisions are compared to its debt situations. A negative value denotes that the firm did not make an optimal decision, because interest expenses were greater than the amount of returns generated by investments.
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Net Interest Margin Securities - NIMS
- A type of security that allows holders to access excess cash flows resulting from securitized mortgage loan pools.
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Net Margin
- The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage – that shows how much of each dollar earned by the company is translated into profits. Net margins can generally be calculated as:
- The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage – that shows how much of each dollar earned by the company is translated into profits. Net margins can generally be calculated as:
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Non-Marginable Securities
- Securities that cannot be purchased on margin at a particular brokerage or financial institution. Some classes of securities, such as recent initial public offerings (IPOs), over-the-counter bulletin board stocks, and penny stocks, are non-marginable by decree of the Federal Reserve Board. Other securities, such as stocks with share prices under $5 or with extremely high betas, may be excluded at the discretion of the broker itself.
Non-marginable securities must be 100% funded by the investor's own cash, and holdings in non-marginable securities do not add to the investor's margin buying power.
- Securities that cannot be purchased on margin at a particular brokerage or financial institution. Some classes of securities, such as recent initial public offerings (IPOs), over-the-counter bulletin board stocks, and penny stocks, are non-marginable by decree of the Federal Reserve Board. Other securities, such as stocks with share prices under $5 or with extremely high betas, may be excluded at the discretion of the broker itself.
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Operating Margin
- A ratio used to measure a company's pricing strategy and operating efficiency.
Calculated as:
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.
Also known as "operating profit margin" or "net profit margin".
- A ratio used to measure a company's pricing strategy and operating efficiency.
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Portfolio Margin
- The modern composite-margin requirements that must be maintained in a derivatives account containing options and/or futures contracts. Portfolio margin accounting requires a margin position that is equal to the remaining liability that exists after all offsetting positions have been netted against each other.
For example, if a position in the portfolio is netting a positive return, then it could offset the liability of a losing position in the same portfolio. This would reduce the overall margin requirement that is necessary for holding a losing derivatives position.
- The modern composite-margin requirements that must be maintained in a derivatives account containing options and/or futures contracts. Portfolio margin accounting requires a margin position that is equal to the remaining liability that exists after all offsetting positions have been netted against each other.
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Profit Margin
- A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
Also known as Net Profit Margin.
- A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
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Remargining
- The process of bringing an account up to minimum equity standards by depositing more cash or equity. This typically occurs after the account holder has received a margin call.
When a stock is purchased on margin in a margin account, the account holder is required to maintain certain levels of equity in that account. When these requirements are not met, the brokerage firm will require that additional cash or securities be deposited to bring the account up to minimum equity levels.
- The process of bringing an account up to minimum equity standards by depositing more cash or equity. This typically occurs after the account holder has received a margin call.
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Reset Margin
- The additional fixed spread above the index underlying a floating-rate security.
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SPAN Margin
- Short for standardized portfolio analysis of risk (SPAN). This is a leading margin system, which has been adopted by most options and futures exchanges around the world. SPAN is based on a sophisticated set of algorithms that determine margin according to a global (total portfolio) assessment of the one-day risk for a trader's account.
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Variation Margin
- A variable margin payment that is made by clearing members to their respective clearing houses based upon adverse price movements of the futures contracts that these members hold.
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