# Margin: concept, main types, difference from marginality. How to calculate margin

Today the word "margin" is used in various industries - in business, banking, trade, insurance and etc. In this case, almost always we are talking about one of the parameters of pricing or an indicator of profitability, but the final meaning in each of the areas will be different.

Since the concept of margin originally appeared in the economic sciences, it is in this context that it should be disassembled initially. We will start with this, then consider the most significant types of margin and, finally, move on to the calculation formulas with illustrative examples.

- What is the margin
- Types of margin

- How to calculate the margin

- Margin and marginality are one and the same?
- Margin and margin - looking for differences
- The concepts of margin

## What is the margin

** Margin ** (from the French * “Marge” * - stock, reserve) is an indicator that reflects the share of profit in the proceeds from any economic activity. It is expressed as a percentage. It cannot be more than 100%.

Also often expressed expression of margin in currencies (rubles, hryvnias, dollars). In this case, it is calculated as the difference between the final price and the purchase (cost).

This simplified method of determining margin is quite popular, but the calculation in fractions or percent is considered canonical and also more informative in assessing the financial effectiveness of any activity.

## Types of margin

Practically in every sector of the economy your varieties of margin. Also, variations of this indicator are distinguished depending on the inclusion of various additional parameters in the process of determining it. Consider the most common varieties.

### Gross

** Gross margin ** is the difference between the total revenue received (before taxes) and production costs (staff salary, communal services, components, etc.) . In other words, this is the share of revenue that remains after deducting from it the cost of the product.

The calculation of gross margin is carried out according to the formula:

* BM = (OB - C) / OB * *

*100%,* where * ОВ * is the total revenue; * With * - the cost.

This indicator is usually used to measure the profitability of manufacturing enterprises.

### Variation

** Variation margin ** is the amount, which the speculator receives as a result of changes in the value of borrowed obligations in an open position. Variation margin is present in trading with securities , futures, indices and other exchange-traded assets.

It can be both positive and negative (in the second case, the trader will incur losses). Each trading platform is determined by its own formulas.

### Net interest (banking)

** Net margin ** is a basic indicator when analyzing the effectiveness of credit and banking institutions. It is defined as the ratio of the difference between deposit and credit interest rates to income-generating assets.

The bank interest margin is calculated according to the following formula:

** BPM = (PD - PR) / PD **

** 100% ,* where * PD * and * PR * - income and expenses at% rates.

As a rule, the values of this indicator for specific banks are in the public domain. Thus, the client can assess the financial stability of the institution in advance, making a decision on the possibility of using its services.

### Operating margin

** Operating margin ** is the most important indicator of profitability, which displays the share of net income in revenue (after deducting all costs associated with the production).

You can determine the operating margin by the formula:

** OP = BH / W * 100%, **

where * In * - revenue, * BH * - net income.

This indicator is an improved version of the gross margin, which, when found, does not pay attention to operating expenses.

### Other types of margin

Many other types are most often adapted to a particular industry version of the above margin variations. Therefore, we will only briefly consider their definitions:

**Guaranteed margin**- the difference between the cost of the deposit made by the client and the amount of the loan issued to him.

**Security margin**is an investment term that indicates the percentage reduction in the value of an asset, upon reaching which you can enter into a secure purchase transaction.

**Back-margin**- the amount of bonuses received from suppliers of goods (for participation in a marketing campaign, listing, etc.).

**Front margin**- the difference between the income from the sale of goods and the cost of their purchase.

## How to calculate the margin

How to calculate the margin: [ 19459009]

- Decide on the type of margin sought.
- Select the appropriate formula.
- Find out the values of the parameters included in the formula.
- Perform mathematical calculations.

The first item can be sorted out using the information from the previous section. The rest, let's take a closer look.

### The formula for calculating the margin

The method of calculating the margin depends on what kind of indicator you want to find. You have already seen some calculation formulas in the above material and you may have noticed that they are all similar.

And this is not at all surprising, since initially there was only one margin calculation scheme, which was subsequently adapted to the specifics of various sectors of the economy.

** The basic formula ** for determining the margin:

** M = (D - C) / D * 100%, ** [ 19459009]

where * D * - income (final price); * C * - the cost price (purchase price).

We will use this formula to calculate the margin using an example.

### Calculation procedure

Having defined the formula to be used, you can go directly to calculation.

For example, consider a situation in which you need to calculate the margin for the results of 10 transactions for the sale of mobile phones online store.

Let's say each gadget is sold for 16,000 rubles. So the total income from transactions for which you want to calculate the margin will be:

* D = 10 * 16 000 = 160 000 (rubles) *

Now we need to find out the value the cost of goods sold for the sample in question. Imagine that the store owner receives smartphones from a supplier from China, and each unit costs him 11,000 rubles (taking into account delivery from abroad). Consequently, the cost price of 10 telephones included in the margin calculation formula is:

* С = 10 * 11 000 = 110 000 (rubles) *

Having received all the necessary values of the parameters present in the formula for determining margin, we can proceed to the mathematics:

* M = (160,000 - 110,000) / 160,000 * 100% = 31.25% *

Thus the profit (P) of the online store after 10 transactions will be 37.5% of the total amount that will be received as a result of the sale of smartphones. Well, to determine profit in absolute terms, you just need to multiply the margin and income:

* P = (M * D) / 100% = (31.25% * 160 000) / 100% = 50 000 (rubles) *

As you can see, it is not so difficult to find the value of the margin. The main thing is to choose the right formula and understand where to get the values of the parameters required to find the result from it.

## Margin and margin are one and the same?

Many people believe that there is no clear separation between these concepts and therefore use them interchangeably. However, there is still a difference.

It turns out that the second term is a synonym for profitability, and the first is one of the parameters for its assessment. And this in turn means that margin is an expression of marginality.

Here is a tautology: the margin allows you to evaluate the marginality. The greater the value of margin, the higher the marginality, that is, the economic efficiency of the subject in question.

## Margin and margin - looking for differences

Quite often it happens that the margin and margin are considered the same indicator. However, in reality it turns out that these are two completely different parameters.

The margin is calculated as the ratio of the profit received to the initial cost of the product. But to determine the margin, profit is divided by the selling price.

Another difference is that the margin does not exceed 100%, and the margin is often 200% or higher.

For illustrative purposes, consider an example - a store purchased TVs from the manufacturer for $ 120 apiece and sells them to its visitors for $ 360. In this case, the commodity margin will be:

* H = (360 - 120) / 120 * 100% * * = 200% *

And now we calculate margin value:

* M = (360 - 120) / 360 * * * 100% = 66.67% *

It turns out that for each unit The goods store made an extra charge of 200%. But at the same time, this margin is only 66.67% of the income received from the sale. The remaining 33.33% is payment for the purchase of goods from a supplier.

## The concepts of margin

As mentioned above, depending on the type of economic activity the concept of margin changes, and in some cases dramatically. The most popular variations of this parameter can be found in the following industries.

### In business

Margin in business is a key parameter when analyzing the profitability of an existing project or when evaluating the prospects of investments at the planning stage. In addition, this parameter is taken into account when calculating the final price of the product (for the consumer).

Therefore, the margin formula is used ** basic ** - (D - C) / D * 100%, but the cost value can only be obtained as a result of complex calculations that economists and analysts are involved in.

Also, the margin index can be calculated for individual product categories to determine which ones adversely affect the general condition of the business, and which, on the contrary, allow it to stay afloat. An analysis of the resulting margin values allows you to make a decision to reduce costs in certain areas of the business and thus increase its overall profitability.

The highest-margin business categories currently include the production and sale of alcohol, tea / coffee, cosmetics, snacks, and tobacco products. Also, a high margin often accompanies goods from the "handmade" category.

### In trade

The essence of margin in trade is almost no different from the general initial concept - this is all the same indicator that allows you to judge profitability.

For each individual case, its value will be different, but on average it is believed that trading activity is effective, in which the margin is more than 10% (ideally 20-30%).

The calculation of this indicator is carried out according to a formula similar to those that we have already considered:

** M = (B - ЗЦ) / В * 100%, **

where * B * - the proceeds from the sale of goods; * ZTs * - purchase price.

If, on the basis of the results of trading activities, it is necessary to determine the net margin indicator, instead of the purchase price, the formula includes the cost of goods calculated taking into account all the costs that accompany the sale process.

### At Forex

Perhaps the most different concept of margin from the standard refers to the sphere of speculation in the markets of exchange-traded assets, in particular, Forex. This implies the amount that a trader pays to the trading floor as collateral and receives in return the right to use borrowed funds in his transactions.

This trade is called margin trading and makes it possible to make a profit that is many times higher than the income that would have been obtained using only the originally available deposit. In addition, the trader can open transactions not only for the purchase, but also for the sale of assets that he actually does not have.

[1945904] successful completion of the transaction in margin trading, the rate should continue to move in the direction chosen by the speculator. Otherwise, the margin (a deposit allocated for trading) will act as compensation to the exchange or to the broker for the unsuccessful use of credit funds.

Read also:

What is GDP: explain in simple words

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