Financial Terms related to Margin

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MARGIN
After tax profit margin

• The ratio of net income to net sales.

Average pre tax profit margin

• Pre-tax Income divided by Sales. This measures how well management converts
sales dollars into profits after deducting all the operating expenses for making and
selling its products. Compare the last two years' pre-tax profit margins with the 5-
year average to show the trend of growth.

Average profit margin

• See Average Pre-tax Profit Margin.

Before tax profit margin

• The ratio of net income before taxes to net sales.

Buy on margin
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• A transaction in which an investor borrows to buy additional shares, using the

shares themselves as collateral.

Contribution margin

• The difference between variable revenue and variable cost.

Dollar safety margin

• The dollar equivalent of the safety cushion for a portfolio in a contingent

immunization strategy.

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Effective margin

• EM. 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 scenario.

Equitize a margin call

• Is an event whereby a previously unsatisfied margin call is eliminated by an

effective transfer of ownership. In 1998, Long Term Capital Management transfereda
portion of ownership to its creditors. In some respects, it was a debt for equity swap.
The immediate benefit to the previous creditors is that the regulatory capital
requirement is not impaired by a default. It also extends the horizon for position
liquidation.

Gross margin

• Measures the percentage of each sales dollar remaining after the firm has paid the
direct costs of the products sold (Cost of Goods Sold).

• Equals sales revenue less the cost of goods sold

Gross profit margin

• Gross profit divided by sales, which is equal to each sales dollar left over after
paying for the cost of goods sold.
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Initial margin

• Is the amount of funds and/or securities required to establish a position.

Initial margin requirement

• 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 the

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exchange.

Maintenance margin requirement

• 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.

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).

• Equals sales revenue minus the cost of goods sold and minus other variable
expenses, such as shipping

• The use of borrowed money to purchase securities. This action is expressed by the
phrase buying on margin.

• (1) In a repo or a reverse repurchase transaction, the amount by which the market
value of the securities collateralizing the transaction exceeds the amount lent. (2) In
futures markets, money buyers and seller must put up to ensure performance on the
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contracts. (3) In options, similar meaning as in futures for sellers of put and call
options.

• Is the amount required to open a position. This amount is different for each futures
market depending on each contract. Also, the dollar amount varies for each security
and option account because of the variations in holdings among all accounts.

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 if the value

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of the stock drops sufficiently, the account holder will be required to deposit more
cash or sell a portion of the stock. See also: Cash Account; Regulation T.

Margin account stocks

• 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.

Margin call

• A demand for additional funds because of adverse price movement. Maintenance

margin requirement, security deposit maintenance

• The Federal Reserve Board's demand that a customer deposit a specified amount
of money or securities when a purchase is made in a Margin Account. The amount is
expressed as a percentage of the market value of the securities at the time of
purchase. The deposit must be made within one payment period. See also: Margin;
Fed Call.

• Is the phrase used to represent a call for additional funds. This demand for more
funds in either cash and/or securities is to restore an account to its initial margin
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requirement level. Generally, this occurs when the price action is adverse to the
account holders positions. It can also reflect an increase in margin requirements.

Margin of profit ratio

• Also known as the Operating Profit Ratio. A measure of a corporation's relative

profitability. It is calculated by dividing the operating profit by the net sales. See also:
Profit Margin.

Margin of safety

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• With respect to working capital management, the difference between 1) the amount
of long-term financing, and 2) the sum of fixed assets and the permanent component
of current assets.

Margin requirement

• Is the amount of funds necessary for a position or a portfolio's entire holdings.

Margin requirement options

• 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.

Marginal

• Incremental.

Marginal analysis

• Economic principle that states that financial decisions should be made and actions
taken only when the added benefits exceed the added costs.

Marginal cost of capital

• Abbreviated MMC. The firm's weighted average cost of capital (WACC) associated
with its next dollar of total new financing.
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Marginal cost of capital schedule

• Graph that relates the firm's weighted average cost of capital (WACC) to the level
of total new financing.

Marginal tax rate

• The rate at which additional income is taxed.

• The tax rate that would have to be paid on any additional dollars of taxable income
earned.

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• The tax rate that would have to be paid on any additional dollars of taxable income
earned.

Net interest margin

• A ratio used for evaluating management for bank stocks. Measures the difference
between interest paid and interest collected.

• Is the difference between the interest revenue and the interest expense.
Sometimes, it is referred to as the spread.

Net operating margin

• 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.

• Measures the percentage of each sales dollar remaining after all expenses,
including taxes, have been deducted.

• A measurement defined as the net income before non-recurring gains and losses,
as a percentage of sales or revenues.

Operating margin
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• Measures the percentage of each sales dollar remaining after all expenses
associated with producing and selling the product and operating the company are
deducted.

• A Value Line measurement defined as operating earnings (before deduction of

Depreciation, Depletion, Amortization, Interest, and income tax) as a percentage of
sales or revenues. See also: Value Line Financial Strength.

Operating profit margin

• The ratio of operating margin to net sales.

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Original margin

• The margin needed to cover a specific new position. Related: Margin, security
deposit (initial)

• See Initial Margin.

Profit margin

• 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 percentage.

• Measures the percentage of each sales dollar remaining after all expenses,
including financing expenses and taxes have been deducted.

• See Pre-tax Profit on Sales.

Variation margin

• 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.