What is margin in trading in simple words, the difference from profit, revenue and markup. What is marginality? Analysis and calculation of the indicator Term margin

Many people come across the concept of “margin,” but often do not fully understand what it means. We will try to correct the situation and give an answer to the question of what margin is in simple words, and we will also look at what types there are and how to calculate it.

Margin concept

Margin (eng. margin - difference, advantage) is an absolute indicator that reflects how the business operates. Sometimes you can also find another name - gross profit. Its generalized concept shows what the difference is between any two indicators. For example, economic or financial.

Important! If you are in doubt about whether to write walrus or margin, then know that from a grammatical point of view you need to write it with the letter “a”.

This word is used in a variety of areas. It is necessary to distinguish what margin is in trading, on stock exchanges, in insurance companies and banking institutions.

Main types

This term is used in many areas of human activity - there are a large number of its varieties. Let's look at the most widely used ones.

Gross Profit Margin

Gross or gross margin is the percentage of total revenue remaining after variable costs. Such costs can be the purchase of raw materials for production, payment of wages to employees, spending money on the sale of goods, etc. It characterizes the overall operation of the enterprise, determines its net profit, and is also used to calculate other values.

Operating profit margin

Operating margin is the ratio of a company's operating profit to its income. It indicates the percentage of revenue that remains with the company after taking into account the cost of goods, as well as other related expenses.

Important! High indicators indicate good performance of the company. But be on the lookout because these numbers can be manipulated.

Net Profit Margin

Net margin is the ratio of a company's net profit to its revenue. It displays how many monetary units of profit the company receives from one monetary unit of revenue. After calculating it, it becomes clear how successfully the company copes with its expenses.

It should be noted that the value of the final indicator is influenced by the direction of the enterprise. For example, firms operating in the retail trade usually have fairly small numbers, while large manufacturing enterprises have fairly high numbers.

Interest

Interest margin is one of the important indicators of a bank’s performance; it characterizes the ratio of its income and expense parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.

This variety can be absolute or relative. Its value can be influenced by inflation rates, various types of active operations, the relationship between the bank’s capital and resources attracted from outside, etc.

Variational

Variation margin (VM) is a value that indicates the possible profit or loss on trading platforms. It is also the number by which the amount of funds taken as collateral during a trade transaction can increase or decrease.

If the trader correctly predicted the market movement, then this value will be positive. In the opposite situation it will be negative.

When the session ends, the running VM is added to the account or, vice versa, canceled.

If a trader holds his position for only one session, then the results of the trade transaction will be the same as the VM.

And if a trader holds his position for a long time, it will be added to daily, and ultimately its performance will not be the same as the outcome of the transaction.

Watch a video about what margin is:

Margin and Profit: What's the Difference?

Most people tend to think that the concepts of “margin” and “profit” are identical, and cannot understand the difference between them. However, even if it is insignificant, the difference is still present, and it is important to understand it, especially for people who use these concepts every day.

Recall that margin is the difference between a company's revenue and the cost of the goods it produces. To calculate it, only variable costs are taken into account without taking into account the rest.

Profit is the result of a company’s financial activities at the end of a certain period. That is, these are the funds that remain with the enterprise after taking into account all the costs of production and marketing of goods.

In other words, the margin can be calculated this way: subtract the cost of the product from the revenue. And when profit is calculated, in addition to the cost of the product, various costs, business management costs, interest paid or received, and other types of expenses are also taken into account.

By the way, such words as “back margin” (profit from discounts, bonuses and promotional offers) and “front margin” (profit from markups) are associated with profit.

What is the difference between margin and markup?

To understand the difference between margin and markup, you must first clarify these concepts. If everything is already clear with the first word, then with the second it is not entirely clear.

The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: production, delivery, storage and sales.

Therefore, it is clear that the markup is an addition to the cost of production, and the margin does not take this cost into account during calculation.

    To make the difference between margin and markup more clear, let’s break it down into several points:
  • Different difference. When calculating the markup, they take the difference between the cost of goods and the purchase price, and when calculating the margin, they take the difference between the company’s revenue after sales and the cost of goods.
  • Maximum volume. The markup has almost no restrictions, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
  • Basis of calculation. When calculating the margin, the company's income is taken as the base, and when calculating the markup, the cost is taken.
  • Correspondence. Both quantities are always directly proportional to each other. The only thing is that the second indicator cannot exceed the first.

Margin and markup are quite common terms used not only by specialists, but also by ordinary people in everyday life, and now you know what their main differences are.

Margin calculation formula

Basic concepts:

G.P.(grossprofit) - gross margin. Reflects the difference between revenue and total costs.

C.M.(contribution margin) - marginal income (marginal profit). The difference between revenue from product sales and variable costs

TR(totalrevenue) – revenue. Income, the product of unit price and production and sales volume.

TC(totalcost) - total costs. Cost price, consisting of all costing items: materials, electricity, wages, depreciation, etc. They are divided into two types of costs – fixed and variable.

F.C.(fixed cost) - fixed costs. Costs that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.

V.C.(variablecost) - variable costs. Costs that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.

Gross Margin reflects the difference between revenue and total costs. The indicator is necessary for analyzing profit taking into account cost and is calculated using the formula:

GP = TR - TC

Similarly, the difference between revenue and variable costs will be called Marginal income and is calculated by the formula:

CM = TR - VC

Using only the gross margin (marginal income) indicator, it is impossible to assess the overall financial condition of the enterprise. These indicators are usually used to calculate a number of other important indicators: contribution margin ratio and gross margin ratio.

Gross Margin Ratio , equal to the ratio of gross margin to the amount of sales revenue:

K VM = GP/TR

Likewise Marginal Income Ratio equal to the ratio of marginal income to the amount of sales revenue:

K MD = CM / TR

It is also called the contribution margin rate. For industrial enterprises the margin rate is 20%, for retail enterprises – 30%.

The gross margin ratio shows how much profit we will make, for example, from one dollar of revenue. If the gross margin ratio is 22%, this means that every dollar will bring us 22 cents in profit.

This value is important when it is necessary to make important decisions about enterprise management. It can be used to predict changes in profits during expected growth or decline in sales.

Interest margin shows the ratio of total costs to revenue (income).

GP = TC/TR

or variable costs to revenue:

CM = VC/TR

As we already mentioned, the concept of “margin” is used in many areas, and this may be why it can be difficult for an outsider to understand what it is. Let's take a closer look at where it is used and what definitions it gives.

In economics

Economists define it as the difference between the price of a product and its cost. That is, this is actually its main definition.

Important! In Europe, economists explain this concept as the percentage rate of the ratio of profit to product sales at the selling price and use it to understand whether the company’s activities are effective.

In general, when analyzing the results of a company’s work, the gross variety is most used, because it is it that has an impact on net profit, which is used for the further development of the enterprise by increasing fixed capital.

In banking

In banking documentation you can find such a term as credit margin. When a loan agreement is concluded, the amount of goods under this agreement and the amount actually paid to the borrower may be different. This difference is called credit.

When applying for a secured loan, there is a concept called the guarantee margin - the difference between the value of the property issued as collateral and the amount of funds issued.

Almost all banks lend and accept deposits. And in order for the bank to make a profit from this type of activity, different interest rates are set. The difference between the interest rate on loans and deposits is called the bank margin.

In exchange activities

On exchanges they use a variation variety. It is most often used on futures trading platforms. From the name it is clear that it is changeable and cannot have the same meaning. It can be positive if the trades were profitable, or negative if the trades turned out to be unprofitable.

Thus, we can conclude that the term “margin” is not so complicated. Now you can easily calculate using the formula its various types, marginal profit, its coefficient and, most importantly, you have an idea in which areas this word is used and for what purpose.


The concept of markup and margin (people also say “gap”) similar to each other. They are easy to confuse. Therefore, first, let's clearly define the difference between these two important financial indicators.

We use markup to set prices, and margin to calculate net profit from total income. In absolute terms, the markup and margin are always the same, but in relative (percentage) terms they are always different.

Formulas for calculating margins and markups in Excel

A simple example to calculate margin and markup. To implement this task, we need only two financial indicators: price and cost. We know the price and cost of the product, but we need to calculate the markup and margin.

Formula for calculating margin in Excel

Create a table in Excel, as shown in the figure:

In the cell under the word margin D2, enter the following formula:


As a result, we get the margin volume indicator, for us it was: 33.3%.



Formula for calculating markup in Excel

Move the cursor to cell B2, where the result of the calculations should be displayed, and enter the formula into it:


As a result, we obtain the following markup percentage: 50% (easy to check 80+50%=120).

The difference between margin and markup using an example

Both of these financial ratios consist of profits and expenses. What is the difference between markup and margin? And their differences are quite significant!

These two financial ratios differ in the way they are calculated and the results in percentage terms.

Markups allow businesses to cover costs and make a profit. Without it, trade and production would go into minus. And the margin is the result after the markup. For a clear example, let’s define all these concepts with the formulas:

  1. Product price = Cost + Markup.
  2. Margin is the difference between price and cost.
  3. Margin is the share of profit that the price contains, so the margin cannot be 100% or more, since any price also contains a share of the cost.

The markup is the part of the price that we added to the cost.

Margin is the portion of the price that remains after subtracting the cost.

For clarity, let’s translate the above into formulas:

  1. N=(Ct-S)/S*100;
  2. M=(Ct-S)/Ct*100.

Description of indicators:

  • N – markup indicator;
  • M – margin indicator;
  • Ct – product price;
  • S – cost.

If we calculate these two indicators in numbers then: Markup = Margin.

And if in percentage terms, then: Markup > Margin.


Please note that the markup can be as high as 20,000%, and the margin level can never exceed 99.9%. Otherwise, the cost will be = 0r.

All relative (percentage) financial indicators allow you to display their dynamic changes. Thus, changes in indicators in specific periods of time are monitored.

They are proportional: the higher the markup, the greater the margin and profit.


This gives us the opportunity to calculate the values ​​of one indicator if we have the values ​​of the second. For example, markup indicators allow you to predict real profit (margin). And vice versa. If the goal is to reach a certain profit, you need to figure out what markup to set that will lead to the desired result.

Let's summarize before practice:

  • for margin we need indicators of sales amount and markup;
  • For the markup we need the sales amount and the margin.

How to calculate the margin as a percentage if we know the markup?

For clarity, let's give a practical example. After collecting reporting data, the company received the following indicators:

  1. Sales volume = 1000
  2. Markup = 60%
  3. Based on the data obtained, we calculate the cost (1000 - x) / x = 60%

Hence x = 1000 / (1 + 60%) = 625

Calculate margin:

  • 1000 - 625 = 375
  • 375 / 1000 * 100 = 37,5%

This example follows the formula for calculating margin for Excel:

How to calculate the markup as a percentage if we know the margin?

Sales reports for the previous period showed the following indicators:

  1. Sales volume = 1000
  2. Margin = 37.5%
  3. Based on the data obtained, we calculate the cost (1000 - x) / 1000 = 37.5%

Hence x = 625

We calculate the markup:

  • 1000 - 625 = 375
  • 375 / 625 * 100 = 60%

An example of an algorithm for calculating a markup formula for Excel:


Note. To check formulas, press the key combination CTRL+~ (the “~” key is located before the one) to switch to the corresponding mode. To exit this mode, press again.

Various indicators are used to evaluate economic activity. The key is margin. In monetary terms, it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.

 

It is necessary to periodically evaluate the financial activities of an enterprise. This measure will allow you to identify problems and see opportunities, find weaknesses and strengthen strong positions.

Margin is an economic indicator. It is used to estimate the amount of markup on the cost of production. It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.

It is often used to assess the profitability of an industry (oil refining):

Or justify making an important decision at a separate enterprise (“Auchan”):

It is calculated as part of an analysis of the company's financial condition.

Examples and formulas

The indicator can be expressed in monetary and percentage terms. You can count it either way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:

M = CPU - C, where

CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:

M = (CPU - C) / CPU x 100

Peculiarities:

  • cannot be 100% or more;
  • helps analyze processes in dynamics.

An increase in product prices should lead to an increase in margins. If this does not happen, then the cost is rising faster. And in order not to be at a loss, it is necessary to reconsider the pricing policy.

Attitude towards markup

Margin ≠ Markup when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:

N = (CP - C) / C x 100

How to find by markup

If you know the markup of a product as a percentage and another indicator, for example, the selling price, calculating the margin is not difficult.

Initial data:

  • markup 60%;
  • sale price - 2,000 rub.

We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.

Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%

Summary

The indicator is useful for small enterprises and large corporations to calculate. It helps to assess the financial condition, allows you to identify problems in the pricing policy of the enterprise and take timely measures so as not to miss out on profits. It is calculated along with net and gross profit for individual products, product groups and the entire company as a whole.

Margin (English margin - difference, advantage) is one of the types of profit, an absolute indicator of the functioning of an enterprise, reflecting the result of primary and additional activities.

Unlike relative indicators (for example, ), margin is necessary only for analyzing the internal situation in the organization, this indicator does not allow comparing several companies with each other. In general terms, margin reflects the difference between two economic or financial indicators.

What is margin

Margin in trading– this is a trade margin, a percentage added to the price to obtain the final result.

What is markup and margin in trading, as well as how they differ and what you should pay attention to when talking about them, the video clearly explains:

IN microeconomics margin(grossprofit - GP) - a type of profit that reflects difference between revenue and costs for manufactured products, work performed and services provided, or the difference between the price and the cost of a unit of goods. This type of profit coincides with the indicator “ profit from sales».

Also within economics of the company allocate marginal income(contribution margin - CM) is another type of profit that shows the difference between revenue and variable costs. This type of profit helps to draw conclusions about the share of variable costs in revenue.

IN financial sector under the term " margin» refers to the difference in interest rates, exchange rates and securities and interest rates. Almost all financial transactions are aimed at obtaining margin - additional profit from these differences.

For commercial banks margin– this is the difference between the interest on loans issued and deposits used. Margin and marginal income can be measured both in value terms and as a percentage (the ratio of variable costs to revenue).

On securities market under margin refers to collateral that can be left to obtain a loan, goods and other valuables. They are necessary for transactions on the securities market.

A margin loan differs from a traditional loan in that the collateral is only a portion of the loan amount or the proposed transaction amount. Typically the margin is up to 25% of the loan amount.

Margin also refers to the advance of cash provided when purchasing futures.

Gross and percentage margin

Another name for marginal income is the concept of “ gross margin"(grossprofit – GP). This indicator reflects the difference between revenue and total or variable costs. The indicator is necessary for analyzing profit taking into account cost.

Interest margin shows the ratio of total and variable costs to revenue (income). This type of profit reflects the share of costs in relation to revenue.

Revenue(TR– total revenue) – income, the product of the unit price and the volume of production and sales. Total costs (TC – totalcost) – cost price, consisting of all costing items (materials, electricity, wages, etc.).

Cost price are divided into two types of costs - fixed and variable.

TO fixed costs(FC – fixed cost) include those that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.

TO variable costs(VC – variable cost) include those that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.

Margin - calculation formula

Gross Margin

GP=TR-TC or CM=TR-VC

where GP is gross margin, CM is gross marginal income.

Interest margin calculated using the following formula:

GP=TC/TR orCM=VC/TR,

where GP is interest margin, CM is interest margin income.

where TR is revenue, P is the price of a unit of production in monetary terms, Q is the number of products sold in physical terms.

TC=FC+VC, VC=TC-FC

where TC is the total cost, FC is fixed costs, VC is variable costs.

Gross margin is calculated as the difference between income and costs, percentage margin is calculated as the ratio of costs to income.

After calculating the margin value, you can find contribution margin ratio, equal to the ratio of margin to revenue:

To md =GP/TR or To md =CM/TR,

where K md is the marginal income coefficient.

This indicator K md reflects the share of margin in the total revenue of the organization; it is also called rate of marginal income.

For industrial enterprises the margin rate is 20%, for retail enterprises – 30%. In general, the marginal income coefficient is equal to profitability of sales(by margin).

Video - profitability of sales, the difference between margin and markup:

 

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