The main goal in business is certainly to gain profit. And of course there are ways that must be done to be able to find out. In the world of business and trading, of course there are various terms that you need to know and learn.

Such as Leverage, Spread, Pips, Lot, Liquidate, or other terms. And this time we will learn what is called Margin. Margin is something related to profit. In addition to margin, in business it can also be referred to as turnover, profit, or profit.

Usually the margin will be presented in the form of a percentage. However, there are also many simple margins without a percentage such as just a profit or the difference between the selling price of goods and the capital spent to produce or buy the goods.

Margin On Business

Margin is an important component in financial reporting. In terms of accounting, margin will be used as a reinforcement of the understanding of profit which means the difference between sales results minus production costs. The same as in business, the term margin will be associated with the term profit. As discussed earlier, margin is a term that refers to the difference between finance and turnover in a business in the form of a percentage.

Types of Margins in Business

After learning what margin is and related terms, next we will learn what and how the types of margins themselves are. The types of margins in business also vary, to find out more, we can learn it through the writing below.

Profit Margin

Profit Margin is a profitability ratio (profit) calculated by comparing profit after interest and taxes with sales. This profit margin will show the profit that will be obtained from sales. There are also net profit and gross profit.

The profit itself can be increased by gaining additional income or by reducing costs. This profit margin will also take into account all costs faced in the business, not just the cost of goods sold. This profit margin can be used by large-scale companies and small and medium entrepreneurs to show potential profits.

Usually investors who are looking for a particular startup to fund will assess this profit margin from the potential services being developed. In addition, profit margin is also commonly used by investors to compare 2 or more businesses to identify which one is better for investment. To calculate this profit margin, you can do it with the following formula:

  1. Profit Margin = Net Profit (Revenue) / Net Sales (Revenue).
  2. Or you can also write it as Profit Margin = Net sales - costs / net sales.
  3. You can also formulate it with Profit Margin = 1 - (Expenses/Net Sales).

Gross Margin

If previously we discussed profit margin, now we discuss gross margin. Gross Margin is the income left for the company after deducting the cost of production. In other words, gross margin is a number of rupiah from the sales results that are retained by the company after paying all costs related to the production of goods and services sold.

The higher the margin, the greater the amount of capital that the company will get back from each sale. Conversely, the lower the gross margin, it will indicate that the company is less able to control its production costs and cost of goods sold, which will cause the company's operating conditions to decline.

The formula that you can use to calculate Gross Margin is: Gross Profit Margin = Gross Profit (Gross Profit): Net Sales.

Operating Margin

Operating margin is a measure of the amount of profit generated from each sale obtained by a company after paying variable production costs, such as salaries and raw materials, but before paying interest and taxes.

Because this operating margin is part of the profitability ratio, this margin is calculated by dividing the company's operating profit by its net sales. The function of the operating margin itself is to show the company's profitability over a certain period of time.

This margin is an indicator to determine how well the management and business risks are obtained. In addition, operating margin also makes it easier for investors to understand how a business can make money. However, this margin can only be used to compare the same company with similar sales.

Keep in mind that operating profit is the same as earnings before interest and taxes (EBIT) which is usually found in the income statement. The formula to find out Operating Margin or operating profit is: Operating Margin = Operating Profit / Revenue.

Meanwhile, the formula for calculating EBIT is: EBIT = Gross Profit - (Operational expenses + Depreciation + Amortization).

Margin On Forex

After learning what margin is and its types, this time we will learn what margin is in forex. Forex is a currency that is usually traded based on other currencies. This is also done in trading. There is also the term margin in forex trading itself. In trading, Margin is a term used to trade with borrowed capital.

This is something interesting because of the fact that forex investment can be done with real money that is lower than the transaction size. And besides that, you as a trader can also open a larger position with a smaller capital.

Types of Margin in Forex

In addition to the types of margins in business, there are also types of margins in forex. These types of margins include margin requirements, short margins, margin calls, free margins, and margin levels which will have their respective functions that you can learn through this article as well. These types of margins are:

Margin Requirement

Margin Requirement is the margin needed to make a transaction. This margin can also be called collateral. When we want to open a position in trading, then later a guarantee will be needed that matches the lot size, well this guarantee is called the Margin Requirement.

If in futures trading, margin requirement means a guarantee or requirement in the form of a certain amount of funds to make a transaction. And for each product in futures trading, the margin needed and used to make a transaction will have different amounts. In addition, the margin that will be needed also often changes. Depending on the rules of the relevant agencies.

Example of Margin Requirement

An example for calculating this margin requirement is:
  1. Purchasing Power x 50% (Initial Margin Example) = $5,000.
  2. Purchasing power = $5,000/50% = $10,000.

Short Margin

Short margin transactions are also often referred to as short selling. Short Margin is a transaction to sell securities where the securities in question are not owned by the seller at the time the transaction is carried out. The securities in question can be in the form of shares.

By using this short margin facility, customers and traders can sell securities that are not yet owned by traders through the provision of securities from securities companies. As for the transaction, it is usually carried out if the customer sees a price of securities that has the potential to fall. Technically, this short selling transaction is the opposite of general stock transactions.

Normally, investors will buy stocks in the hope that the price will increase so that they make a profit. However, in short selling transactions, they actually hope that the price of the shares or securities they transact will decrease. Therefore, the Indonesia Stock Exchange (IDX) revoked all shares that were transacted by short selling or margin because the transactions carried out were the opposite of general transactions.

It should also be noted that not all trading will use this feature, so there is no need to worry about using other margin features.

Margin Call

In addition to the above types, there is also a Margin Call type. This Margin Call can be interpreted when the broker you follow asks you to add margin due to the loss of your position that is currently falling. Position here means the amount of securities, commodities, or currencies that you have. So is the profit on your position.

Usually the profit will come in the form of a margin deposit that returns to your account. If the position loss continues to increase and the equity value has decreased far from the margin management, the broker will close some positions until the margin management is met.

And closing this position is called Stop Out. Usually, most traders will misplace the meaning of Stop Out and Margin Call. Whereas Margin Call is a feature that can save traders who are almost out of capital.

Free Margin

In margin, there is also a type of margin with the term Free Margin. Free Margin is the difference between equity and the total margin of all open positions. So, you cannot use this margin as collateral in transacting in the financial market.

However, if there is no position, then all funds in the account can be called Free Margin Forex. You can call this free margin as the resilience of the funds you have. To make it easier, free margin can be said to be the amount of money that is not put into trading.

So, forex traders can use the money in the form of withdrawals or open trading positions again. For example, when you open a trading position again and then you get a profit, then you can get greater equity which makes Free Margin bigger. This free margin can also be used as a trading plan or more precisely, to measure proper financial management and risk management.

Free Margin Formula

The formula for calculating Free Margin is: Free Margin = Equity - Margin currently in use.

Margin Level

Margin Level is a limiter provided by forex brokers for you traders as a session to trade. This margin will be used to limit the value of losses from all capital played by traders. For this margin level, it will be very closely related to risk management in the trading world.

Because this margin level will prevent the risk of large losses or losses experienced by traders if they cannot control their egos to continue trading. In terms of trading, it is better to maintain a trading balance by using the margin level feature so that it can protect against losing too much capital if you are experiencing a loss.

Usually, the smaller the margin level shown, the more dangerous the position of your account. Because forex brokers use margin levels to determine whether traders can open transactions again or not, this margin level becomes a very important feature.

Each broker has a different limit in determining the margin level. Usually 100% but there are also those who provide margin levels of up to 40% or less. And this limit is called the margin call level.

Margin Level Formula

The way to measure margin level is: Margin Level = (Equity/margin) x 100%.

Uses of Margin

In every feature in trading, it certainly has its own function that can be owned by every trader. So is the margin feature. For those of you who want to know what the uses or benefits of this margin feature are, you can find out through the writing below.
  1. The benefits that you can get are starting from increasing the purchasing power of traders who have limited capital. For those of you who have little capital, you can start by using this margin feature as a way to get profit.
  2. The next advantage is that it can increase the potential of traders to gain profits faster. However, this margin technique must be used correctly in order to create the potential for this profit.
  3. Then you can also avoid Suspend Buy. Suspend buy is a situation where customers or traders can no longer make stock purchases, they can only make sales transactions to fulfill obligations. In addition, for traders who use regular accounts, in terms of securities they can do force sell or forced sales. However, as long as you use this margin feature, investors can still make stock purchase transactions with the available limits. With the condition that the minimum collateral ratio is still sufficient.
  4. In addition, you will get more benefits about the interest earned. By using a margin account, traders can enjoy affordable and light interest loan facilities. If traders have monitored an investment that has potential and plan to buy it, then if given the opportunity to increase the amount of purchases, customers or traders can maximize the profits that will be received from the results of the stock transaction.
  5. Next, there is an advantage that can extend the payment period. However, this advantage can only be obtained at some trader companies so not all can have this feature.

After learning about margins and their types and benefits, we must continue to learn other things in the world of traders. In order to become a trader who gets stable profits, it is expected to continue to learn other things in order to get benefits such as when using this margin feature.

Now, limited capital is no longer an obstacle for you to achieve success in forex trading or others. Thus the discussion from GIC Indonesia regarding a brief explanation of margin.

Don't forget to keep looking for information related to banks, forex, and other finances, such as "Stock Analysis: Definition, Types, and Applications", only in Jurnal GIC. Also make sure you deepen your forex knowledge at GIC Indonesia, via ebook scalping, and also NFP live trading.