Profit Margin

DEFINITION of Profit margin

Profit margin is a profitability ratio counted as net income divided by revenue, or net profits divided by sales.

WHAT IT IS IN ESSENCE

Buying low and selling high is the only way to stay profitable. As simple as that sounds, why is it so challenging for traders to stay profitable?

Why is it so challenging for traders to stay profitable?

Before you placed the trade did you have a mechanical process to project a profit target? Did the potential profit warrant the risk you were putting on?

Do you understand the concept of probabilities, and that it takes a larger sample size to ascertain the viability of any method?

If you answered no to any of these questions then you’re trading is not profitable.

Profit margin is a profitability ratio counted as net income divided by revenue, or net profits divided by sales.

Net income or net profit are calculated when all of a company’s expenses, including operating costs, material costs (including raw materials) and tax costs, deducted from its total revenue.

HOW TO USE

Savvy investors can use margin to get more bang for their buck in the stock market.

They also know and respect the risks of margin when things aren’t working right.

A margin account allows investors to borrow money from a brokerage to buy more securities than they otherwise could, creating the potential for bigger profits or bigger losses.

Profit margins are expressing in percentage. They measure how much out of every dollar of sales a company keeps in earnings. 

Example: 20% profit margin means the company has a net income of $0.20 for each dollar of total revenue earned.

Mathematically,

 

Profit Margin     = Net Profits (or Income) / Net Sales (or Revenue)

 

                               = (Net Sales – Expenses) / Net Sales

 

                               = 1- (Expenses / Net Sales)

You can determine net profit by subtracting all the associated expenses.