What is margin?

As a profitability measure, margin shows how much of each dollar of revenue is left after a set of costs. Gross margin is revenue minus cost of goods sold, divided by revenue and shown as a percentage. Operating margin divides operating profit by revenue, net margin divides profit after tax by revenue, and contribution margin (revenue minus variable costs per unit) helps with pricing and volume decisions.

Margins let you compare performance across periods, products or peers. Do not confuse margin with markup. A 20% markup on cost gives a margin of about 16.67% of the selling price, because markup is measured against cost and margin against price. To convert, margin equals markup divided by (1 plus markup), using decimals.

In lending, margin is the part of the rate the lender controls. It starts from a benchmark or its own cost of funds, then adds a margin for the borrower, the asset and the term, which is why two customers of one lender can be quoted differently.

In the share market, a margin lender advances funds against shares or managed funds you already hold. Its approved securities list sets the maximum loan to value ratio it will lend against each holding, and your own equity makes up the rest. Above that maximum sits a buffer, a bit of headroom before the lender acts. If prices fall far enough to use up the buffer, it issues a margin call: you add cash or approved securities, or the lender sells part of the portfolio. A lender can also cut the ratio on a holding, which can trigger a call when prices have not moved.

Borrowing to invest costs margin interest and possibly fees. Rates are usually quoted as a spread over the lender's base rate and move with market rates, which the RBA cash rate influences through bank funding costs. Interest is worked out daily on the outstanding balance and usually debited monthly, so capitalising it rather than paying it means paying interest on interest.

Margin multiplies gains and losses, and a forced sale can land at the worst time. Lenders manage that by setting a maximum ratio for each security and holding a buffer above it, tightening both when markets turn volatile. Margin lending is a regulated financial product, so the Product Disclosure Statement sets out the buffer, the call process and when the lender can sell, and a licensed adviser can go through whether it fits. Interest may be deductible when the borrowed funds produce assessable income, but conditions apply, so check the ATO's guidance. For business assets, asset finance or a business loan is often the better comparison.