Margin of Safety

View Financial Glossary Index

Definition

The term "Margin of Safety" was coined by Benjamin Graham and David Dodd in the popular investing book, "Security Analysis" (1934).

Margin of Safety refers to the difference between a stock's intrinsic worth (a value which no one is certain) and the price that an investor is purchasing the stock at. This difference is crucial for an investor, it provides a cushion where the investor may be incorrect in his/her prediction on price and not lose on his/her investment.

If an investor believes a certain company should be valued at 25 per share, and the stock is currently trading at 20 per share, the investor has a margin of safety between the 20 dollar entry and the 25 dollar valuation. Even if the investor has over estimated the price of 25 per share, the margin of safety allows him/her to be wrong up to 5 dollars before they take a loss.

Having a margin of safety implies a few things : an investor is valuing a company correctly based on its intrinsic worth, purchasing a company when its market price is lower than its intrinsic value, and markets will correct themselves to the intrinsic value.

Are you an investing professional?

Click here to request a live demo of YCharts Professional, our premium suite of tools and data.
Learn more about our professional products. Call (866) 965-7552 or email sales@ycharts.com

Search the Glossary

Advertisement

Related Terms

{{root.upsell.info.feature_headline}}.

{{root.upsell.info.feature_description}}

Please note that this feature is only available as an add-on to YCharts subscriptions.


Please note that this feature requires full activation of your account and is not permitted during the free trial period.

Start My Free Trial {{root.upsell.info.call_to_action}} No credit card required.

Already a subscriber? Sign in.