Margin of safety
What is a margin of safety?
It's the difference between the market price of a security and its intrinsic value. The term was invented by the founders of value investing, Benjamin Graham and David Dodd.
Where have you heard about margins of safety?
You might have used a margin of safety to work out when to buy a security. The more it costs compared to its market value, the better – and the higher the margin of safety.
What you need to know about margins of safety.
The purpose of a margin of safety is to make sure you're minimising the risk associated with losses – otherwise known as the downside risk. Fair value is usually difficult to calculate, so a margin of safety makes sure you're investing in something sensibly, and with a lower risk.
The ideal margin of safety varies. Investors generally want to pay 90% of a security's intrinsic value for high-quality issues, or around 50% or less for speculative investments.
Margins of safety are also used in the accounting world in break-even analysis. It's used to calculate how much sales can fall before a business reaches break-even.
Find out more about margins of safety.
For more about how margins of safety protect your investments, read our guide to downside risk.