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Margin of Safety

What is the definition of Margin of Safety?

Margin of Safety is a term that is more or less owned by value investors, whose central aim is to buy stocks that they believe are undervalued by the market. The difference between the market price and the intrinsic value is the Margin of Safety. If the shares of a company currently trade for 75p, but the intrinsic value of the shares is £1.00, then the Margin of Safety would be 25%.

Stockopedia explains Margin of Safety...

Determining a company's "true" worth (its intrinsic value) is highly subjective. The way that Benjamin Graham calculated margin of safety years back was highly asset/NCAV-based, and probably quite different from how analysts today might make the calculation. We provide a range of models to allow you to easily run your own valuations and margin of safety calculations. The pre-defined values are simply a starting point based on global assumptions that we have applied across the market - you should amend them as you see fit depending on the specific circumstances of the stock.

For further reading, see this article or Seth Klarman's classic book, "Margin of Safety" (if you can find a copy as it's famously hard to get hold of!).

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