Fundamental analysis
Margin of safety
Definition
The discount between a conservative estimate of value and the price paid, as a percentage of the value.
Example
Say your conservative estimate of company XYZ’s value is $50 a share and the stock trades at $35. The margin of safety is ($50 − $35) ÷ $50 = 30%. If your estimate later proves 20% too high, the value is really $40, and the price you paid still sits below it.
Hypothetical numbers, for illustration only.
Also defined in
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