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Margin of safety in Investment

 

Margin of safety is a concept used in investment analysis to determine the level of risk associated with a particular investment. It refers to the difference between the current market price of a security or investment and its intrinsic value.

In other words, the margin of safety is the amount by which the price of a security or investment can fall before it reaches its intrinsic value. It acts as a cushion against potential losses in case the market price of the security or investment drops.

The margin of safety is calculated by subtracting the intrinsic value of the investment from its current market price. The larger the margin of safety, the lower the risk associated with the investment.

Investors who are interested in value investing tend to focus on the margin of safety. They seek investments that are undervalued in the market and have a large margin of safety, as they believe that the market will eventually recognize the true value of the investment and the price will increase.

By using the margin of safety concept, investors can make informed decisions about whether an investment is worth the risk. A higher margin of safety indicates a lower risk investment, while a lower margin of safety indicates a higher risk investment.

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