Definition
Margin of Safety
Margin of safety is the practice of buying a stock at a meaningful discount to its estimated intrinsic value to protect against errors and bad luck.
Coined by Benjamin Graham, the margin of safety is the cushion between a stock's price and its calculated intrinsic value. If you estimate a share is worth ₹100 and buy it at ₹65, the 35% discount protects you if your estimate is too optimistic or the business hits trouble.
The bigger the uncertainty, the larger the margin you should demand. It is the cornerstone of value investing: profit comes not from precise forecasts but from buying conservatively below worth, so that even being roughly right still pays off.
Related terms
- Discounted Cash Flow (DCF)DCF is a valuation method that estimates a company's worth by projecting its future cash flows and discounting them back to today's value.
- Intrinsic ValueIntrinsic value is the estimated true worth of a business based on its fundamentals and future cash flows, independent of the current market price.
- Value InvestingValue investing is a style of buying stocks that trade below their intrinsic worth, betting the market will eventually recognise their true value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.