Margin of Safety
The discount between the price paid for a security and the analyst's estimate of its intrinsic value.
Formula
Margin of Safety = (Estimated Intrinsic Value - Market Price) / Estimated Intrinsic Value x 100
Unit
%
In depth
The margin of safety exists because valuations are estimates built on assumptions, and the buffer is protection against those assumptions being wrong rather than a forecast of profit. The required size scales with uncertainty: a stable utility warrants a smaller discount than a cyclical commodity producer with volatile earnings. It is a discipline against overconfidence — the point is not that the estimate is right and the discount is bonus, but that the estimate may be wrong and the discount is insurance. Applying a large margin of safety to a value estimate that is itself optimistic provides no protection at all, which is the failure mode to watch.
Worked example
An estimated intrinsic value of ₹90 against a market price of ₹60 gives a margin of safety of (90 - 60) / 90 = 33%. If the estimate proves 20% too high, true value is ₹72 and the buyer at ₹60 still holds a positive position.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Margin of Safety” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.