Most people know that in business, making money is important. However, understanding how much money you make after covering all your costs is what we call "profit".
What is profit?
Profit is the money you make when your business earns more from selling things or providing services than it spends on things like supplies, workers' wages, and taxes. It's what's left over after all the costs are taken care of.
What does profit tell you?
Profit tells you if a business is making money or not. If a business has profit, it means it's earning more from sales than it's spending on expenses like supplies and salaries. It shows how successful the business is at making a financial gain after covering all its costs. Profit helps business owners decide if they're doing well and if they can grow or give money back to investors.
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What is the difference between gross, operating, and net profit?
1. Gross profit:
- Definition: Gross profit is what remains after subtracting the cost of goods sold (COGS) from total revenue (sales).
- Formula: Gross Profit = Revenue (Sales) - Cost of Goods Sold (COGS).
- What it tells you: It shows how much money a business makes from selling its products or services after accounting for the direct costs of making or buying those products.
2. Operating profit:
- Definition: Operating profit is what's left after subtracting operating expenses (like rent, salaries, and utilities) from gross profit.
- Formula: Operating Profit = Gross Profit - Operating Expenses.
- What it tells you: It indicates how much profit a company makes from its core business operations, before considering interest expenses, taxes, and other non-operating costs.
3. Net profit:
- Definition: Net profit is the amount left over after deducting all expenses, including interest and taxes, from operating profit.
- Formula: Net Profit = Operating Profit - Interest Expense - Taxes.
- What it tells you: It represents the overall profitability of a business after all expenses are taken into account. It's often referred to as the "bottom line" because it shows how much money the company has earned after all costs.
In summary, gross profit focuses on sales and the direct costs to produce goods or services. Operating profit adds operating expenses to understand profitability from day-to-day activities. Net profit further deducts interest and taxes to reveal the true earnings available to the business after all financial obligations are met. Each level of profit provides insight into different aspects of a company's financial health and performance.
What is ‘take-profit’ in trading?
Take-profit is a trading strategy used to automatically close a trade when a specified profit level is reached. It allows traders to lock in gains without needing to monitor the market constantly.
Imagine you buy Ethereum - ETH through a CFD (Contract for Difference) on a trading platform like Skilling. Let's say you buy 10 ETH at $3,000 each, hoping the price will rise. You set a take-profit order at $3,500 per ETH.
- Step 1: Sign up for free for a Skilling trading account.
- Step 2: Search for Ethereum (ETH) in your account.
- Step 3: Look for the option to set a "Take-Profit" order. This is usually found within the trade details.
- Step 4: Enter the price at which you want to automatically sell your ETH to take-profit, e.g., $3,500 per ETH.
- Step 5: Confirm the details of your take profit order, including the quantity (10 ETH in this example).
- Step 6: Place the take-profit order. Once the market price of Ethereum reaches $3,500 per ETH, Skilling will automatically execute a sell order for your 10 ETH to secure your profit.
Key points:
- Take-profit helps traders secure profits by automatically closing a position at a predetermined price level.
- It removes the need for constant monitoring of the market, allowing traders to set their exit points in advance.
- Take-profit orders can be set for various financial instruments like cryptocurrencies (e.g., Ethereum), commodities (e.g., cocoa price) and precious metals (e.g., silver price) offered as CFDs on platforms like Skilling.
Using take-profit effectively requires understanding market conditions, setting realistic profit targets, and adjusting strategies based on ongoing market movements.
Disclaimer: Past performance does not guarantee or predict future performance.
Summary
Remember, profit is what remains after you subtract the costs of making or buying something from the money you earn by selling it. It's like a reward for your effort and smart choices in business. In simple terms, if you spend less money on making or buying something than you earn from selling it, you've made a profit.
