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Operating expenses

The costs of running the business that are not tied to producing each unit: selling, marketing, admin, and research and development.

Operating expenses sit below gross-profit and above operating-income. The usual buckets are sg-and-a and research-and-development, sometimes split further into sales and marketing versus general and administrative.

Most opex is closer to fixed than COGS is, which is the source of operating-leverage. If revenue rises 20% and opex rises 6%, operating profit rises far faster than 20%. The same maths works brutally in reverse.

Example: Northwind Tools spends $250M of opex: $160M of SG&A and $90M of R&D. On $370M of gross profit that leaves $120M of operating income. A 10% opex cut with flat revenue would lift operating income by 21%.

Related: sg-and-a, research-and-development, operating-income, operating-leverage, fixed-costs

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.

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