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There are three types of margins: profit margins, operating margins, and gross margins. All are measures of how much money a company keeps after it pays for different aspects of the production of a product. Gross margins tell you how much is left after labor and materials have been paid. Operating margins tell you what's left before taxes and one-time charges. Profit margins tell you what's left after all of the bills have been paid.

When earnings increase faster than sales, it means that margins are rising and times are good. Companies that are increasing their margins tend to produce the best earnings over time.

When the opposite happens, look out below. Falling margins indicate that sales are expanding faster than earnings. Falling margins normally mean slowing earnings, and indicates a great place to look for shorts.

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