Margin allows you to buy securities with borrowed funds. Traders find several margin balances when they open a margin trading account. It can be overwhelming trying to calculate and understand each one, but having a grasp on these figures can help you control risk and manage your profit and losses.
A stock margin calculator can help you know your margin requirements and balances. Learn more about how to calculate margin in a stock trading account.
How to Calculate Margins on Trades
Margin requirement calculators can help you track your margin levels and determine how much interest you might owe. Since trading on margin involves borrowing money, you owe margin interest that accrues daily.
A stock margin calculator also allows you to see the impact financial transactions can have on your margin balances and margin requirements. You can see how the numbers change by plugging in hypothetical buys, sells, deposits, and withdrawals.
With a margin loan, you can borrow money from your broker for any purpose, but you will owe interest on the loan based on the borrowing rate. Of course, you will also need the greater of either the $2k minimum margin requirement or 50% of the security’s purchase price in your account to buy on margin. For example, if you were to purchase 10 shares of a stock trading at $30, 50% is $1,500. However, since that is less than $2,000, you’ll need to deposit $2,000 in order to purchase the 10 shares on margin. Conversely, if you wanted to purchase 10 shares of a stock selling for $50, 50% is $2,500. In this case you would need to deposit $2,500, not $2,000, in order to make your purchase on margin.
Calculating Initial Margin
Initial margin refers to the percentage of the purchase price of a security on which the trader must use their own money — typically, at least 50%. This margin rate is set by Federal Reserve Board Regulation T. Some brokers might have stricter initial margin requirements, forcing traders to have a larger percentage of cash to establish positions.
An initial margin requirement is a straightforward calculation. It is the number of shares multiplied by the stock price multiplied by the margin rate.
Initial margin requirement = number of shares x stock price x margin rate
For example, let’s say you want to buy 100 shares of XYZ stock priced at $90 per share, with a 50% initial margin requirement. When you enter the long stock trade, the margin requirement is 100 x $90 x 50% = $4,500. The value of the long stock position is $9,000, so you only need $4,500 of equity to open that $9,000 stake.
In that example, you would need $4,500 to purchase 100 shares of XYZ stock — that is the initial margin requirement. The maximum loan value is 100 shares x $90 x 50% = $4,500. Your margin excess is $4,500.
Calculating Maintenance Margin
Once you own shares, there is a maintenance margin requirement which is often less than the initial margin amount. Maintenance margin is the minimum amount of equity a trader needs to keep in their account to continue to hold positions. Reg T sets this amount at 25%, but many brokerage firms have stricter maintenance margin rates to protect themselves against investors defaulting on their margin loans. Maintenance margin varies by stock; highly volatile stocks often feature higher margin requirements.
To calculate a maintenance margin, we’ll continue the example from above, using the same formula:
Maintenance margin requirement = number of shares x stock price x margin rate
Let’s assume XYZ stock is a fully marginable stock with a 25% requirement. You only need $2,250 of equity to continue to own the position. The formula is: 100 shares x $90 per share x 25% = $2,250.
If the stock price fell, however, you would face a margin call since your equity percentage would drop below 25%. Your margin loan would swell above 75%.
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Calculating Margin on Short Stock
Here is a short stock margin calculation example. It’s worth noting that selling stocks short comes with its own set of risks since there is no limit on how high a stock value can go.
Let’s say you short sell 100 shares of XYZ stock at $90 per share. The margin requirement is 150%. Since you receive 100% cash from selling the shares, the additional margin requirement is 50% on top of that 100%.
The margin calculation is: 100 shares x $90 x 150% = $13,500.
Maintaining Adequate Margin
You are responsible for always keeping a minimum margin balance — that is the equity in your account. Let’s dive into what happens when your position value fluctuates.
Suppose you bought 1,000 XYZ shares at $10 per share and it has a 50% initial margin requirement. That $10,000 position requires $5,000 of equity. The maximum loan value is $5,000, or 50% of the purchase value.
Assuming a 25% maintenance margin, your equity must remain at or above 25% of the position value. Once the position is established, the maximum loan value is 1,000 shares x $10 x 75% = $7,500.
Now suppose the stock price rises to $15. The position value is now $15,000 and your equity has risen to $10,000. The maximum loan percentage is still 75%, but that equates to $11,250 — which means your equity must be at or above $3,750. You have excess margin of $6,250.
Now let’s say the stock price drops sharply to $6 per share. Your equity is $1,000 and you are borrowing $5,000. The maximum loan value is now: 1,000 shares x $6 x 75% = $4,500.
Since the loan balance is greater than the maximum loan value, you must resolve the shortfall immediately. The account requires a deposit of cash or marginable securities by the close of business that day.
Calculating Maximum Trade Size From Margin Excess
In this example, assume you have $6,000 of margin excess and seek to purchase the maximum number of shares of a stock with a 30% margin requirement. The stock price is $20.
Your stock margin calculator shows: $6,000 / 30% = $20,000.
At $20,000, you can buy 1,000 shares: $20,000 / $20.
Calculating Maximum Trade Value at Different Margin Rates for $10,000 Excess Margin
Here is a breakdown of maximum trade values at different margin rates for $10,000 of excess margin. You can employ a margin requirement calculator to easily determine margin levels.
25% Maintenance margin: $10,000 / 25% = $40,000
30% Marginable equities: $10,000 / 30% = $33,333
50% Initial margin: $10,000 / 50% = $20,000
75% Marginable equities: $10,000 / 75% = $13,333
It’s important to remember that different brokers will have different margin requirements. Moreover, margin rates vary by security.
Margin Calls
An online stock margin calculator can keep track of your margin balances to help avoid margin calls.
A margin call happens when the value of your margin account falls below the broker’s requirements. The brokerage firm will demand that you satisfy the call by depositing more cash or securities. You can also meet the call by selling your existing holdings. The broker can execute a forced sale if you do not act quickly enough.
The Takeaway
A stock margin calculator can help you know your margin balances when trading with borrowed funds. With changing stock prices and when holding multiple positions, account margin levels can vary minute by minute. Knowing how to calculate margin in stock trading is important in order to carefully manage your risk.
If you have the experience and risk tolerance and are ready to try out trading on margin for yourself, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.
Photo credit: iStock/erdikocak
*Borrow at 8.50%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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