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Investors who trade using margin, or funds they’ve borrowed from their broker, do so via a margin account. An investor’s margin equity is the market value of their margin account, minus the total amount borrowed. Their margin equity percentage is simply the percentage of the account’s value that they own outright.
It can be important for investors who use margin to understand both margin equity and margin percentage — and their importance when trading or investing with a margin brokerage account.
Key Points
• Margin accounts let qualified investors borrow money from their broker to buy stocks and other securities, using their own investments as collateral.
• Margin equity is the part of a margin account that the investor actually owns after subtracting the borrowed money.
• Investors may be able to borrow up to 50% of a security’s purchase price, but they must still repay the loan with interest even if they lose money.
• Margin equity percentage shows how much of the account belongs to the investor compared with how much is borrowed from the broker.
• If an account falls below the required margin level, the broker can issue a margin call and may sell investments to recover the borrowed money.
What Is Margin Equity?
Margin equity is the portion of a margin trading account that an investor owns outright at any given time. A margin account is a stock brokerage account that allows the account holder to borrow up to a specific amount of money from the brokerage firm. A margin account can be a powerful investment tool for sophisticated investors comfortable with higher levels of risk because they have to put up less of their own money in order to make a trade.
Investors can use funds in a margin account to invest in more financial securities, such as stocks, bonds, or funds, that are paid for with funds that exist in the margin account. Money in a margin account is typically in either cash or securities.
Using the value of those assets, a margin account investor can borrow up to 50% of the amount of the cash needed to buy a stock or other security. The securities broker charges interest on any money borrowed in a margin account, plus a commission for executing the trade.
The goal for any margin account investor is to earn back enough profit from a margin account trade to cover the costs of interest on the borrowed margin account funds. If an investor loses money on a margin account trade using borrowed funds, they still have to repay those funds, with interest.
Recommended: What Is Margin Trading, and How Does It Work?
Margin Account Rules
The Financial Industry Regulatory Authority (FINRA) sets the minimum equity balance of a margin account at $2,000. A brokerage firm may have its own maximum fund limits based on the ability of the investor to prove they can repay any money borrowed from the broker via a margin account.
Any time a margin buying investor wants to buy a new security and requires borrowed margin account funds to do so, the amount of cash the investor puts on the table is known as the margin requirement.
To determine an account’s margin equity, you subtract the amount you borrowed from your brokerage from the current value of the margin account’s investments. This total is called your margin equity.
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What Is Margin Equity Percentage?
Margin equity percentage is the portion of unleveraged assets in the account. The process of calculating margin equity percentage is similar to using debt-to-equity ratios. Here’s an example:
Let’s say an investor buys $10,000 in stocks and funds and has borrowed $5,000 in margin account funds from the broker. The value of that $10,000 investment has increased to $11,000, as the assets purchased have increased by $1,000. The margin loan hasn’t changed — it’s still $5,000. Thus, the investor’s margin equity in the account stands at $6,000.
If that original $10,000 investment fell in value to $9,000, the margin equity portion of the account would stand at $4,000 ($9,000 – $4,000 = $4,000).
In the example above, the equity margin percentage is represented by the investor’s margin equity divided by the value of the margin account.
Using the same figures in the example where the account grows by $1,000 ($10,000 + $1,000), $6,000 divided by $11,000 is 54.5%. Using the same figures, where the account declines by $1,000, and the equity value of the margin account is $4,000 divided by $9,000 (the total amount of money left in the margin account), the margin equity percentage is 44.4%.
The Importance of Knowing Your Margin Equity and Margin Equity Percentage
Knowing your margin equity and margin equity percentage can help you understand the level of risk that you’re taking in the account. That can help you determine whether you might need to make changes in order to boost your maintenance margin, or the minimum account balance needed to avoid a “margin call.”
Brokerage firms issue margin calls if an investor’s funds fall below the required maintenance margin. If you can’t meet a margin call, the brokerage firm can shut down your margin account and hold you personally responsible for any losses incurred in the account (and charge you additional fees and commissions, as well).
The Takeaway
The existing balance in an investor’s margin account is their margin equity, and their margin equity percentage is the portion of funds in that account that they own (vs. funds they’ve borrowed).
Investors who choose to trade on margin should keep an eye on their margin equity and margin equity percentage as one metric for measuring the performance and investment risk of that account. A margin account with a higher equity percentage has lower levels of debt, making a margin call less likely.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
How do you calculate margin equity?
Margin equity is the part of a margin account that the investor owns after subtracting the amount of money borrowed from their brokerage. The value of a margin account includes the cash balance and the value of the securities held in the account.
What is a margin equity percentage?
Margin equity percentage shows how much of the account belongs to the investor compared with how much is borrowed from the broker. The calculation is simple: You divide the portion of the margin account that belongs to the investor by the account’s total current market value.
How does a margin account work?
A margin account allows a qualified investor to borrow money from their broker to increase their purchasing power. This allows them to buy more stock or other securities than they would purchase themselves, using their own investments as collateral. For example, if you want to buy $1,000 of stock in a company but only have $500, your broker can lend you $500 to make the purchase. Bear in mind that even if you lose money on the investment, you’re still responsible for repaying the $500 loan, plus interest on that loan, making margin trading a high risk investment.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.
Trading securities on margin loans involves high risk and costs and is not suitable for all investors. It is possible to lose more than your initial investment when using margin. Please see more details at https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf
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