What Is Margin Level and How Do You Calculate It?

Margin level is a risk-management indicator that helps you understand what influence the currently opened positions have on your account.

The margin level in your trading account is a formula that tells you how much of your funds are available to open new trades. You’ll most often see it on forex trading platforms. The higher your margin level percentage, the more funds are available to trade. If the margin level drops too low, you could receive a margin call.

What Is Margin Level?

Your margin level percentage is a measure of the relationship between the equity in your trading or brokerage account and how much margin is in use. The margin level calculation is expressed as a percentage: (equity / margin) x 100.

It’s helpful to think of margin level as a reading of your trading account’s health. A margin level of 100% means that the amount of a portfolio’s equity and used margin are equal. Equity is the cash available to trade, plus any unrealized profits and losses on open positions. Many brokers will not allow investors to make new opening trades when the margin level on their trading account is 100% or less.

When margin level falls below 100%, the broker might issue a margin call. Unless the market moves back in your favor, you may deposit more funds (or assets) into your account when you are hit with a margin call. You can also satisfy a margin call by exiting your current position.

The margin level percentage depends on various factors. The volume of your positions and their potential effect on the market can affect your margin level calculation; as can the amount of leverage you use.

How Does Margin Trading Work?

To understand what margin level means, it’s important first to grasp the concept of margin itself. Margin is the amount of cash or securities a trader must deposit in their account before opening a position. Margin allows traders to access leverage, or the ability to control a larger position with less upfront capital. You can think of margin as a good faith deposit or a form of collateral.

In a traditional brokerage account, margin is a loan. The broker lends part of the purchase price, your securities serve as collateral, and you pay interest on the balance for as long as you carry it. The Federal Reserve Board’s Reg T sets the initial requirement for the margin loan, while FINRA sets the minimum you have to maintain after that.

Margin works differently in the forex market than in stock trading accounts. In forex, margin is a security deposit. A portion of your account balance is set aside while a position stays open, then released when you close it. You aren’t borrowing anything, so no interest accrues on the amount set aside. The National Futures Association requires at least 2% of a transaction’s notional value for major currencies, and 5% for others.

That difference is why the two are measured in different ways. When margin is money set aside, as in forex trading, comparing your equity to the amount committed tells you something useful. When margin is borrowed, as with traditional margin trading, what matters is how much of the position you actually own, your margin equity percentage, measured against the value of the securities rather than the size of the loan.

What Does Margin Level Really Do?

In forex trading, the margin level calculation tells you how much of your funds are available to use for new opening trades. The higher your margin level, the more “free margin” you have. Free margin is the amount of money available to place new trades. Margin is composed of “used” and “free” amounts. Used margin is the aggregate of all the required margin on your existing positions. Free margin, on the other hand, is the difference between equity and used margin.

Margin level also can inform you of how much wiggle room you have in your trading account. A very high margin level percentage means you have a large amount of equity relative to the total amount of required margin. A low margin level calculation tells you that your account might not be far from getting a margin call.

Calculating Margin Level

Calculating margin level is straightforward: Divide the equity by the amount of used margin; then multiply that quotient by 100:

Margin level = (equity / margin) x 100

If you don’t have any open positions, there’s no used margin to divide by, so margin level doesn’t apply. Platforms typically show a dash or a zero.

Margin Level Example

Suppose you deposit $10,000 into your account. Before you make any trades, margin level doesn’t apply yet, as you don’t have any used margin (the divisor in the earlier-mentioned equation is zero). You then open a position that requires $5,000 in margin. Your margin level calculation is now 200% ($10,000 / $5,000 = 200%).

Now let’s say you open a second position requiring another $5,000 in margin. Your margin level declines to 100% ($10,000 / $10,000 = 100%). We will assume that is the broker’s minimum margin level before a margin call is issued. Later, we’ll detail what happens if your margin level falls below the critical 100% threshold.

Why Understanding Margin Level Is Important

The margin level percentage is important, as brokers use this figure to determine whether you can open new positions. Many brokers set a minimum margin percentage at 100%. So if your margin percentage drops below that threshold, then you could encounter a margin call — or even a forced liquidation — on one or more of your open trades. If you want to take on new positions, then you’d be forced to sell an existing holding or add more funds to your account.

Margin Level Below 100%

Taking our earlier example a step further, if the market moves against you, and your account equity falls to $9,000, your margin level calculation would decline to below the minimum margin level ($9,000 / $10,000 = 90%). The broker then could issue a margin call.

You have two choices: either sell an existing position or deposit more assets into the account. If you do not act promptly, the broker can sell one of your positions automatically.

Your margin level could fall below 100% based on small moves in the assets you own. Broad market conditions, like volatility, also could affect your account negatively, so consider managing risks carefully when using leverage.

If you’re interested in trading on margin, or just want to know more about it, you’ll need to understand the difference between marginable and non-marginable securities.

The Takeaway

The margin level in your trading account is a formula that tells you how much of your funds are available to open new trades. Trading on margin is an advanced strategy that comes with greater risk than trading other securities, like stocks or ETFs, for example. But while the risks are greater, so are the potential rewards (and losses).

For experienced traders, using margin can enhance buying power. But using margin and leverage introduces additional risk into the mix, which investors should be aware of.

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.

Get one of the most competitive margin loan rates with SoFi, from 5.00% to 9.75%*

FAQ

What does a margin level of 100% mean?

It means the equity in the account equals the margin currently in use, leaving no free margin available to open new positions. Thresholds vary by platform, though 100% is a common point at which new positions are restricted.

Is margin level the same as margin equity percentage?

No. Margin level divides equity by the margin in use and is typically displayed on forex platforms. Margin equity percentage divides equity by the total market value of the securities held and is the measure used in U.S. brokerage accounts. The two produce different numbers for the same account.

Why isn’t forex margin considered a loan?

In forex, margin is a security deposit set aside from the account balance while a position remains open, rather than money advanced by the broker. Because nothing is borrowed, no interest is charged on the amount set aside.

What happens if an account falls below the maintenance requirement?

The firm generally issues a margin call, asking for additional cash or securities or for positions to be closed. If the account owner doesn’t act, the firm may sell securities in the account without contacting them first.

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Photo credit: iStock/fizkes

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