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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.

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.

Photo credit: iStock/fizkes

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Before investing, carefully consider the investment objectives, risks, charges, and expenses detailed in a Fund’s prospectus. This document contains important information and must be read carefully prior to investing; you can find the current prospectus by clicking the link on the Fund’s respective page.
Alternative investments are highly risky and may not be suitable for all investors. These investments often involve leveraging, speculative practices, and the potential for complete loss of investment. They typically charge high fees, lack diversification, and can be highly illiquid and volatile. Be aware that both registered and unregistered alternative investments, including Interval Funds, are not subject to the same regulatory requirements as mutual funds, and their illiquid nature may restrict your ability to trade on your timeline. Always review the specific fee schedule for Interval Funds within their prospectus.

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To start investing, learn the basics, set clear goals, and choose a strategy that fits your timeline and risk tolerance. Even small, consistent investments can help build wealth over time.

Investing can help you work towards your financial goals for the future, but it can also feel like an intimidating minefield for the uninitiated. Fortunately, modern technology has made it easier to start an investment portfolio. You could get started today if you have an internet connection and a brokerage account.

But it’s important to understand both the potential risks and benefits before you put your money into the financial markets. You’ll want to learn the basics of investing, from the different types of investments to the various strategies you can use to try to build your wealth. With this knowledge, you can start to identify which investments may be right for you, and how to get started.

How to Start Investing

If you are ready to start investing and want to build a portfolio on your own, you can follow these steps to get started. Just remember that it’s important to do your homework first to identify whether an investment may be a good fit for your goals and tolerance for risk.

1. Determine Your Investment Goals

You’ll want to do your best to establish your financial goals before you start investing. Since investments offer the potential for growth over time, many people use portfolio gains to fund future financial goals, like purchasing a home or retirement. Figuring out which investment strategy is right for you starts by assessing and understanding your goals and time horizon, because they’re not the same for everyone.

2. Choose an Investment Account

You will also need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks, exchange traded funds (ETFs), mutual funds, and other securities.

You may also use an employer-sponsored retirement plan, like a 401(k), or an individual retirement account (IRA) – such as a Roth IRA – to make your investments. One benefit of some retirement investment accounts is that they are tax-advantaged, meaning your investments may grow tax-free or tax-deferred within the accounts.

It’s worth remembering that you may need to pay taxes when withdrawing money. A tax professional can help advise you on what options may be best for your personal circumstances. To get started, here’s a guide on how to open a brokerage account.

Start investing with up to $3,000 in stock.

Open and fund a SoFi Active Invest account and get up to $3,000 in stock.*

Prefer mobile? Download the app:

3. Know Your Investment Options

There are numerous types of investments that you can explore and choose from. Here are some examples:

1. Stocks

When you think of investing, you probably think of the stock market. A stock gives an investor fractional ownership of a publicly traded company in units known as shares. Investing in stocks as a beginner — which may involve investing in and monitoring a small number of relatively low-risk companies — can be a good way to learn about the markets.

Stocks may generate returns for investors through capital appreciation, dividends, or both. Capital appreciation occurs when you buy a stock at one price, then sell it for a higher price in the future. The company may also pay dividends if it distributes part of its profits to shareholders.

Note, however, that it’s possible for investors to lose some of their initial investment if a company’s share price falls below their purchase price or all of that investment if the stock hits zero, making the stock worthless, which can happen. Investing in stocks carries some significant risks, and investors should be aware of those risks.

2. Bonds

Bonds are loans you make to a company or a government — federal or municipal — for a fixed period. In return for loaning them money, they promise to pay you, the investor, periodic interest and, eventually, your principal at the end of the period of the loan.

Bonds are often considered less risky investments than stocks. Bonds may be backed by the full faith and credit of the U.S. government, as is the case with U.S. Treasurys, or by state or local governments. They also may be backed by large companies.

However, the risk varies, and bonds are rated for quality and creditworthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered some of the least risky investments. However, they also tend to have lower returns. To start investing in bonds, a good first step is to learn about the options for buying bonds and the different types available..

3. Mutual Funds and ETFs

A mutual fund is a portfolio of assets either managed by a professional, or set up to track an index, such as the S&P 500. Funds typically focus on an asset class, industry, or region, and investors pay fees to the fund manager to buy and sell investments.

Exchange-traded funds (ETFs) are similar to mutual funds, though ETFs are traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. ETFs may also charge lower management fees than comparable mutual funds.

Mutual funds and ETFs can allow investors to diversify their holdings with a single investment vehicle. However, investors often invest in multiple funds for broader portfolio diversification.

4. Real Estate

Real estate is another type of investment which many people invest in by purchasing a home or a rental property.

If owning a home or becoming a landlord is out of reach for you, you can also invest in a real estate investment trust (REIT), or a company that operates in the real estate business. You can trade shares of a publicly listed REIT on a stock exchange like you would a stock. With a REIT, an investor buys a share of a real estate company that typically earns income through different types of property.

5. Robo Investing

For beginners who would be more comfortable with a hands-off approach, robo-investing uses automated, algorithm-driven technology to build and manage a diversified portfolio based on your financial goals and risk tolerance. These services typically have lower investment minimums and management fees compared to traditional human financial advisors, making them an accessible option for those just starting out. Some also offer varying degrees of human support for questions you may have about your investments.

To choose a robo advisor, investors may consider factors such as the range of investment products and portfolios offered, the types of investment accounts it supports (such as brokerage, retirement, and college saving accounts), how it handles portfolio rebalancing, and the level of support offered.

4. Decide Your Investment Style

Each individual investor will have different goals and concerns as it relates to their portfolio. You may want to work with a financial professional to help you zero in on what type of investments and overall portfolio may give you the best chance at reaching your goals.

With that in mind, you’ll want to think about your time frame, or time horizon — that is, how long you have to invest, and how long you might want to wait before selling your investments to see potential profits — assuming your investments accrued value.

Also think about your risk tolerance, or how much risk you’re willing to take with your money. Riskier investments may generate larger returns over time, but they can also lead to significant losses. This is something to consider when figuring out your specific investment style.

You’ll also want to think about how you allocate your investments, or the degree to which you diversify your portfolio. That means looking at the specific mix of investment types in your portfolio, and getting a sense of the risks and potential returns that each brings to the fold.

Quick Tips for Investing Beginners

An investment strategy is a plan for how you will invest your money. An investing strategy should consider your financial goals, risk tolerance, and time horizon. Here are three recommended tips and strategies for beginner investors.

•   Consider a buy-and-hold approach: Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so can help curb the tendency to panic sell, and it can also help minimize fees associated with trading, which may boost overall portfolio returns.

•   Utilize dollar-cost averaging: Dollar-cost averaging is a strategy that helps individuals regularly invest by making fixed investments on a regular schedule regardless of price. A dollar-cost averaging strategy can help individuals access a lower average share price and help them avoid emotional investing. On the flip side, dollar cost averaging may offer lower returns compared to lump sum investing in a rising market (and there is never a guarantee of seeing returns in investing).

•   Stay stoic: Remember to keep your emotions in check when investing. You may feel panicked every time the market dips, the economy slows, or a friend tells you that you need to shift your portfolio. But it may be wise to stick to your strategy and keep your goals in mind. There are no guarantees in investing, so don’t let the whims of the market give you whiplash.

Remember the Risks

It bears repeating that investing involves risk. There are all sorts of risks that investors assume when they put their money in the markets, and each individual investment may come with different types of associated risks. Some investment types are significantly riskier than others, too.

It’s important for beginner investors to keep in mind that there are no guarantees when investing. There’s a chance they could see negative returns, or lose all of their initial investment.

The Takeaway

For beginners, investing can seem complicated and intimidating — in many ways, it is. But if you take some simple initial steps to familiarize yourself with the markets, investing tools, and types of investments — and pair them with a sound strategy – you should set yourself up to be more confident and comfortable when you start investing.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

FAQ

How much money do you need to start investing?

It’s possible to start investing with very little money. Some brokerages allow investors to open accounts with as little as $0 to $5. At the same time, some investments may require a substantial minimum investment. Remember, however, that money is always needed in the account to purchase investments, such as stocks or funds.

What are the most popular investment options for beginners?

Some popular beginner investments include stocks, mutual funds, and exchange-traded funds (ETFs).

What are some simple investment strategies for beginners?

Some common investment strategies for beginners include buy and hold and dollar-cost averaging. Many beginners may also employ an index investing strategy, buying ETFs and mutual funds that track a benchmark index, like the S&P 500.

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Real estate investment trusts (REITs) and real estate mutual funds offer exposure to property investments, but in different ways. A REIT is a legal entity that owns and operates income-producing real estate and is required to pay dividends to its shareholders, while a real estate mutual fund is a pooled investment vehicle.

What Is a REIT?

A REIT is a trust that invests in real estate, typically through direct ownership. Those properties generate rental income, which is paid out to REIT shareholders in the form of dividends. The types of properties REITs may own can include:

•   Hotels and resorts

•   Self-storage facilities

•   Warehouses

•   Commercial office space

•   Retail space

•   Apartment buildings

•   Strip malls

Some REITs take a different approach to how they generate returns for investors. Rather than owning income-producing property, they may invest in mortgage loans and mortgage-backed securities. A third category of REITs employs a hybrid strategy, investing in both properties and mortgages.

REITs may be publicly traded on an exchange, similar to a stock, or they may be registered with the SEC but not publicly traded. This second category of REITs can also be referred to as nontraded REITs. Regardless of how they’re classified, REITs are considered alternative investments.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alternative assets through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

What Is a Real Estate Mutual Fund?

A real estate fund is a type of mutual fund that’s focused on the real estate sector. Mutual funds are pooled investment vehicles that allow multiple investors to buy shares and gain access to underlying investments. What a real estate mutual fund invests in can depend on its objective.

Real estate fund investments may include:

•   REITs

•   Real estate index funds

•   Real estate equities

•   Equities for real estate-related services and resources

•   Real estate fixed income or debt instruments, such as mortgage-backed securities

Many real estate funds concentrate holdings on REITs, with some focusing on a specific niche, such as office buildings, hotels, or shopping centers. Real estate funds may also hold real estate stocks, including stocks for real-estate related services and resources, such as timberland or other building supply companies. Some funds may include fixed income bonds or debt instruments. Funds may also use derivatives to help manage risk, though derivatives may bring higher risk, as well.

A fund manager determines which investments to hold inside the fund. The frequency with which fund assets turn over can depend on whether it uses an active or passive management strategy.

Real estate funds can pay out dividends to investors, though not all of them do. Some real estate funds are exchange-traded funds (ETFs), meaning they have the structure of a mutual fund but trade on an exchange like a stock.

Like most funds, real estate mutual funds have annual fees in the form of expense ratios.

What Are Key Differences Between REITs and Real Estate Mutual Funds

The most significant differences between REITs and real estate funds lie in how they operate, how they attempt to generate returns for investors, and how they’re taxed. While both have the same overall goal of leveraging real estate for potential returns, they don’t approach that goal the same way.

How They’re Structured

REITs are companies that either own and operate income-producing real estate, invest in mortgages and mortgage-backed securities, or a mix of both. To qualify as a REIT, the company must pay out at least 90% of its taxable income annually to investors as dividends.

A real estate fund is structured as a pooled investment vehicle that may hold dozens of different investments. Many real estate funds concentrate holdings on REITs, with some focusing on a specific niche, such as equities for commercial office buildings, hotels, or shopping centers. Other real estate funds may hold real estate stocks.

Both REITs and real estate funds may be actively or passively managed. With an active management strategy, the fund manager’s goal is to beat the market. Passive management, on the other hand, aims to track the performance of an underlying benchmark.

How They’re Taxed

How a REIT generates its income can determine how dividends paid to investors are treated for tax purposes. In most instances, dividends that result from the collection of rent payments are treated as ordinary income for the investor. If a REIT sells a property at a profit, however, those dividends would be treated as capital gains.

Investors who own REIT shares should receive a Form 1099-DIV each year that breaks down:

•   Dividends from ordinary income

•   Qualified dividends

•   Capital gains

•   Payments for return of capital

Qualified dividends are taxed at the long-term capital gains tax rate. This rate is lower than ordinary income tax rates for certain taxpayers.

Real estate mutual funds can also generate a Form 1099-DIV for investors when there are taxable distributions to report. Investors have to pay tax on income and/or capital gains they receive from the fund, including:

•   Dividends

•   Interest payments

•   Capital gains from the sale of underlying assets

Ordinary dividends are taxed as ordinary income, while qualified dividends qualify for the long-term capital gains tax rate. Interest is also taxed as ordinary income in most cases, while capital gains are subject to the short- or long-term capital gains tax rate, depending on how long the assets were held.

Recommended: How Are Mutual Funds Taxed?

Key Investment Considerations

When debating whether to invest in a REIT vs. mutual fund, it’s important to consider your objectives, risk tolerance, and time horizon. Specifically, you may want to ask yourself the following:

•   Is it more important to collect dividends for passive income or realize gains through capital appreciation?

•   What degree of risk are you comfortable taking?

•   Which real estate sectors are you seeking exposure to?

•   How much capital do you have available to invest in REITs or real estate funds?

•   How long do you plan to hold real estate investments in your portfolio?

It’s also helpful to look at the specifics of individual investments. For instance, if you’re interested in a REIT, you’d want to consider its past performance and typical dividend payout, the types of properties it owns, how the REIT is structured, and the fees you might pay.

With a real estate fund, it’s also important to look at the underlying assets and the fund manager’s strategy. While past performance isn’t a guarantee of future returns, it can give you insight into how the fund has moved in prior years. It’s also wise to check the expense ratio to see what owning the fund might cost.

Keep in mind that REIT ETFs may be an option, as well.

Are There Similarities Between REITs and Real Estate Mutual Funds?

REITs and real estate funds are similar in two key ways. They’re both pathways to diversifying with real estate, and in most cases, they’re highly liquid investments.

If you’re interested in leveraging the possible benefits of real estate investments in a portfolio but don’t want to own property directly, a REIT or a real estate fund may help you accomplish that goal. How wide or narrow the scope of those investments ends up being can depend on the REIT or fund’s overall strategy.

Publicly traded REITs and real estate funds are relatively straightforward to trade. You can generally buy and sell either one through an online broker. If you were to buy a fix-and-flip property or a rental property, on the other hand, it could be more challenging to unload the investment once you’re ready to exit.

Risks and Role of Real Estate in Your Portfolio

Real estate investments in general may act as an inflationary hedge in a portfolio. When consumer prices rise, rents tend to move in tandem. Real estate also has a lower correlation overall with the stock market, which may provide some added insulation against volatility, though this is never guaranteed.

However, there are risks involved in real estate investing, either through a REIT or a real estate fund. The biggest risk factors include:

•   Declines in property values

•   Fluctuations in interest rates

•   Demand for properties

Liquidity risk can also become an issue for REITs or real estate funds that have low trading volume. Evaluating your risk tolerance can help you decide how much of your portfolio to commit to REITs or real estate funds.

The Takeaway

REITs and real estate funds can play a role in an investment portfolio if you’re looking to invest beyond stocks and bonds. Familiarizing yourself with how each one works and the potential risks is a good place to start. Once you’ve decided whether to invest in REITs, real estate funds, or both, you can take the next step and trade in an investment account.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

FAQ

Are REITs a good investment?

Real estate investment trusts (REITs) may be a good investment if the underlying assets perform well and generate consistent dividend income for investors. But there are no guarantees, and the real estate market comes with its own risks. Thus, it’s important to consider the tax implications and the potential risks of REIT investing before getting started.

Are real estate funds a good investment?

A real estate fund can be a way to invest in property (or properties) without direct ownership. It’s possible to diversify a portfolio with multiple property types or sectors using only a couple of funds. While investors may benefit from dividends, capital appreciation, or a mix of both, the real estate market is still subject to interest rate risk, fluctuating trends, and other factors.

What are the risks associated with REITs and real estate funds?

The real estate market may not be influenced by the stock or bond markets, but real estate values can also be volatile, and prices in certain property sectors — or geographic areas — can rise and fall just as suddenly as equities. When investing in real estate directly or indirectly through real estate investment trusts (REITs) or real estate funds, be sure to do your due diligence about relevant risk factors.

Can you lose money investing in a REIT or real estate fund?

Yes, it’s possible to lose money in any type of investment, including real estate-related instruments, such as real estate investment trusts (REITs), real estate mutual funds and exchange-traded funds (ETFs). The underlying properties are not guaranteed to provide investors with a profit, so it’s important to understand what you’re investing in before you do so.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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