InvestGen Archives | Page 29 of 83

Nov

2023

What Are Margin Rates?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

A margin rate is the interest rate that applies when investors trade on margin. Margin rates can vary from one brokerage to the next, and there are different factors that affect the rates brokerages charge. Many brokerages use a tiered rate schedule based on the amount of the margin loan.

Trading on margin can increase an investor’s purchasing power and potentially, their returns. Margin trading simply means investing with money borrowed from a brokerage in order to buy more shares than you might otherwise be able. While trading on margin may benefit investors by providing them with additional capital, it can also be riskier than regular online stock trading. Before opening a margin account, it helps to understand the basic margin rate definition.

Understanding Margin Rates

A margin rate is an interest rate or premium that applies to margin trading accounts with a brokerage.

It helps to start with an overview of how margin accounts work to understand margin rates. Margin accounts allow investors to purchase securities using borrowed money. Investors may use margin to trade options, individual stocks, or other securities. Under Federal Reserve Board Regulation T, brokerage firms must cap the amount investors can borrow up to 50% of the securities’ purchase price. This is called the initial margin.

Investors must also meet maintenance margin requirements in their margin account. Specifically, an investor’s equity can’t fall below 25% of the current market value of the securities held in the account.

If an investor fails to meet maintenance margin guidelines, they may be subject to a margin call. A margin call is when the brokerage requires the investor to deposit more money into their margin account in order to make additional trades.

Brokerage firms charge margin rates, the same way a bank might charge interest on a mortgage or a business loan. Interest is a form of risk management, in the event that a borrower defaults.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How Margin Rates Work

Margin rates represent the cost of borrowing for an investor for an outstanding margin loan. Each brokerage can set the margin rate differently, it typically reflects the current broker call rate or call money rate. This is the rate that the bank charges the broker for the money used to fund investors’ margin loans.

Brokerages can establish a base rate, then add or subtract percentage points from that margin rate based on the margin balance. The higher the balance in a margin account, the lower the likely margin rate. So the more you borrow from the brokerage, the less you’ll pay in interest for it, as a percentage of the balance.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

*For full margin details, see terms.

Factors That Affect Margin Rate

There are a variety of factors that can determine what a brokerage charges for margin rates.

Broker Call Rate

This is the rate that brokerages pay to borrow the money used to fund margin loans. The higher this rate is, the higher the base margin rate may be.

Supply and Demand

Increased demand for margin loans could result in brokerages charging higher margin rates, both to manage risk on those loans and to reap higher profits.

Inflation and Monetary Policy

Margin rates reflect broader interest rates. If banks begin charging brokers higher interest rates, they’ll pass those on to investors.

Account Balance

Maintaining a higher balance on margin could result in a lower margin rate if the brokerage discounts rates for clients who invest more.

How Can Margin Rates Affect You?

Margin rates can determine your total net profit when trading securities on margin.

Assume, for example, that you open a margin account. You want to purchase $10,000 worth of securities of which $5,000 is borrowed money. You take out a margin loan to purchase the stocks. Those same stocks increase in value, so your $10,000 investment ($5,000 of your own money + $5,000 margin) is now worth $15,000.

You sell the stocks and repay the $5,000 you initially borrowed. You also pay $500 in interest to the brokerage for the margin loan. Once you subtract your initial $5,000 investment, the total net profit to you is $4,500.

Now, how do margin rates affect you if your investment doesn’t pan out? Going back to the previous example, say those stocks drop in value to $6,000 rather than increasing. You sell them for that amount, then pay back the $5,000 you borrowed on margin. You also have to pay $500 in interest. If you subtract those amounts from your initial $5,000 investment, you’re now left with only $500.

Understanding margin rates — and the risks involved in margin trading — can help you decide if it’s an investment strategy worth pursuing, based on your risk tolerance and goals.

When Is Margin Rate Charged?

Margin rates are accrued daily and charged on a monthly basis. So as soon as you purchase securities on margin, the margin rate applies and begins accruing. The total amount of margin interest paid depends on how much you borrow from the brokerage, the margin rate and how long it takes you to pay the loan back.

Generally speaking, traders use margins for short-term trading purposes. Though there’s no set end date for margin loans, the longer you take to pay them off, the more interest you’ll pay in total.

How Is Margin Rate Calculated?

Unlike other loans, margin loans typically do not have a set end date. Interest charges accrue monthly. To find the annual interest rate on a margin loan, you’d multiply the margin rate by the principal amount. To find the daily rate, you’d divide that amount by 360 days.

So assume that you have a $100,000 margin loan with a 6.825% margin rate, which is a common margin rate figure at top brokerages. Your yearly interest charges would add up to $6,825. If you divide that by 360, your daily interest charge breaks down to $18.96. If you were to pay your margin loan off in 10 days, you’d pay a total of $189.60 in interest.

Determining how much you’ll pay for a margin loan is relatively easy if you know the margin rates that apply and have an idea of how long it’ll take you to pay it back. At the very least, you can figure out the daily interest charge and use that as a guide for calculating your total profits on a margin trade.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Takeaway

Margin rates refer to the interest rate traders or investors pay on their margin balance – the amount of money they’ve borrowed from a broker to execute traders and buy investments. Margin rates help determine how much traders will pay to use margin, and can help inform investing decisions.

Margin trading is a more advanced investing strategy that requires some consideration of risk and an understanding of market trends. If you’re just getting started with online stock trading and investing, then you may want to get a feel for how stocks work first before opening a margin account.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Are margin rates yearly? Daily?

Margin rates are accrued on a daily basis, and charged by brokerages on a monthly basis. So, every day that a trader has a margin balance, they’re accruing interest in conjunction with their margin rate.

What does margin rate tell you?

The margin rate tells investors how much they’ll pay to borrow money from their brokerage if they trade on margin – or, in other words, it informs them of how much it costs to use margin.

Photo credit: iStock/Drazen

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN1023006

Nov

2023

What You Need to Know About Margin Balance

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Margin trading simply means borrowing money from a brokerage to purchase securities, and margin balance is the amount of money an investor owes to the brokerage. Trading stocks and other securities on margin allows investors to expand their purchasing power, though the availability of margin is predicated on the holdings an investor has in the first place.

Accordingly, when an investor uses the brokerage’s funds to buy securities, this results in a margin debit balance. Similar to a credit card or traditional loan, a margin balance is a line of credit that the borrower must repay with interest. Having a margin balance outstanding is common in margin trading, but investors should understand the implications of owing money to a brokerage — and what can happen if you’re subject to a margin call.

What Is Margin Balance?

Again, margin balance is the amount of money an investor owes to its brokerage at any given time in a margin trading account. When an investor opens a margin account, they must make an initial deposit, called the “minimum margin.” The Financial Industry Regulatory Authority (FINRA) requires a minimum margin of at least $2,000, though some brokerages may require a higher minimum.

After making that deposit to their brokerage account, investors can then trade using an initial margin. Federal Reserve Board Regulation T allows investors to borrow up to 50% of the purchase price of securities when trading on margin. So, for example, a margin trader could purchase $10,000 worth of stocks using their own funds and another $10,000 using the brokerage’s funds. The $10,000 borrowed from the brokerage represents the investor’s margin balance.

You can trade a variety of securities in a margin account, including stocks, and derivatives such as options or futures.

The rules for margin balance forex are slightly different. In forex trading, margin represents collateral or security that an investor must deposit with the brokerage to start trading. The brokerage typically sets this as a percentage of the trading order.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Margin Balance Works

Margin balance allows investors to borrow money, then repay it to the brokerage with interest. A negative margin balance or margin debit balance represents the amount subject to interest charges. This amount is always either a negative number or $0, depending on how much an investor has outstanding.

Unlike other types of loans, margin balance loans do not have a set repayment schedule. Investors can make payments toward the principal and interest through their brokerage account at a pace convenient for them. They can also deposit cash into their margin accounts or sell off margin securities to reduce their margin balance.

Margin Calls

While there is some flexibility associated with paying off a negative margin balance, investors should understand their interest charges as well as the possibility of being subject to a margin call. Margin calls essentially act as a stopgap risk management tool for the brokerage.

In addition to the minimum margin and the initial margin requirements, investors must observe maintenance margin guidelines. This represents a minimum amount of equity the investor must keep in their account. Under FINRA rules, the maintenance requirement is at least 25% equity, based on the value of the margin account. Some brokerages may raise this to 30%, 40% or more.

Using the previous example, assume that an investor deposits $10,000 of their own money and borrowers $10,000 from their brokerage to invest in marginable securities. Now, say that the investment doesn’t go as planned and the stock’s value drops. That initial $20,000 investment is now worth $10,000. When the margin debit balance of $10,000 is subtracted, that results in a net balance of $0, meaning the trader has zero equity and does not meet the maintenance margin requirements.

At this point, the brokerage may initiate a margin call which would require the investor to deposit more cash into their account in order to continue trading. If an investor can not add more cash to cover the maintenance margin requirement, the brokerage may sell off securities from the account to recoup the negative margin balance.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

*For full margin details, see terms.

Negative Margin Balance

A negative margin balance in a margin account represents what’s owed to the brokerage. Depending on the brokerage, the margin debit balance may be listed inside parentheses or have a negative symbol in front of it.

Margin Balance Example

For example, an investor who has a negative margin balance of $12,225 may see one of the following when logging into their account:

• Margin balance: -$12,225

• Margin balance: ($12,225)

They both mean the same thing: that investor owes the brokerage $12,225 for trading on margin.

If a trader’s margin balance shows as a positive amount, that means they have a margin credit balance rather than a margin debit balance. A credit balance can occur if an investor sells off shares to clear their negative margin balance but the settlement amount is more than what they owe to the brokerage.

How Margin Balance Is Calculated

Brokerages can lend investors money on margin but in exchange for this convenience, they can charge those investors interest, or margin rates. The level of those rates depends on the brokerage and the type of securities that you’re trading. Many brokerages use a benchmark rate, known as a broker call rate or call money rate, then tier that rate across different margin account balances.

Brokerages can use this as a baseline rate, then add or deduct percentage points. Generally, the larger the margin account balance, the deeper the margin rate discount. Meanwhile, traders who maintain lower margin balances tend to pay higher interest rates. So, an investor with less than $25,000 in their account might pay 7%-8% for margin rates while an investor with over $1 million in their account might pay 4%-5% instead.

Brokerages typically calculate margin interest on a daily basis and charge it to an investor’s account monthly. The interest charges on a margin account can directly affect the net return realized from an investment. Higher margin rates can increase the rate of return needed to break-even on an investment or realize a profit on a stock.

Managing Your Margin Balance

Managing a margin account and margin balances begins with understanding the risks involved, including the possibility of a margin call. The value of your securities can impact your margin balance, and increased volatility could cause the value of margin securities to drop, which could put you below the maintenance margin requirements. You’d then need to deposit more money to your account to continue trading.

Maintaining a cushion of funds inside your margin account could help avoid margin calls. Alternatively, you may keep a reserve of funds elsewhere that you could transfer to your margin account if increased volatility threatens to diminish the value of margin securities in your portfolio.

It’s also important to consider how much money you’re comfortable owing to your brokerage at any given time. Setting a cap on the maximum margin can help you avoid overextending yourself. You can also keep margin balances under control by scheduling regular cash deposits or routinely selling securities to reduce what’s owed. One strategy is to pay enough to cover the interest each month to keep your balance from ballooning.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

The Takeaway

A margin balance refers to the balance in an investor’s margin account, which involves borrowing money from a brokerage with which to make trades. That can help investors or traders increase their potential returns, if used wisely.

When you open a brokerage account, you can choose either a cash account or a margin account that allows you to engage in margin trading. Margin trading is a more advanced investment strategy that requires some know-how of the markets and a willingness to accept higher levels of risk.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Photo credit: iStock/AndreyPopov

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN1023009

Nov

2023

What Are Variation Margins? How Do They Work?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Margin variation is money needed to maintain margin level in a margin account. Variation margins serve as collateral or security against potential losses. Another way to think of it is as unrealized profit or loss in open derivative positions.

When a margin account balance drops below the brokerage’s specified limits, the brokerage can extend a margin call to request a futures variation margin payment. If a trader does not have the funds to meet the margin call, the brokerage may sell securities in their account to make up the difference.

What Is Variation Margin?

Variation margin is a collateral payment made by one party to a counterparty to cover any change in value of underlying assets used in futures contracts.

Traders may make these payments on a day-to-day or intraday basis as directed by the clearing house. Variation margin serves as a risk management tool for the clearing house. By collecting these payments, the clearing house can sustain its targeted risk level while allowing traders to have margin debt in their accounts.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Margin Trading Basics

To understand variation margins, it’s helpful to review some of the basics of margin trading. When an investor trades on margin, it essentially means they’re trading using borrowed money. So, for example, an investor who wants to purchase futures contracts may invest 50% of their own money and borrow the remaining 50% from their brokerage.

In exchange, the brokerage requires investors to maintain an initial margin, maintenance margin, and variation margin amount in liquid funds. Each one represents a different balance threshold. Margin accounts require investors to meet the minimum requirements.

Recommended: How Does a Margin Account Work?

How Do Variation Margins Work?

Variation margin works by filling gaps in margin account balance levels. When trading futures, variation margin allows clearing houses to continue facilitating trades while managing risk. Understanding stock volatility can help with understanding how variation margin works.

Equity prices fluctuate as volatility ebbs and flows in the markets. Changing prices can directly affect investor profits or losses, and trading equity derivatives on margin can amplify those profits and losses.

Variation margins work by accounting for changes in the prices of financial securities being traded. Traders make these payments, typically in cash, from the party who lost value to the party that’s gained value in a margin transaction. The amount due depends on the type of security being traded, expected price movements for that security and overall market conditions. That’s why it’s called variation margin, as the amount may vary from transaction to transaction.

Variation Margin Example

Here’s a simple example of how variation margin works. Assume an investor purchases 100 shares of stock for $30 each. The initial margin for the purchase is set at 50%. This would mean the broker would need to have $1,500 in their account at all times in order to make trades (50% of 100 x $30). Meanwhile, the maintenance margin is $1,000.

If the stock’s share price were to fall to $20, then the brokerages would deduct $1,000 in losses from the initial margin balance. Now the initial margin balance is $500. The new initial margin amount required becomes $1,000 (50% of 100 shares x $20 per share). So the investor would have to add $500 to their account as a variation margin payment to meet the new initial margin requirement.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

*For full margin details, see terms.

Variation Margin Calculation

Calculating variation margin depends on the type of security being traded and its price movements. So it’s something that must be done on a transaction-by-transaction basis, since every security is different.

But there is a simple variation margin formula that can be used for calculations:

VM = Initial margin – Margin balance

So to calculate variation margin, an investor needs to know three things:

• Initial margin requirement

• Maintenance margin requirement

• Current price of the underlying security

Finding variation margin means doing some math to determine how much the new initial margin requirement works out to when the price of the underlying security drops. But as the previous variation example illustrates, it’s not overly complicated.

Initial Margin vs Variation Margin

Initial margin and variation margin are often mentioned together when discussing margin trading but they’re not the same thing. Initial margin refers to the amount of money an investor can borrow inside a margin account.

Regulation T of the Federal Reserve Board allows investors to borrow up to 50% of the purchase price of securities being traded on margin. Though some brokerages may require a larger deposit to satisfy initial margin requirements.

Initial Margin	Variation Margin
Money that must be paid upfront to purchase securities on margin	Money that’s paid when a security being traded on margin loses value
Paid in cash prior to purchasing securities	Paid daily or intraday, typically in cash
Federal regulations set at initial margin at a minimum of 50% of the security’s price, though brokerages may set the amount higher	Amounts due for variation margin can depend on the type of security, its price movements, and market conditions.

Variation Margin and Maintenance Margin

Maintenance margin is another term often used in discussions of margin trading and it’s often used synonymously with variation margin. The maintenance margin represents the minimum amount of equity a trader must maintain in a margin account at all times. Equity is the difference between the value of securities held in the account and any amounts owed to the brokerage.

Under Financial Industry Regulatory Authority (FINRA) rules, maintenance margin must be at least 25% of the total market value of margin securities being held. Brokerage firms set the bar higher, however, requiring investors to meet a 30% or 40% margin maintenance requirement.

The maintenance margin is not the same thing as minimum margin. Minimum margin is the minimum amount required to open a margin account. FINRA requires this amount to be $2,000 or 100% of the purchase price of margin securities, whichever is less.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

To recap, variation margin is a collateral payment made by one party to a counterparty to cover any change in value of underlying assets when discussing futures contracts. It’s a fairly high-level concept, and many investors may not need to worry much about it, or even encounter it if they stick to a relatively simple investment strategy.

With that said, margin trading can potentially yield significant returns for investors, though it has more risks than traditional trading. Understanding variation margin and margin requirements can help traders manage that risk.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is variation margin a derivative?

Variation margin is not a derivative, but is a factor in derivatives markets. It’s one of the chief types of collateral that is required to protect investors or other parties in the market.

Is variation margin the same as mark to market?

Variation margin is a type of collateral, and is determined, in part, but the size of a party’s exposure in a trade – that, too, depends on mark-to-market value of the derivatives at play. As such, the two are not the same.

Can variation margin be negative?

It is possible for variation margin to be negative, and in that case, it would mean that there’s been a loss.

Is variation margin collateral?

Variation margin is a type of collateral, and is payment made by one party to a counterparty to cover any change in value of underlying assets used in futures contracts.

Why is variation margin important?

For investors or traders, variation margin is important as it informs them of the amount of funds that they need to solidify margin levels in order to trade.

Photo credit: iStock/Prostock-Studio

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN1023008

Nov

2023

What Is a Margin Loan? Definition & Examples

Margin Loans: Definition, Examples, Pros & Cons

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Margin loans are a type of loan that an investor takes out from a brokerage to buy investments. An investor typically borrows from a brokerage if they don’t have the cash balance in their trading account to cover the cost of a trade or investment – so, they use credit from their brokerage to cover the costs.

While there are risks associated with using margin and margin loans, they can also increase an investor’s purchasing power and bolster potential returns.

What Is a Margin Loan?

A margin loan is a loan from your brokerage to pay for securities that you can’t cover with cash. Similar to any other loan, you must apply for the account and be approved before you can borrow funds; and your brokerage will charge interest on any funds you borrow.

Having a margin account by definition enables you to take out a margin loan (the two are synonymous in many ways). Having the flexibility to buy securities on margin gives many traders the ability to take positions they might not have been able to afford otherwise. In fact, margin loans are a cornerstone to putting together effective day trading strategies, for advanced investors.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Understanding Margin Loans

Understanding margin trading can be tricky, but for the average investor, all you really need to know is that a margin loan is essentially a short-term financing solution. If you want to buy securities, but don’t have the cash in your account, your brokerage may allow you to buy those securities using credit. It’s similar to a line of credit, in that way.

So, that’s what margin debt is: The result of a margin loan, in which a trader borrows money to buy securities.

How Margin Loans Work

While we’ve mostly been discussing margin loans in terms of trading and investing, they could be used for any purpose. But almost always, a margin loan is used to buy securities.

As for the process of how they actually work: A margin loan is more or less like any other loan. To get one, you’ll need to apply and qualify for margin on your brokerage account (typically called a “margin account”).

Margin Accounts and How They Work

Like other forms of lending, margin loans have strict criteria. In addition, these accounts are governed by industry regulations as well as the policies of individual institutions, so be sure to understand how your desired margin account works. Each brokerage has different rules and eligibility requirements, and FINRA, for example, also requires you to deposit a minimum of $2,000 or 100% of the security’s purchase price, whichever is less. This is the “minimum margin.” Some firms may require you to deposit more than $2,000.

If you’re approved for a margin account, you’re able to trade using a margin loan — up to a certain amount. According to Regulation T of the Federal Reserve Board, you may borrow up to 50% of the purchase price of securities that can be purchased on margin.

This is known as the “initial margin.” Some firms require you to deposit more than 50 percent of the purchase price. (Also be aware that not all securities can be purchased on margin. Only those deemed “marginable” can be traded on margin.)

If you have $5,000 in your brokerage account, and you want to buy Stock X, which is valued at $50 per share, with a 50% margin you could buy 50% more than your cash balance: 200 shares instead of 100. But half of those (100 shares) would’ve been purchased on margin — so, you’d need to settle up your account at some point, if or when you decide to sell your shares (hopefully for a profit).

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

*For full margin details, see terms.

How Margin Interest Works

The other important thing to remember about margin loans is that they are, like pretty much all loans, subject to interest charges. Your brokerage is going to charge you for the money you borrow.

Margin interest is a big topic unto itself, but the key takeaway is to know that you’ll be on the hook for paying your brokerage back for the money you borrow, plus interest charges.

You’re probably thinking: “Can I avoid paying margin interest?” The answer is that it depends on how fast you can pay your margin balance back. Most brokerages will charge interest by the day and add the charges to your account monthly. So, if you have cash or can sell securities and pay your balance off before interest accrues, it’s possible.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Margin Loan Pros and Cons

Marginal loans can be highly useful for traders and investors. But like almost any financial instrument, margin loans have their pros and cons.

The biggest upside of margin is that it can open up a new swath of investing choices for traders. That means increasing their buying power, and allowing them to buy securities that may have otherwise been too expensive. This can increase potential profitability, too.

Conversely, traders who aren’t careful can’t quickly find themselves in debt if one of their trades backfires.

There are also interest charges to consider, as discussed. And if things really go sideways, some traders may experience a “margin call,” which is when your brokerage sells your assets without warning to settle up or get your account balance back within its requirements.

Here’s a quick rundown:

Margin Loans: Pros & Cons

Pros	Cons
Increased trading capacity	Traders can accumulate debt
Traders can buy pricier securities	Interest charges
Increased potential gains	Potential margin calls

Typical Margin Loan Rates

Margin loan rates, or, the interest rate charged by a brokerage for using margin, vary. Brokerages make the information available to traders and investors, so finding what types of margin loan rates you’re subjected to usually just requires a little research (or a call to your broker).

As mentioned, a brokerage will probably charge different interest rates depending on your overall margin balance, and how much you’ve borrowed. Lower balances are typically charged higher interest rates.

Here are some hypothetical examples: Let’s say Brokerage ABC’s margin interest rates vary between 4% and 8%, depending on the trader’s balance. Traders using up to $24,999 in margin will be subject to the highest interest rate (8%), whereas traders with more than $1 million in margin debit are subject to the 4% rate.

Brokerage B, however, has a different scale, with traders in margin debt up to $24,999 subject to 8.5% interest, and those with balances between $500,000 and $999,999 subject to 6.5%.

So, while brokerages do vary in what they charge for margin loan rates, they tend to be similar. To know your exact rate, contact your brokerage, or look up the current rate schedule on the company’s website.

The Takeaway

Margin loans are similar to any other type of loan, but are typically used for the purpose of buying stocks or other securities. Once you’ve applied for and been approved for a margin account, which is akin to adding a line of credit to your existing brokerage account, you’ll have the flexibility to buy more investments than if you were relying only on cash.

That said, you’re on the hook for repaying the money you’ve borrowed, with interest. If you’ve made a profitable investment, this shouldn’t be a problem. But if you invest in Stock X on margin, say, and the price drops, you would still owe the full amount you’d borrowed to buy the stock, plus interest.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Can you withdraw a margin loan?

Yes, it’s possible to withdraw a margin loan, although the specifics will depend on an individual brokerage, as will any applicable interest charges.

Are margin loans a good idea?

Margin loans can be useful for many investors and traders, and whether or not they’re a good idea will depend on the specific individual considering taking one out. They do have risks, but upsides, too.

How do I pay back my margin loan?

The simplest ways to pay back margin loans are to either deposit cash into your brokerage account to get the balance back to zero, or to sell holdings that will result in a positive or neutral balance.

How much collateral is required for a margin loan?

The collateral required to take out a margin loan depends on a specific brokerage, but it’s not uncommon for brokerages to require somewhere between 30%, 40%, or 50%.

What happens if you can’t pay back a margin loan?

If you can’t pay back a margin loan, the brokerage will likely reach out to see what can be done, or lock you out of your account. Further, it could end up liquidating securities in your portfolio in order to cover the debt.

Photo credit: iStock/Sergey Nazarov

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN1023012

Oct

2023

What Is Pre-IPO Placement?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

A pre-IPO placement involves the sale of unregistered shares in a company before they’re listed on a stock exchange for the first time. A pre-IPO placement usually occurs immediately before a company goes public.

Companies typically sell pre-IPO shares to hedge funds, private equity firms and other institutional investors that can purchase them in large quantities. It’s possible, however, to get involved in pre-IPO investing as an individual retail investor.

Investing in IPOs or pre-IPO stock could be profitable, if the company’s public offering lives up to or exceeds market expectations. But it’s also risky, since you never know how a stock will perform in the future.

How Does Pre-IPO Placement Work?

An IPO, or initial public offering, is an opportunity for private companies to introduce their stock to the market for the first time. A typical IPO requires a lengthy process, as there are numerous regulatory guidelines that companies must meet.

Once those hurdles are cleared, however, the company will have a date on which it goes public. Investors can then purchase shares of the company through the stock exchange where it lists.

Pre-IPO investing works a little differently. The end goal is still to have the company go public. But before that, the company sells blocks of shares privately, based on its IPO valuation. A successful pre-IPO gives the company attention, as well as capital from investors ahead of the actual IPO date.

For the most part, pre-IPO shares are restricted to high-net-worth investors, or accredited investors, i.e. those who can afford to invest large amounts of capital, and can afford to take on a certain amount of risk. A pre-IPO placement of shares could be made without a prospectus or even a guarantee that the IPO will occur.

Individual investors typically don’t have the funds required, or the stomach for that level of risk.

In return for that measure of uncertainty Pre-IPO investors get in on the ground floor and purchase shares before they’re available to the market at large. There may also be an added incentive. Because they’re buying such large blocks of shares, pre-IPO investors may get access to them for less than the projected IPO price.

💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

An Example of Pre-IPO Placement

Pre-IPO placements have gained popularity over the last decade, with more companies opting to offer them ahead of going public. Some of the companies that have offered pre-IPO stock include Uber and Alibaba, both of which have ties to e-commerce.

Alibaba’s pre-IPO offering was notable due to the fact that a single investor and portfolio manager purchased a large block of shares. The investor, Ozi Amanat, purchased $35 million worth of pre-IPO stock at a price that was below $60 per share.

He then distributed those shares among a select group of families. By the end of the first public trading day, Alibaba’s shares had risen to $90 each. Alibaba’s IPO delivered a 48% return to those pre-IPO shareholders due to higher-than-expected demand for the company’s stock.

In Uber’s case, PayPal agreed to purchase $500 million worth of the company’s common stock ahead of its IPO. PayPal then lost a large portion of its investment when the Uber stock price fell by about 30% following its IPO.

Pros and Cons of Pre-IPO Placement

There are benefits to pre-IPOs placements, but there are also some important drawbacks that investors should understand.

Pros of Pre-IPO Placement

From the perspective of the company, pre-IPO offerings can be advantageous if they help the company to raise much-needed capital ahead of the IPO. Offering private placements of shares before going public can help attract interest to the IPO itself, which could help make it more successful.

For investors, the benefits include:

• Access to shares of a company before the public.

• The potential ability to purchase shares of pre-IPO stock at a discount. So if a company’s IPO price is expected to be $30 a share, pre-IPO investors may be able to purchase it for $25 instead. This already gives them an edge over investors who may be purchasing shares the day the IPO launches.

• Purchasing shares at a discount can potentially translate to higher returns overall if the IPO meets or exceeds initial expectations. The higher the company’s stock price rises following the IPO, the more profits you could pocket by selling those shares later.

Cons of Pre-IPO Placement

While pre-IPO investing could be lucrative, there are some potential backs to consider. Specifically, there are certain risks involved that could make it a less attractive option for investors.

• The company’s IPO may not meet the expectations that have been set for it. That doesn’t mean a company won’t be successful later. Facebook, for example, is noteworthy for having an IPO described as a “belly flop”. A disappointing showing on the day a company goes public for the first time could shake investor confidence in the stock and bode ill for its future performance. That in turn could affect the returns realized from an investment in pre-IPO stock.

• The company may never follow through on its IPO and fails to go public. In that case, investors may be left wondering what to do with the shares they hold through a pre-IPO private placement. WeWork is an example of this in action. In 2019, the workspace-sharing company announced that it had scrapped its plans for an IPO, thanks to limited interest from investors and concerns over the sustainability of its business model. In 2021, the company did go public — but not through an Initial Public Offering. Instead, WeWork went public through a merger with a special acquisition company or SPAC.

• Pre-IPOs are less regulated than regular IPOs.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Summary of Pros and Cons of Pre-IPO Placement

Here’s a quick look at the benefits and drawbacks of pre-IPO placements:

Pre-IPO Private Placement Pros and Cons

Pros	Cons
• Investors have an opportunity to get into an investment ahead of the crowd • Pre-IPO investors may be able to purchase shares at a price that’s below the IPO price • Purchasing pre-IPO stock could yield higher returns if the IPO is successful	• Pre-IPO placements can be risky, as they’re less regulated than regular IPOs • There are no guarantees that an IPO will deliver the type of returns investors expect • Does not guarantee you’ll get the loan

Pros

Cons

• Investors have an opportunity to get into an investment ahead of the crowd

• Pre-IPO investors may be able to purchase shares at a price that’s below the IPO price

• Purchasing pre-IPO stock could yield higher returns if the IPO is successful

• Pre-IPO placements can be risky, as they’re less regulated than regular IPOs

• There are no guarantees that an IPO will deliver the type of returns investors expect

• Does not guarantee you’ll get the loan

How to Buy Pre-IPO Stock

Typically, only accredited investors can purchase pre-IPO placements. As of 2021, the Securities and Exchange Commission defines an accredited investor as anyone who:

• Earned income over $200,000 (or $300,000 if married) in each of the prior two years and reasonably expects to earn that same amount in the current year, OR

• Has a net worth over $1 million, either by themselves or with a spouse, excluding the value of their primary residence, OR

• Holds a Series 7, 65 or 82 license in good standing

If you meet these conditions for accredited investor status, then you may be able to purchase shares of pre-IPO stock through your brokerage account. Your brokerage will have to offer this service and not all of them do.

Other options for buying pre-IPO stock include purchasing it from the company directly. To do that, you may need to have a larger amount of capital at the ready. So if you’re not already an angel investor or venture capitalist, this option might be off the table.

You could also pursue pre-IPO placements indirectly by investing in companies that routinely purchase pre-IPO shares. For example, you might invest in a mutual fund or exchange-traded fund that specializes in private equity or late-stage companies preparing to go public. You won’t get the direct benefits of owning pre-IPO stock but you can still get exposure to them in your portfolio this way.

The Takeaway

For some high-net-worth or institutional investors, buying pre-IPO shares — a private sale of shares before a company’s initial public offering — might be possible. But it’s highly risky. For the most part, individual investors won’t have access to these kinds of private deals. But eligible investors may be able to trade ordinary IPO shares through their brokerage.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

Invest with as little as $5 with a SoFi Active Investing account.

Photo credit: iStock/filadendron

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0623066

What Are Margin Rates?

Understanding Margin Rates

How Margin Rates Work

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

Factors That Affect Margin Rate

Broker Call Rate

Supply and Demand

Inflation and Monetary Policy

Account Balance

How Can Margin Rates Affect You?

When Is Margin Rate Charged?

How Is Margin Rate Calculated?

The Takeaway

FAQ

Are margin rates yearly? Daily?

What does margin rate tell you?

What You Need to Know About Margin Balance

What Is Margin Balance?

How Margin Balance Works

Margin Calls

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

Negative Margin Balance

Margin Balance Example

How Margin Balance Is Calculated

Managing Your Margin Balance

The Takeaway

What Are Variation Margins? How Do They Work?

What Is Variation Margin?

Margin Trading Basics

How Do Variation Margins Work?

Variation Margin Example

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

Variation Margin Calculation

Initial Margin vs Variation Margin

Variation Margin and Maintenance Margin

The Takeaway

FAQ

Is variation margin a derivative?

Is variation margin the same as mark to market?

Can variation margin be negative?

Is variation margin collateral?

Why is variation margin important?

Margin Loans: Definition, Examples, Pros & Cons

What Is a Margin Loan?

Understanding Margin Loans

How Margin Loans Work

Margin Accounts and How They Work

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

How Margin Interest Works

Margin Loan Pros and Cons

Typical Margin Loan Rates

The Takeaway

FAQ

Can you withdraw a margin loan?

Are margin loans a good idea?

How do I pay back my margin loan?

How much collateral is required for a margin loan?

What happens if you can’t pay back a margin loan?

What Is Pre-IPO Placement?

How Does Pre-IPO Placement Work?

An Example of Pre-IPO Placement

Pros and Cons of Pre-IPO Placement

Pros of Pre-IPO Placement

Cons of Pre-IPO Placement

Summary of Pros and Cons of Pre-IPO Placement

How to Buy Pre-IPO Stock

The Takeaway

CATEGORIES

JOIN THE COMMUNITY

Student Loan Refinancing

Personal Loans

Online Investments

Other

Student Loan
Refinancing

Personal
Loans

Online
Investments