InvestGen Archives | Page 30 of 64

Dec

2023

Consumer Price Index (CPI): What Is CPI?

The Consumer Price Index (CPI): A Comprehensive Guide

By Austin Kilham | Growing Wealth, invest, Investing, Terminology | Comments Off

The Consumer Price Index (CPI) is a monthly measure of how the aggregate costs of consumer goods and services in the United States are changing. Economists use CPI to help them understand whether the economy is in a period of inflation or deflation, and individuals can use it to get a sense of where prices might be headed.

What Is the Consumer Price Index (CPI)?

The CPI measures the change of the weighted-average prices paid by urban consumers for select goods and services, according to the Bureau of Labor Statistics (BLS). In other words, the metric tracks the rise and fall of prices over a given period of time.

Definition and Significance

As mentioned, “CPI” is short for Consumer Price Index, and it’s an often-cited economic indicator.

The BLS produces indexes that cover two populations: CPI-U covers all urban consumers, representing more than 90% of the population. And CPI-W represents urban wage earners and clerical workers, representing approximately 30% of the population. The CPI excludes people who live in rural areas, the military, and imprisoned people.

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How the CPI Works

cpi year over year change 2020-2024

The CPI tracks prices for a basket of goods and services people commonly buy in eight major categories, including:

• Food and beverage

• Recreation

• Apparel

• Transportation

• Housing

• Medical care

• Education and communication

• Various services

CPI Formulas

Each month, the BLS contacts retailers, service providers, and rental spaces across the country gathering prices for about 80,000 items. It uses this data to calculate CPI using the following formula:

CPI = Cost of the Market Basket in a Given Year/Cost of the Market Basket in the Base Year.

The result is multiplied by 100 to express CPI as a percentage. The BLS uses the years 1982-1984 as its base year. It set the index level during this period at 100.

Annual CPI Calculation

Here’s an example of the annual CPI calculation, and comparing two different years to get a gist of the differences.

Imagine the cost of a hypothetical basket of goods in 1984.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 1984	$10	$1.50	$5
Quantity	2	6	10
Total Cost	$20	$9	$50

When you total the price of these goods you get $79. Using the CPI formula above you take $79/$79 x 100 = 100%. This is where the 1984 base rate of 100 comes from.

Now let’s consider the same basket of goods in 2023.

	Sweatshirt	1 dozen eggs	Movie ticket
Price in 2023	$24	$3	$15
Quantity	2	6	10
Total Cost	$48	$18	$150

When you total the prices of these goods you get $216. Now, when you plug this into the CPI formula you get $216/$79 x 100 = 273%. You can now tell that from 1984 to 2023 prices for this particular basket of goods have risen by 173%.

Diverse Categories Within CPI

The CPI tracks more than 200 categories of items, and within each category it samples hundreds of specific items at various businesses which serve to represent the thousands of items available to consumers. In addition to these categories, CPI includes government-charged user fees like water, sewages, tolls, and auto registration fees. It also factors in taxes associated with the price of goods such as sales tax and excise tax. However, it does not include Social Security taxes or income taxes that aren’t directly related to the purchasing of goods and services.

The CPI also does not include the purchase of investments, like stocks and bonds.

The Consumer Price Index (CPI) in Practice

The CPI can be used in a variety of ways, but perhaps most prominently, in economic policy.

Usage in Economic Policy

The CPI is the most common way to measure inflation, the economic trend of rising prices over time, or deflation, the trend of falling prices. The federal government — or the Federal Reserve, more specifically — sets a target inflation rate of 2% annually, and the CPI can help the government understand whether or not its monetary policy is effective in meeting this target.

The Federal Reserve’s Utilization

The Federal Reserve may look at the CPI to gauge whether or not to raise interest rates, which may cool or heat up the economy, accordingly, by increasing the cost of borrowing. As borrowing costs go up, demand for goods or services tends to fall, lowering prices, and putting downward pressure on the CPI.

Implications for Other Government Agencies

Economists also use CPI as a measure of cost of living, the amount of money you need to cover basic expenses, such as housing, food, and health care. This is important because the government may make cost-of-living adjustments to programs such as Social Security benefits. As the cost of living rises, benefit amounts may be adjusted higher to keep up with the rising costs of goods.

Employers may also look at the cost of living to help them set competitive salaries and determine when to raise wages for employees.

Recommended: Cost of Living by State

CPI’s Influence on Market Sectors

The CPI can also have an influence on market sectors, like the housing markets, financial markets, and even labor markets. As noted, a lot of it is top-down — depending on how the Federal Reserve reads the CPI and decides to change interest rates, if at all.

Raising rates can temper demand in the housing market, as a mortgage can become more expensive. It can also slow down sales for all sorts of businesses, which is reflected in earnings reports and finally, in the stock market. That can then spill into the labor market, and potentially raise unemployment as companies look to cut costs.

All told, the CPI’s influence can run deep in an economy.

CPI Versus Other Economic Indicators

The CPI is only one of many economic indicators, as mentioned. Others include unemployment, and the Producer Price Index (PPI).

CPI vs Unemployment: Understanding the Relationship

As noted, there tends to be a relationship between the CPI and unemployment rate, as the Fed targets 2% inflation, and full employment. As such, it can decide to make changes to monetary policy to try and restore balance or at least get closer to its goals.

CPI vs PPI (Producer Price Index)

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods. Like the CPI, the PPI can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Analyzing and Critiquing the CPI Methodology

The CPI is a useful measure in many ways, but it does have some limitations. First, it doesn’t apply to all populations in the United States. CPI considers urban populations alone, so it is not necessarily representative of the costs for those who live outside of those areas.

Also, the CPI calculation does not take into account all of the goods and services available to consumers or new technologies not yet considered consumer staples. What’s more, the metric does not provide any contact into what’s causing prices to move up and down, such as social or environmental trends.

CPI’s Broader Impact and Usage

CPI reports are issued monthly by the BLS, and are available to anyone who wants to access them online. They give a broad breakdown of the previous month, and compare price changes year-over-year, and month-over-month.

Breaking Down the Monthly CPI Report

The standard CPI report has an introduction that discusses the changes over the previous month, followed by a table that outlines changes in specific price categories over the past year and several months. It further breaks down food, energy, and “all items less food and energy,” providing additional insight for each category.

Anticipating the Next CPI Report

The BLS publishes the date and time of the upcoming CPI report on its website, typically the second week of the month, at 8:30am ET.

Contemporary Relevance of CPI

In recent years, many people have kept a closely-trained eye on the CPI and CPI reports due to increased costs following the pandemic in 2020. While there were a variety of reasons as to why prices increased, that bout of inflation — the first serious case of inflation since the 1980s — caught many people off guard, and strained consumers’ budgets.

It also led to the Fed increasing interest rates. Inflation, or the increase in the CPI over the past couple of years, peaked at more than 9% during the summer of 2022, and as of late 2023, was back down to around 3.1%.

Educational Resources and Further Reading on CPI

There are numerous resources and places to learn more about the CPI, especially after all the attention it has garnered in recent years.

Learning More About CPI

A simple internet search will net a cornucopia of results, loaded with information and insight into the CPI. You’re also likely to find opinion pieces and other media discussing the CPI’s shortcomings or strengths — it can be a good idea to consider everything, and formulate your own opinion.

But in terms of learning more about the CPI itself, the BLS publishes a handbook discussing the concepts and methods it uses, which can also be helpful if you’re hoping to bolster your CPI IQ.

CPI-Related Statistics and Where to Find Them

The BLS publishes the CPI, and a whole host of data and statistics related to it. With that in mind, it can be a great place to start when hunting down CPI-related data. There are multiple other sources that utilize the BLS’ data to compile charts, graphs, and more, but typically, it’s all sourced back to the BLS.

The Bottom Line: Why the CPI Matters to Everyone

Rising inflation decreases the value of individuals’ cash savings over time. Investing in stocks, bonds and other investments that offer inflation-beating returns may help consumers protect the value of their savings. Understanding CPI, and how it’s moving, can help you devise a strategy for your investment portfolio.

The CPI can be a deep topic, especially when you consider how it intersects and relates to other elements of the economy, such as unemployment and interest rates. And again, the more an investor understands about the underlying machinations of the economy, the more knowledge they’ll have to power their decisions in the market.

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Dec

2023

What Is Initial Margin? Initial Margin Definition & Examples

What Is Initial Margin? Examples and Minimums

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

When an investor buys a security using a margin account, the initial margin or initial margin requirement is how much of the purchase price – represented as a percentage – that the investor must cover with either cash or the collateral in that account.

The Federal Reserve Board’s Regulation T sets the minimum initial margin at 50%, meaning investors trading on a margin account must have cash or collateral to cover at least half of the market value of the securities they buy on margin.

Using Initial Margin

Investors who want to open a margin account at a brokerage must first deposit the initial margin requirement. They can make that deposit in the form of cash, securities or other collateral, and the amount they deposit will vary depending on how much trading the investor plans to do on margin, and where the brokerage firm sets its initial margin.

Once the investor makes that initial margin deposit as collateral, they essentially have a line of credit with which they can begin margin trading. That line of credit allows the investor to buy securities with money borrowed from the brokerage.

As noted, Regulation T sets minimum initial margin levels. It’s important to note, however, that the Federal Reserve Board’s Regulation T only sets the minimum for margin accounts. Brokerage firms offering margin accounts can set their initial margin requirement higher than 50% based on the markets, their clients, and their own business considerations. But brokerages cannot set the initial margins for their clients any lower than 50%. The level that a brokerage sets for margin is known as the “house requirement.”

Risks of Margin Trading

Trading on margin brings its own unique set of opportunities and risks. It can lead to outsized profits if investors buy appreciating stocks on margin. But if investors buy sinking securities on margin, they can lose even more than if they’d purchased the securities outright.

In the unfortunate situation where the securities purchased on margin lose all value, the investor must deposit the full purchase price of the securities to cover the loss. Given these risks, you’re typically not able to trade on margin in retirement accounts such as an IRA or a 401(k).

Sometimes investors use margin to short a stock, or bet that it will lose value. In that instance, they’d borrow shares from the brokerage firm that holds a position in the stock and sell them to another investor. If the share price goes down, the investor can purchase them back at a lower price.

In general, investors looking for safer investments might want to avoid margin trading, due to their inherent risk. Investors with a high appetite for risk, however, might appreciate the ability to generate outsize returns.

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How Do You Calculate Initial Margin?

An investor who wants to trade in a margin account, must first determine how much to deposit as an initial margin. While that will depend on how much the investor wants to trade, and how big a role margin will play in their strategy, there are some guidelines.

The New York Stock Exchange and some of the other securities exchanges require that investors have at least $2,000 in their accounts. For day traders, the minimum initial margin is $25,000. Each brokerage has its own set of requirements in terms of the amount clients need to keep as collateral, and the minimum size of the account necessary to trade on margin.

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Initial Margin Requirement Examples

It’s possible, for example, that a brokerage firm might require 65% initial margin. That’s the first number an investor needs to know. The next is how much they plan to invest. The initial margin calculation simply requires the investor to multiply the investment amount by the initial margin requirement percentage. For an investor who wants to buy $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

The advantage for the investor is that they get $20,000 of exposure to that stock for only $13,000. In a scenario where the investor is buying a stock at a 50% margin, that investor can buy twice as many shares as they could if they bought them outright. That can double their return if the stock goes up. But if the stock drops, that investor could lose twice as much money.

If the price falls far enough, the investor could get a margin call from their broker. That means that they must deposit additional funds. Otherwise, the broker will sell the stock in their account to cover the borrowed money.

Initial Margin vs Maintenance Margin

For investors who buy securities on margin, the initial margin is an important number to know when starting out. But once the investor has opened a margin account at their brokerage, it’s important to know the maintenance margin as well.

The maintenance margin is the minimum amount of money that an investor has to keep in their margin account after they’ve purchased securities on margin. It is generally lower than the initial margin.

Currently, the minimum maintenance margin, as set by the Financial Industry Regulatory Authority (FINRA,) is 25% of the total value of the margin account. As with the initial margin requirements, however, 25% is only the minimum that the investor must have deposited in a margin account. The reality is that brokerage firms can – and often do – require that investors in margin accounts maintain a margin of between 30% to 40% of the total value of the account.

Some brokerage firms refer to the maintenance margin by other terms, including a minimum maintenance or a maintenance requirement. The initial margin on futures contracts may be significantly lower.

Maintenance Margin Example

As an example of a maintenance margin, an investor with $10,000 of securities in a margin account with a 25% maintenance margin must maintain at least $2,500 in the account. But if the value of their investment goes up to $15,000, the investor has to keep pace by raising the amount of money in their margin account to reach the maintenance margin, which rises to $3,750.

Maintenance Margin Calls

If the value of the investor’s margin account falls below the maintenance margin, then they can face a margin call, or else the brokerage will sell the securities in the account to cover the difference between what’s in their account and the maintenance margin.

With a maintenance margin, the investor could also face a margin call if the investment goes up in value. That’s because as the investment goes up, the percentage of margin in relation by comparison goes down.

The Takeaway

Initial margin requirements and maintenance margins are just two considerations for investors who are looking to trade on margin. They allow investors to understand how much cash they need to hand on hand in order to trade on margin — and when they might be susceptible to a margin call.

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FAQ

What is an example of initial margin?

If initial margin is 65% and an investor wants to purchase $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.

Is initial margin refundable?

Yes, initial margin is refundable, as it acts as a deposit put forward to enact a transaction or trade.

Why is initial margin important?

Initial margin is important because it acts as a form of collateral to cover a loss in the event loses money using borrowed funds. It helps the lender – or brokerage – recoup some of those losses.

Why is initial margin paid?

Initial margin is paid or put forth to act as a deposit or a form of collateral and establish good faith between a borrower and lender, typically an investor or trader and their brokerage.

Who sets the initial margin requirement?

Initial margin requirements are established by the Federal Reserve’s Regulation T. But there can also be other requirements put in place by an individual brokerage, and FINRA’s additional margin rules can further increase the amount.

Does initial margin have to be cash?

Generally, initial margin needs to be in the form of cash deposits, but it’s possible that some brokerages will allow it to take the form of other securities, such as government bonds.

Is initial margin a cost?

Initial margin is not a cost per se, but a form of collateral, and is money that is returned or refunded like a deposit. As such, it’s not spent or a typical “cost,” though it may be a financial barrier of sorts for some traders.

Photo credit: iStock/FG Trade

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.

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.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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Dec

2023

How Much Does a Pharmacist Make in a Year?

By Susan Guillory | Building Your Career, Life & Career, relay | Comments Off

If you’re exploring career options, pharmacy might have popped up on your radar — and for good reason. Not only can pharmacists command a good salary, they also have job security, as the pharmaceutical industry is one that won’t vanish any time soon.

That said, how much does a pharmacist make? Is it worth all the trouble of going through pharmacy school to become one? Let’s find out.

What Are Pharmacists?

You’ve likely picked up a prescription or two at a pharmacy, but maybe you didn’t give any thought to the person behind the counter. This individual is your local pharmacist, and it’s their job to prepare and dispense prescription medications.

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Pharmacist Job Responsibility Examples

In addition to doling out prescription drugs, pharmacists also consult with patients, provide instructions for how to take medications, and help patients find low-cost medications. Some also give health screenings and immunizations.

Keep in mind, a pharmacist often needs to be outgoing, since their work involves speaking with patients throughout the day. If that’s not your personality, you may want to look into jobs for introverts.

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How Much Is a Starting Pharmacist Salary?

As with most professions, pharmacists tend to earn more money as they gain more experience. But what is a good entry-level salary for pharmacists?

Pharmacists with less than a year of experience generally earn, on average, about $54 per hour. That’s $112,320 per year.

Of course, how much you actually can earn depends on where you live, what your duties are, and whether you work for an independent pharmacy or a chain. It can also help to research the highest-paying jobs by state.

Recommended: Is a $100,000 Salary Good?

What Is the Average Salary for a Pharmacist?

Now that you see what starting salaries are for pharmacists, let’s address the next question: How much money does a more experienced pharmacist make?

Generally speaking, pharmacists are usually paid by the hour. A pharmacist with 10 years of experience earns an average of $67.05 per hour. That adds up to $139,464 per year.

What Is the Average Pharmacist Salary by State for 2023?

The amount you make will depend on where you live, among other factors. Here’s a look at the average pharmacist salaries by state, from highest to lowest.

State	Salary
California	$161,597
Oregon	$155,710
Washington	$149,466
New Hampshire	$141,041
Nevada	$140,869
Maine	$139,517
Vermont	$137,658
Delaware	$136,276
Maryland	$135,894
Connecticut	$134,175
Alaska	$134,044
Massachusetts	$131,978
Rhode Island	$131,960
New Jersey	$131,698
New York	$131,594
Pennsylvania	$129,724
New Mexico	$129,145
Wisconsin	$128,918
Minnesota	$128,502
Virginia	$128,380
Hawaii	$128,245
Arizona	$126,174
Idaho	$125,760
North Carolina	$125,068
Michigan	$124,768
Colorado	$120,986
Illinois	$120,887
Kansas	$118,122
Ohio	$117,573
Kentucky	$117,448
Indiana	$117,338
Missouri	$116,513
Nebraska	$116,366
Utah	$116,009
South Carolina	$115,570
West Virginia	$115,339
Texas	$115,089
North Dakota	$114,359
Georgia	$114,118
Tennessee	$112,879
Wyoming	$112,326
Montana	$111,924
Iowa	$110,405
Florida	$109,106
Alabama	$106,271
Mississippi	$105,677
Louisiana	$102,542
South Dakota	$100,246
Oklahoma	$98,951
Arkansas	$89,660

Source: Zippia

Pharmacist Job Considerations for Pay & Benefits

Where you live is one factor that can determine how much you earn as a pharmacist. Your on-the-job responsibilities may also play a role. For example, there are different job titles, and each has its own set of responsibilities, requirements, and salary ranges. Examples include:

• Staff pharmacist

• Pharmacy specialist

• Clinical pharmacist

• Pharmacy manager

• Director of pharmacy

Some pharmacists may have roles and responsibilities beyond filling prescriptions, such as offering immunizations and health screenings. Some may be in charge of hiring and managing other employees. Some may work in traditional pharmacies, while others may work for companies focusing on chemotherapy, nuclear pharmacy, or long-term care.

Recommended: 25 High-Paying Trade Jobs in Demand

Pros and Cons of Pharmacist Salary

While being a pharmacist can be a rewarding job, there are potential drawbacks to keep in mind. Let’s look at some pros and cons.

Pros of Being a Pharmacist

Naturally, the high salary pharmacists tend to command may be one reason to consider this career path. Because many pharmacists get paid by the hour, they’ll be compensated fairly for their time even if they work more than 40 hours a week.

Another perk is that you may have a flexible schedule that allows you to work part-time or during certain hours. There could even be opportunities to work remotely, which may be useful if you’re working in a rural area.

You might also be able to open your own pharmacy instead of working for someone else. This brings freedom and flexibility to you as a business owner.

Finally, you’ll be a valuable member of your community, since it’s your job to help people on their path to wellness.

Cons of Becoming a Pharmacist

If becoming a pharmacist was easy, everyone would do it! For starters, you’ll need to have about six years of education after high school. And the cost of pharmacy school can range anywhere from $5,000 to $30,000 a year for an in-state public college, or $20,000 to $95,000 a year for a private school.

Depending on your financial situation, this could require you to tap into savings or take out student loans. (Creating a budget while you’re in school or just starting out can help you keep track of where your money is going. A money tracker app can help make the job easier.)

Another possible drawback? Some pharmacies may not guarantee a certain number of hours a week, and in that case, being paid hourly may not come with the big paycheck you’d expect.

Also keep in mind that some pharmacists work long hours, which can have a negative impact on your health and mental wellbeing.

💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

If you’re looking for a rewarding and potentially lucrative job, becoming a pharmacist might fit the bill. You’ll help your local community get healthier, and depending on where you live and your level of experience, you could earn competitive pay, too.

FAQ

What is the highest pharmacist salary?

The state where pharmacists tend to earn the most is California. The average annual income of a pharmacist there is $161,597.

Is it hard to be hired as a pharmacist?

Becoming a pharmacist requires six years of education after high school. The workload is challenging, and pharmacies looking to hire generally have high expectations of applicants.

Photo credit: iStock/ADragan
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Dec

2023

What Are Securities in Finance? How Security Trading Works

What Are Securities in Finance? How Securities Trading Works

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

A security is any financial instrument with a fungible value (meaning a value that’s essentially equal) that investors can trade. Common securities include stocks, bonds, and index and mutual funds, as well as options and other derivatives that derive their value from other assets. Most securities trade on financial exchanges, and all play a role in aiming to build wealth for individuals, companies, and other investors.

What are securities in finance and how do they work? Here’s a glimpse inside the world of securities in trading.

What is a Security?

A security is a tradable investment vehicle that traders can buy and sell on financial exchanges or other platforms. In general, investors earn money by buying securities at a low price and selling them at a higher one.

Securities in finance have some monetary value; buyers and sellers determine their value when trading them. Securities vary in nature – stocks, for example, represent ownership in a company, while bonds are essentially loan vehicles where borrowers pay lenders interest for their loan money.

Here are some common security categories.

Equity Securities

This type of securities in finance includes stocks and stock funds. Typically traded on exchanges, the price of equity securities rise or fall depending on the economy, the performance of the underlying company that offers the stock (or companies in the fund), and the sector that company or fund operates. Individual stocks may also pay dividends to investors who own them.

💡 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.

Debt Securities

This group includes bonds and other fixed-income vehicles where lenders borrow money from investors and pay an interest rate (i.e., the price for borrowing) on the investment principal. Bond issuers may include states, local and municipal governments, companies, and banks and other financial institutions. Typically, debt securities pay investors a specific interest rate paid usually twice per year until a maturity date, when the bond expires.

Some common debt securities include:

• Treasury bills. Issued by the U.S. government, T-Bills are considered among the safest securities.

• Corporate bonds. These are bonds issued by companies to raise money without going to the equity markets.

• Bond funds. These allow investors to get exposure to the bond market without buying individual bonds.

Derivatives

This group of securities includes higher-risk investments like options trading and futures which offer investors a higher rate of return but at a higher level of risk.

Derivatives are based on underlying assets, and it’s the performance of those assets that drive derivative security investment returns. For example, an investor can buy a call option based on 100 shares of ABC stock, at a specific price and at a specific time before the option contract expires. If ABC stock declines during that contract period, the call option buyer has the right to buy the stock at a reduced rate, thus locking in gains when the stock price rises again.

Derivatives allow investors to place higher-risk bets on stocks, bonds, and commodities like oil or gold, and currencies. Typically, institutional investors, such as pension funds or hedge funds, are more active in the derivative market than individual investors.

Hybrid Securities

A hybrid security combines two or more distinct investment securities into one security. For example, a convertible bond is a debt security, due to its fixed income component, but also has characteristics of a stock, since it’s convertible.

Hybrid securities sometimes act like debt securities, as when they provide investors with a floating or fixed rate of return, as bonds normally do. Hybrid securities, however, may also pay dividends like stocks and offer unique tax advantages of both stocks and bonds.

💡 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 Security Trading Works

Securities often trade in open financial exchanges where investors can buy or sell securities with the goal of making a financial profit.

Stocks, for example, are listed on global stock exchanges and investors can purchase them during market trading hours. Exchanges are highly regulated and expected to comply with strict fair-trading mandates. For example, U.S.-based stock exchanges like the New York Stock Exchange or Nasdaq must adhere to the rules and regulations laid out by Congress and enforced by the U.S. Securities and Exchange Commission (SEC).

Each country has their own rules and regulations for fair and compliant securities trading, including oversight of stocks, bonds, derivatives, and other investment vehicles. Debt instruments, like bonds, usually trade on secondary markets while stocks and derivatives are traded on stock exchanges.

There are many ways for investors to engage in security trading. A few of the most common ones include:

Brokerage Accounts

Once an investor opens a brokerage account with a credentialed investment firm, they can start trading securities.

All a stock or bond investor has to do is fill out the required forms and deposit money to fund their investments. Investors looking to invest in higher-risk derivatives like options, futures, or currencies may have to fill out additional documentation proving their credentials as educated, experienced investors. They may also have to make larger cash deposits, as trading in derivatives is more complex and has more potential for risk.

Some investors with brokerage accounts can engage in margin trading, meaning that they trade securities using money borrowed from the broker.

Retirement Accounts

By opening a retirement account, through work or a bank or brokerage account, investors can invest in a range of securities, including stocks, mutual and index funds, bonds and bond funds, and annuities.

The type of securities you have access to will depend on the type of retirement account that you have. Workplace plans such as 401(k)s typically have fewer investment choices (but higher limits for tax-advantaged contributions) than Individual Retirement Accounts.

The Takeaway

There are many different types of securities that investors may purchase as part of their portfolio. Choosing which securities to invest in will depend on several factors, including your financial goals, current financial picture, and risk tolerance.

A great way to start building a portfolio of securities is by opening a brokerage account on the SoFi Invest® investment platform. Securities on the platform include stocks and exchange-traded funds.

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

FAQ

What are the four types of securities?

The four types of securities are: equity securities (such as stocks), debt securities (such as bonds), derivatives (such as higher-risk investments like options trading), and hybrid securities (such as convertible bonds).

What is a securities investment?

A securities investment is an investment in a security such as stocks, bonds, or derivatives. A security is a tradable type of investment that traders can buy and sell.

What’s the difference between securities and shares?

Stocks, also known as equity shares, are a type of security. The term “securities” refers to a range of different investments, one of which is stocks, or shares.

Photo credit: iStock/paulaphoto

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SoFi Invest®

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

SOIN1023179

Dec

2023

What Is Margin Debt?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Margin debt refers to the funds investors can borrow from a brokerage firm to purchase securities. Margin debt is basically a loan from a broker that must be backed with collateral (cash and other securities), and paid back with interest.

Margin is not available with a cash-only brokerage account, where a trader simply buys the securities they want and cover the full amount using the funds in their account. Margin accounts are available only to investors who qualify, owing to the high-risk nature of margin trading.

Margin Debt Definition

In order to understand what margin debt is and how it works, it helps to review the basics of margin accounts.

What Is a Margin Account?

With a cash brokerage account, an investor can only buy as many investments as they can cover with cash. If an investor has $10,000 in their account, they can buy $10,000 of stock, for example.

A margin account, however, allows qualified investors to borrow funds from the brokerage to purchase securities that are worth more than the cash they have on hand.

In this case, the cash or securities already in the investor’s account act as collateral, which is why the investor can generally borrow no more than the amount they have in cash. If they have $10,000 worth of cash and securities in their account, they can borrow up to another $10,000 (depending on brokerage rules and restrictions), and place a $20,000 trade.

Recommended: What Is Margin Trading?

Margin Debt, Explained

In other words, when engaging in margin trading an investor generally can only borrow up to 50% of the value of the trade they want to place, though an individual brokerage firm has license to impose stricter limits. Although the cash and securities in the account act as collateral for the loan, the broker also charges interest on the loan, which adds to the cost — and to the risk of loss.

Margin debt is high-risk debt. If an investor borrows funds to buy securities, that additional leverage enables them to place much bigger bets in the hope of seeing a profit. The risk is that if the trade moves against them they could lose all the money they borrowed, plus the cash collateral, and they would have to repay the loan to their broker with interest — on top of any brokerage fees and investment costs.

For this reason, among others, margin accounts are considered to be more appropriate for experienced investors, since trading on margin means taking on additional costs and risks. It’s also why only certain investors can open margin accounts.

💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

How Margin Debt Works

Traders can use margin debt for both long and short selling stocks. The Federal Reserve Board’s Regulation T (Reg T) places limitations on the amount that a trader can borrow for margin trades. Currently the limit is 50% of the initial investment the trader makes. This is known as the initial margin.

In addition to federal regulations, brokerages also have their own rules and limitations on margin trades, which tend to be stricter than federal regulations. Brokers and governments place restrictions on margin trades to protect investors and financial institutions from steep losses.

Example of Margin Debt

An investor wants to purchase 2,000 shares of Company ABC for $100 per share. They only want to put down a portion of the $200,000 that this trade would cost. Due to federal regulations, the trader would only be allowed to borrow up to 50% of the initial investment, so $100,000.

In addition to this regulation, the broker might have additional rules. So the trader would need to deposit at least $100,000 into their account in order to enter the trade, and they would be taking on $100,000 in debt. The $100,000 in their account would act as collateral for the loan.

What Is Maintenance Margin?

The broker will also require that the investor keep a certain amount of cash in their account at all times for the duration of the trade: this is known as maintenance margin. Under FINRA rules, the equity in the account must not fall below 25% of the market value of the securities in the account.

If the equity drops below this level, say because the investments have fallen in value, the investor will likely get a margin call from their broker. A margin call is when an investor is required to add cash or forced to sell investments to maintain a certain level of equity in a margin account.

If the investor fails to honor the margin call, meaning they do not add cash or equity into their account, the brokerage can sell the investor’s assets without notice to cover the shortfall.

Managing Interest Payments on Margin Debt

There’s generally no time limit on a margin loan. An investor can keep margin debt and just pay off the margin interest until the stock in which they invested increases to be able to pay off the debt amount.

The brokerage typically takes the interest out of the trader’s account automatically. In order for the investor to earn a profit or break even, the interest rate has to be less than the growth rate of the stock.

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.

Advantages and Disadvantages of Margin Debt

There are several benefits and drawbacks of using margin debt to purchase securities such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs).

Advantages

• Margin trading allows a trader to purchase more securities than they have the cash for, which can lead to bigger gains.

• Traders can also use margin debt to short sell a stock. They can borrow the stock and sell it, and then buy it back later at a lower price.

• Traders using margin can more easily spread out their available cash into multiple investments.

• Rather than selling stocks, which can trigger taxable events or impact their investing strategy, traders can remain invested and borrow funds for other investments.

Recommended: How to Invest in Stocks

Disadvantages

• Margin trading is risky and can lead to significant losses, making it less suitable for beginner investors.

• The investor has to pay interest on the loan, in addition to any other trading fees, commissions, or other investment costs associated with the trade.

• If a trader’s account falls below the required maintenance margin, let’s say if a stock is very volatile, that will trigger a margin call. In this case the trader will have to deposit more money into their account or sell off some of their holdings.

• Brokers have a right to sell off a trader’s holdings without notifying the trader in order to maintain a certain balance in the trader’s account.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Is High Margin Debt a Market Indicator?

What is the impact of high margin debt on the stock market, historically? There is an uneasy relationship between margin debt and market performance. Over the years elevated levels of margin debt have been associated with financial instability and market crashes.

For example, the widespread use of margin trading during the 1920s meant that the market was overleveraged, and the excessive reliance on debt contributed to the calamitous stock market crash that led to the Great Depression in the 1930s.

Different Perspectives on Margin Debt Levels

Today, some traders view margin debt as one measure of investor confidence in the markets because investors feel bullish about buying.

However, high margin debt can also be a sign that investors are chasing stocks, creating a cycle that can lead to greater volatility. If investors’ margin accounts decline, it can force brokers to liquidate securities in order to keep a minimum balance in these accounts.

It can be helpful for investors to look at whether total margin debt has been increasing year over year, rather than focusing on current margin debt levels. FINRA publishes total margin debt levels each month.

Jumps in margin debt do not always indicate a coming market drop, but they may be an indication to keep an eye out for additional signs of market shifts.

Recommended: 5 Bullish Indicators for Stocks

The Takeaway

Margin trading and the use of margin debt — i.e. borrowing funds from a broker to purchase securities — can be a useful tool for some investors, but it isn’t recommended for beginners due to the higher risk of using leverage to place trades. Margin debt does allow investors to place bigger trades than they could with cash on hand, but profits are not guaranteed, and steep losses can follow.

Thus using margin debt may not be the best strategy for investors with a low appetite for risk, who should likely look for safer investment strategies.

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, 12%*

Photo credit: iStock/PeopleImages

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.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

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