Investing Archives

Jan

2026

A woman looks over financial charts while standing at a table.

Value Investing Explained: Strategies & Principles for Long-Term Growth

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

Table of Contents

What Does Value Investing Mean?
What Are The Core Principles of Value Investing?
Who Are the Most Famous Value Investors?
How Is Value Investing Different From Growth Investing?
How to Find and Analyze Value Stocks
What Are the Risks of Value Investing?
FAQ

Value investing is an investment philosophy that takes an analytical approach to selecting stocks based on a company’s fundamentals, such as earnings growth, dividends, cash flow, book value, and intrinsic value. Value investors don’t follow the herd when it comes to buying and selling, which means they don’t tend to follow tips and rumors they hear from coworkers and talking heads on TV or social media.

Instead, they look for stocks that seem to be trading for less than they should be, perhaps because of seasonality, a weaker quarter, an overreaction to news, or simply because they didn’t meet some investors’ high expectations.

Key Points

• Value investing is an analytical approach to selecting stocks based on a company’s fundamentals, such as earnings growth, dividends, cash flow, book value, and intrinsic value.

• The main goal of value investing is to buy securities at a price near or less than their intrinsic value, which represents a stock’s true worth.

• Value investors use metrics like price-to-earnings ratio, price-to-book ratio, debt-to-equity ratio, and free cash flow to determine a stock’s intrinsic value.

• A margin of safety is crucial in value investing, as it helps investors avoid significant losses by buying stocks at a discount to their intrinsic value.

• Patience is critical for value investors, as it allows them to ride out market fluctuations and wait for the market to recognize a stock’s true value.

What Does Value Investing Mean?

A value investor’s goal is to find stocks that the market may be undervaluing. And after conducting their own analysis, an investor then decides whether they think the targeted stocks have potential to accrue value over time, and to invest.

In effect, value investing is an investment strategy that involves looking for “deals” in the U.S. stock market, and taking portfolio positions accordingly.

Historical Background and Evolution

Value investing has been championed and used by some of the most storied investors in history. For example, Warren Buffett, the CEO of Berkshire Hathaway, also known as the “Oracle of Omaha,” is probably the most famous (and most quoted) value investor of all time.

From 1965 to 2017, Buffett’s shares in Berkshire Hathaway had annual returns of 20.9% compared to the S&P 500’s 9.9% return.

Buffett’s mentor was Benjamin Graham, his teacher at Columbia Business School and later his employer, who is known as “the father of value investing.” Columbia professor David Dodd, another Graham protegee and colleague, is recognized for helping him further develop several popular value investing theories.

Billionaire Charlie Munger, vice chairman of Berkshire Hathaway Corp., was another super-investor who followed Graham and Dodd’s approach. And billionaire investor Seth Klarman , chief executive and portfolio manager of the Baupost Group, is a longtime proponent.

Joel Greenblatt, who ran Gotham Capital for over two decades and is now a professor at Columbia Business School, is the co-founder of the Value Investors Club.

What Are The Core Principles of Value Investing?

The main goal of value investing is to buy a security at a price that is near or less than its intrinsic value. That is, the investor is not paying a premium or markup on the stock — they’re getting a “deal” when they invest in it. There can be many elements at play when determining a value stock, including intrinsic value, margin of safety, and market inefficiencies.

Principle 1: Understand a Stock’s Intrinsic Value

Intrinsic value refers to a stock’s “true” value, which may differ from its “market” value. It can be a difficult concept to wrap your head around, but at its core, determining a stock’s intrinsic value can help an investor determine whether they’re actually finding a value stock, or if they’d potentially be overpaying for a stock. That’s why the concept of intrinsic value is critical to value investors.

Principle 2: Always Demand a Margin of Safety

Similarly, investors need to incorporate a “margin of safety,” which accounts for some wiggle room when they’re trying to determine a stock’s intrinsic value. In other words: Investors can be wrong or off in their calculations, and calculating a margin of safety can give them some margin of error when making determinations.

Principle 3: View the Market as a Manic Business Partner

Value investors also tend to believe that the market is rife with inefficiencies. That means that the market isn’t perfect, and doesn’t automatically price all stocks at their intrinsic values — opening up room to make value investments. If you, conversely, believe that the market is perfectly efficient, then there wouldn’t be any stocks that are priced below their intrinsic value.

Who Are the Most Famous Value Investors?

As mentioned, perhaps the most famous value investor of all time is Warren Buffett, who learned from Benjamin Graham. Charlie Munger, again, is also high on the list. But there are many others: Seth Karman, Joel Greenblatt, Mohnish Pabrai, Peter Lynch, Howard Marks, and more.

How Is Value Investing Different From Growth Investing?

Value investing is often discussed alongside growth investing. Value versus growth stocks represent different investment styles or approaches.

Differences and Performance Comparisons

In a general sense, value stocks are stocks that have fallen out of favor in the market, and that may be undervalued. Growth stocks, on the other hand, are shares of companies that demonstrate a strong potential to increase revenue or earnings thereby ramping up their stock price.

In terms of performance value stocks may not be seeing much price growth, whereas growth stocks may be experiencing rapid capital appreciation.

Comparing Value vs. Growth Investing Strategies

Both value and growth investing have their pros and cons.

Value investing, for instance, may see investors experience lowering volatility when investing, and also getting more dividends from their investments. But their portfolio might accrue value more slowly — if at all. Conversely, growth investing may see investors accrue more gains more quickly, but also with higher levels of volatility and risk.

How to Find and Analyze Value Stocks

As noted, value investing is a type of investing strategy, but it’s similar to how a value shopper might operate when hoping to buy a certain brand of a smartwatch for the lowest price possible.

If that shopper suddenly saw the watch advertised at half the price, it would make them happy, but it also might make them wonder: Is there a new version of the watch coming out that’s better than this one? Is there something wrong with the watch I want that I don’t know about? Is this just a really good deal, or am I missing something?

Also as discussed, their first step would likely be to go online and do some research. And if the watch was still worth what they thought, and the price was a good discount from a reliable seller, they’d probably go ahead and snap it up.

Investing in stocks can work in much the same way. The price of a share can fluctuate for various reasons, even if the company is still sound. And a value investor, who isn’t looking for explosive, immediate returns but consistency year after year, may see a drop in price as an opportunity.

Value investors are always on the lookout to buy stocks that trade below their intrinsic value (an asset’s worth based on tangible and intangible factors). Of course, that can be tricky. From day to day, stocks are worth only what investors are willing to pay for them. And there doesn’t have to be a good reason for the market to change its mind, for better or worse, about a stock’s value.

But over the long run, earnings, revenues, and other factors — including intangibles such as trademarks and branding, management stability, and research projects — do matter.

Key Metrics to Look For

Value investors use several metrics to determine a stock’s intrinsic value. A few of the factors they might look at (and compare to other stocks or the S&P 500) include:

Price-to-earnings Ratio (P/E)

This ratio is calculated by dividing a stock’s price by the earnings per share. For value investors, the lower the P/E, the better; it tells you how much you’re paying for each dollar of earnings.

Price/earnings-to-earnings Ratio (PEG)

The PEG ratio can help determine if a stock is undervalued or overvalued in comparison to another company’s stock. If the PEG ratio is higher, the market has overvalued the stock. If the PEG ratio is lower, the market has undervalued the stock. The PEG ratio is calculated by taking the P/E ratio and dividing it by the earnings growth rate.

Price-to-book Ratio (P/B)

A company’s book value is equal to its assets minus its liabilities. The book value per share can be found by dividing the book value by the number of outstanding shares.

The price-to-book ratio is calculated by dividing the company’s stock price by the book value per share. A ratio of less than one is considered good from a value investor’s perspective.

Debt-to-equity Ratio (D/E)

The debt-to-equity ratio measures a company’s capital structure and can be used to determine the risk that a business will be unable to repay its financial obligations. This ratio can be found by dividing the company’s total liabilities by its equity. Value investors typically look for a ratio of less than one.

Free Cash Flow (FCF)

This is the cash remaining after expenses have been paid (cash flow from operations minus capital expenditures equals free cash flow).

If a company is in good shape, it should have enough money to pay off debts, pay dividends, and invest in future growth. It can be useful to watch the ups and downs of free cash flow over a period of a few years, rather than a single year or quarter.

Over time, each value investor may develop their own formula for a successful stock search. That search might start with something as simple as an observation — a positive customer experience with a certain product or company, or noticing how brisk business is at a certain restaurant chain.

But research is an important next step. Investors also may wish to settle on a personal “margin of safety,” based on their individual risk tolerance. This can protect them from bad decisions, bad market conditions, or bad luck.

Why Patience Is Critical for Value Investors

An important thing to remember when it comes to value investing is that investors are likely on the hook for the long term. Many value stocks are probably not going to see huge value increases over short periods of time. They’re fundamentally unsexy, in many respects. For that reason, investors may do well to remember to be patient.

What Are the Risks of Value Investing?

As with any investment strategy, value investing does have its risks. It tends to be a less-risky strategy than others, but it has its risks nonetheless.

For one, investors can mislead themselves by making faulty or erroneous judgments about certain stocks. That can happen if they misunderstand financial statements, or make inaccurate calculations when engaging in fundamental analysis. In other words, investors can make some mistakes and bad judgments.

Investors can also buy stocks that are overvalued — or, at least overvalued compared to what the investor was hoping to purchase it for. There are also concerns to be aware of as it relates to diversification in your overall portfolio (you don’t want a portfolio overloaded with value stocks, or any other specific type of security).

💡 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.

The Takeaway

Value investing is a type of investment strategy or philosophy that involves buying stocks or securities that are “undervalued.” In effect, an investor determines that a stock is worth more than the market has valued it, and purchases it hoping that it will accrue value over time. While it’s a strategy that has its risks, it’s been used by many high-profile investors in the past, such as Warren Buffett.

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FAQ

How can I start value investing?

Anyone could potentially start value investing so long as they’ve reviewed the core tenets or principles of the strategy, and made investment decisions based on those principles.

Is value investing high-risk?

Value investing is generally considered to be a relatively lower or medium-risk investment strategy, but that does not mean it’s risk-free.

Is Warren Buffett a value investor?

Yes, Warren Buffett is perhaps the most famous value investor in history.

What is an example of value investing?

An example of value investing could be an investor purchasing a stock for $10, believing it to be undervalued relative to its intrinsic value. The investor then holds onto the stock for a long period, believing it will appreciate over time to reach its “true” or “fair” value, generating a return.

How long does it take to learn value investing?

It could take an indeterminate amount of time to learn value investing, as it’s not a strict discipline.

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

SOIN-Q425-043

Jan

2026

An investor looks at his investment account on a tablet, considering whether to use leverage for a trade.

What Is Leverage In Finance

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

Table of Contents

What Is Leverage?
How Leverage Works
Example of Leverage
Pros and Cons of Leverage
Leverage vs Margin
Types of Leverage
Leveraged Products
Volatility and Leverage Ratio
FAQ

In finance, leverage is the practice of borrowing funds to establish bigger positions. Leverage increases the potential for larger returns. But using leverage also increases the risk of loss.

In general, only qualified investors may use leverage when they invest, which they can typically access via a margin account. Margin is a type of loan from a brokerage. Trading on margin is a type of leverage.

As an investor, it’s critical to understand leverage and the additional risks involved if you plan to day trade or make other types of short-term investments.

Key Points

• In investing, leverage refers to the practice of borrowing money to place bigger trades, using a margin loan from a brokerage.

• Thus the use of leverage requires access to a margin account, which is subject to strict rules regarding account minimums and trade requirements.

• While leverage can amplify gains, it also magnifies losses and comes with additional risks and costs.

• Only qualified investors may open a margin account, owing to the higher risk of loss.

• Different types of leverage exist, including financial leverage used by businesses to raise capital, and operating leverage used to analyze fixed and variable costs.

What Is Leverage?

In finance, leverage refers to using a small amount of capital to establish bigger positions, using borrowed funds. This is called trading on margin, and it’s a strategy generally available only to qualified investors.

The use of margin is governed by rules from the Financial Industry Regulatory Authority (FINRA). A margin loan must be backed with cash and other securities, a minimum amount of cash must be maintained in the account, and the margin debt must be paid back with interest, whether investing online or through a traditional brokerage.

Trading With Cash vs. Margin

With a cash brokerage account, an investor can only purchase investments they can cover with cash. If an investor has $5,000 in cash, they can buy $5,000 worth of securities.

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 the above example, an investor could borrow up to $5,000, which doubles the amount they can invest (depending on any account restrictions), and place a $10,000 trade.

Although leverage is about borrowing capital in an effort to increase returns when investing in stocks and other securities, if the trade moves in the wrong direction, though, you could suffer a loss — and you’d still have to repay the margin loan, plus interest and fees.

How Leverage Works

In leveraged investing, the leverage is debt that qualified investors use as a part of their investing strategy.

Leverage typically works like this: An investor wants to make a large investment, but doesn’t have enough liquid capital to do it. If they qualify, they use the capital they do have in conjunction with margin (borrowed money) to make a leveraged investment.

If they’re successful, the return on their investment is greater than it would’ve been had they only invested their own capital.

In the event that the investor lost money, they would still have to repay the money they’d borrowed, plus interest and fees.

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Example of Leverage

Let’s say an investor has $10,000 worth of cash and securities in their account. Generally speaking, and assuming they qualify for margin funds, the investor can borrow up to another $10,000, and place a $20,000 trade, though the brokerage firm could impose stricter limits or other restrictions.

That’s because the Federal Reserve’s Regulation T requires a 50% initial margin deposit, minimum, for trading on margin.

Thus, when using margin to buy stocks or other securities, an investor typically can borrow up to 50% of the value of the trade. The cash and securities are collateral for the loan, and the broker also charges interest on the loan, which adds to the cost — and to the risk of loss. (Margin rules can vary, however, depending on the securities being traded and other factors.)

Pros and Cons of Leverage

On the surface, leverage can sound like a powerful tool for investors — which it can be. But it’s a tool that can cut both ways: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

Pros of Leverage	Cons of Leverage
Adds buying power	Increased risks and costs
Potential to earn greater returns	Leveraged losses are magnified
If you qualify, using leverage can be easy	Not all investors qualify for the use of leverage, i.e., margin

Leverage vs Margin

Leverage is a type of debt. And as noted, margin is a type of leverage that can be used to make investment trades. It’s similar to a line of credit for a brokerage account that qualified investors can access.

Leverage can be used by businesses to expand operations or invest in new equipment or to fund an acquisition. Ideally, the use of leverage will generate additional revenue to cover the cost of the debt.

Leverage vs Margin
Leverage	Margin
A loan from a bank for a specific purpose	A loan from a brokerage for investing in financial instruments
Can be used by businesses or individuals	Only qualified investors have access to margin trading
Leverage may be used to expand business operations or achieve other goals	Can be used to increase investment buying power
Borrowed capital generally must be repaid according to the terms of the loan.	Margin loans must be repaid with interest, and fees.

Types of Leverage

So far, we’ve mostly discussed leverage as it relates to the financial markets for investors. But there are other types of leverage, too.

Financial Leverage

Financial leverage is used by businesses and organizations as a way to raise money or access additional capital without having to issue additional shares or sell equity. For instance, if a company wants to expand operations, it can take on debt to finance that expansion.

The main ways that a company may do so is by either issuing bonds or by taking out loans. Much like in the leverage example above, this capital injection gives the company more spending power to do what it needs to do, with the expectation that the profits reaped will outweigh the costs of borrowing in the long run.

Operating Leverage

Operating leverage is an accounting measure used by businesses to get an idea of their fixed versus variable costs. When calculating operating leverage, a company looks at its fixed costs as compared to variable costs to get a sense of how the costs of borrowing are affecting its profitability.

Understanding operating leverage helps to evaluate whether a company’s borrowing is profitable (called the debt-to-equity ratio).

Using Borrowed Money to Invest

While many investors utilize margin, it’s also possible to borrow money from an outside source (not your broker or brokerage) to invest with. This may be appealing to some investors who don’t have high enough account balances to meet the thresholds some brokerages have in place to trade on margin.

If an investor doesn’t meet the margin requirements, looking for an outside loan — a personal loan, a home equity loan, etc.— to meet that threshold may be an appealing option.

But, as mentioned, investors will need to consider the additional costs associated with borrowing funds, such as applicable interest rates. So, before doing so, it may be a good idea to consult a financial professional.

Leverage in Personal Finance

The use of leverage also exists in personal finance — not merely in investing. People often leverage their money to make big purchases like cars or homes with auto loans and mortgages.

A mortgage is a fairly simple example of how an individual may use leverage. They’re using their own money for a down payment to buy a home, and then taking out a loan to pay for the rest. The assumption is that the home will accrue value over time, growing their investment.

Leverage in Professional Trading

Professional traders tend to be more aggressive in trying to boost returns, and as such, many consider leverage an incredibly important and potent tool. While the degree to which professional traders use leverage varies from market to market (the stock market versus the foreign exchange market, for example), in general most pro traders are well-versed in leveraging their trades.

This may allow them to significantly increase returns on a given trade. And professionals are given more leeway with margin than the average investor, so they can potentially borrow significantly more than the typical person to trade. Of course, they also have to stomach the risks of doing so, too — because while it may increase returns on a given trade, there is always the possibility that it will not.

Leveraged Products

There are numerous financial products and instruments that investors can use to gain greater exposure to the market, all without increasing their investments, like leveraged ETFs.

Leveraged ETFs

ETFs, or exchange-traded funds, can have leverage baked into them. ETFs are typically baskets of stocks, bonds, or other assets that mirror a relevant index, such as the S&P 500.

Leveraged ETFs, or LETFs, use derivatives so that investors may potentially double (2x), triple (3x) or short (-1) the daily gains or losses of the index. Financial derivatives are contracts whose prices are reliant on an underlying asset.

Leveraged ETFs are highly risky, owing to their use of derivative products.

Volatility and Leverage Ratio

A leverage ratio measures a company’s debt profile, and gives a snapshot of how much debt a company currently has versus its cash flow. Companies can use leverage to increase profitability by expanding operations, etc., but it’s a gamble because that profitability may not materialize as planned.

Knowing the leverage ratio helps company lenders understand just how much debt they’ve taken on, and can also help investors understand whether a company is a potentially risky investment given its debt obligations.

The leverage ratio formula is: total debt / total equity.

Volatility is another element in the mix, and it can be added into the equation to figure out just how volatile an investment may be. That’s important, given how leverage can significantly amplify risk.

The Takeaway

Leverage can help investors, buyers, corporations and others do more with less cash by using borrowed funds. But there are some important considerations to keep in mind when it comes to leverage. In terms of leveraged investing, it has the potential to magnify gains — but also to magnify losses, and increase total costs.

Utilizing leverage and margin as a part of an investing or trading strategy has its pros and cons, and investors should give the risks serious consideration.

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.

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FAQ

What is leverage in simple terms?

In simple terms, the concept of leverage means to use a small amount of force to create a larger outcome. As it relates to finance or investing, this can mean using a small amount of capital to make large or outsized trades or investments.

What is an ordinary example of leverage?

An example of leverage could be a mortgage, or home loan, in which a borrower makes a relatively small down payment and borrows money to purchase a home. They’re making a big financial move with a fraction of the funds necessary to facilitate the transaction, borrowing the remainder.

Why do people want leverage?

Leverage allows investors or traders to make bigger moves or take larger positions in the market with only a relatively small amount of capital. This could lead to larger returns — or larger losses.

Photo credit: iStock/StockRocket

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

SOIN-Q425-039

Jan

2026

A notebook lies open on a desk, next to a credit card, laptop, and phone, to help an investor address a margin call.

Margin Calls: Defined and Explained

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Margin accounts, which permit qualified investors to trade using borrowed funds, have strict rules about maintaining a minimum amount of cash or securities in the account. The investor could face a margin call if liquid funds drop below that level. In that case, an investor is required to add cash or sell investments to meet the minimum requirement, or the brokerage might do it for them.

Margin trading — which is a form of leverage — is a risky endeavor. Placing bets with borrowed funds may boost gains, but can also amplify losses. Brokers require traders to keep a minimum balance in their margin accounts for this reason.

Margin calls are designed to protect both the brokerage and the client from bigger losses. Here’s a closer look at how margin calls work, as well as how to avoid or cover a margin call.

Table of Contents

What Is a Margin Call?
How Do Margin Calls Work?
Example of Margin Call
Margin Call Formula
2 Steps to Cover a Margin Call
How Long Do I Have to Cover a Margin Call?
Tips on Avoiding Margin Calls
FAQ

Key Points

• A margin call occurs when an investor must deposit cash or sell investments to meet minimum collateral requirements in their margin account.

• Margin trading involves borrowing money from a brokerage firm to enhance trades, but it comes with risks.

• If the equity in a margin account falls below the maintenance margin, a margin call is issued by the brokerage firm.

• Margin calls are designed to protect both the brokerage and the client from bigger losses.

• To cover a margin call, investors can deposit cash or securities into the margin account or sell securities to meet the requirements. If they don’t, the broker may sell securities on their behalf to bring up the account balance.

What Is a Margin Call?

A margin call is when a brokerage firm demands that an investor add cash or equity into their margin account because it has dipped below the required minimum amount. The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage (known as margin debt).

A house call, sometimes called a maintenance call, is a type of margin call. A brokerage firm will issue the house call when the market value of assets in a trader’s margin account falls below the required maintenance margin — usually 25% of the value of the securities in the account, per Financial Industry Regulatory Authority (FINRA) and New York Stock Exchange (NYSE) rules. This is the minimum amount of equity a trader must hold in their margin account, but a broker may require a higher amount.

If the investor fails to honor the margin call, when trading stocks or other securities, 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 in the account.

A margin account entails a high level of responsibility and potential risk, which is why margin trading is primarily for experienced investors, whether investing online or through a traditional brokerage.

How Do Margin Calls Work?

When the equity in an investor’s margin account falls below the maintenance margin, a brokerage firm will typically issue a margin call. Maintenance margins requirements differ from broker to broker.

Additionally, regulatory bodies like the Federal Reserve and FINRA have rules for account minimums — including the initial margin and the maintenance margin, which are different. These rules exist to limit the risk of loss for investors and brokerages alike.

Regulation T

The Federal Reserve Board’s Regulation T states that the initial margin level should be at least 50% of the purchase price of the securities the investor hopes to trade. For example, a $10,000 trade would require an investor to use $5,000 of their own cash for the transaction.

FINRA

FINRA requires that investors have a maintenance margin level of at least 25% of the market value of all securities in the account after they purchase on margin. For example, in a $10,000 trade, the investor must maintain $2,500 in their margin account. If the investment value dips below $2,500, the investor could be subject to a margin call.

Again, some brokers may impose tighter restrictions on margin accounts. Experienced traders will be sure to note the terms of all margin trades.

Example of Margin Call

Here is how a margin trade works. Suppose an investor wants to buy 200 shares of a stock at $50 each for an investment that totals $10,000. He or she puts up $5,000 in initial margin, while the brokerage firm lends the remaining $5,000.

FINRA rules and the broker then require that the investor hold 25% of the total securities value in his or her account at all times — this is the maintenance margin requirement. So the investor would need to maintain $2,500 in his or her brokerage account. The investor currently achieves this since there’s $5,000 in equity from the initial investment.

If the stock’s value falls to $30 per share, the value of the investment drops to $6,000. The broker is entitled to $5,000 (to repay the margin loan), not including interest or fees, leaving approximately $1,000. That would be below the $1,500 required, or 25% of the total $6,000 value in the account.

That would trigger a margin call of $500, or the difference between the $1,000 left in the account and the $1,500 required to maintain the margin account. Normally, a broker will allow two to five days for the investors to cover the margin call. In addition, the investor would also owe interest and possibly fees on the original loan amount of $5,000.

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*For full margin details, see terms.

Margin Call Formula

Here’s how to calculate a margin call:

Margin call amount = (Value of investments multiplied by the percentage margin requirement) minus (Amount of investor equity left in margin account)

Here’s the formula using the hypothetical investor example above:

$500 = ($6000 x 0.25%) – ($1,000)

Investors can also calculate the share price at which he or she would be required to post additional funds.

Margin call price = Initial purchase price times (1– borrowed percentage / 1– margin requirement percentage)

Again, here’s the formula using the hypothetical case above:

$33.33 / share = $50 x (1 – 0.50 / 1 – 0.25)

In other words, the price per share cannot fall below $33.33 or the investor will risk getting a margin call.

2 Steps to Cover a Margin Call

When investors receive a margin call, there are only two options:

1. They can deposit cash into the margin account so that the level of funds is back above the maintenance margin requirement. Investors can also deposit securities that aren’t margined.

2. Investors can also sell the securities that are margined in order to meet requirements.

In a worst case scenario, the broker can sell off securities to cover the debt, without notifying the investor.

How Long Do I Have to Cover a Margin Call?

Brokerage firms are not required to give investors a set amount of time. As mentioned in the example above, a brokerage firm normally gives customers two to five days to meet a margin call. However, the time given to provide additional funds can differ from broker to broker.

In addition, during volatile times in the market, which is also when margin calls are more likely to occur, a broker has the right to sell securities in a customer’s trading account shortly after issuing the margin call. Investors won’t have the right to weigh in on the price at which those securities are sold. This means investors may have to settle their accounts by the next trading day.

Tips on Avoiding Margin Calls

The best way to avoid a margin call is to avoid trading on margin or having a margin account. Trading on margin should be reserved for investors with the time and sophistication to monitor their portfolios properly and take on the risk of substantial losses. Investors who trade on margin can do a few things to avoid a margin call.

• Understand margin trading: Investors can understand how margin trading works and know their broker’s maintenance margin requirements.

• Track the market: Investors can monitor the volatility of the stock, bond, or whatever security they are investing in to ensure their margin account doesn’t dip below the maintenance margin.

• Keep extra cash on hand: Investors can set aside money to fulfill the potential margin call and calculate the lowest security price at which their broker might issue a call.

• Utilize limit orders: Investors can use order types that may help protect them from a margin call, such as a limit order.

The Takeaway

While margin trading allows investors to amplify their purchases in markets, margin calls could result in substantial losses, with the investor paying more than he or she initially invested. Margin calls occur when the level of cash in an investor’s trading account falls below a fixed level required by the brokerage firm.

Investors can then deposit cash or securities to bring the margin account back up to the required value, or they can sell securities in order to raise the cash they need.

Get one of the most competitive margin loan rates with SoFi, from 4.75% to 9.50%*

FAQ

How can you satisfy your margin call in margin trading?

A trader can satisfy a margin call by depositing cash or securities in their account or selling some securities in the margin account to pay down part of the margin loan.

How are fed and house calls different?

A fed call, or a federal call, occurs when an investor’s margin account does not have enough equity to meet the 50% equity retirement outlined in Regulation T. In contrast, a house call happens when an investor’s margin equity dips below the maintenance margin.

How much time do you have to satisfy a margin call?

It depends on the broker. In some circumstances, a broker will demand that a trader satisfy the margin call immediately. The broker will allow two to five days to meet the margin call at other times.

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

SOIN-Q425-022

Jan

2026

A woman wearing glasses, and smiling, reviews the performance of her investments on a computer monitor.

What Is Mean Reversion and How Can You Trade It?

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

Mean reversion is a mathematical concept which holds that over time statistical measurements return to a long-run normal. In investing, mean reversion holds that while a market or an asset may go up and down in the short-term, over time, it should theoretically return to its long-term trend.

If traders anticipate that a market may revert to the mean, they can use that expectation to inform their strategy going forward.

Table of Contents

What Is Mean Reversion?
Mean Reversion Strategies
The Risks of Mean Reversion Strategy
How to Implement a Mean Reversion Strategy
Factors in Creating a Mean Reversion Strategy
FAQ

Key Points

• Mean reversion is a mathematical concept that states assets tend to return to their long-term trends over time.

• Traders may use mean reversion to inform their strategies and expect assets to return to their historical behaviors.

• Mean reversion applies not only to individual stocks, but also to sectors, commodities, and foreign currencies.

• Implementing a mean reversion strategy requires identifying patterns and attempting to time the reversion correctly.

• Mean reversion strategies depend on regularities staying consistent, and there are risks if structural shifts occur in the market or economy.

What Is Mean Reversion?

When stocks revert to the mean, their returns or other characteristics match what they’ve been over a longer period of time than the recent past. This can mean that a stock that becomes highly volatile may revert back to being less volatile; a stock that becomes more expensive (meaning its price far outpaces its earnings) may become cheap; and, quite importantly, the other way around. Mean reversion can work in both directions.

The mean reversion concept not only applies to individual shares, but also to whole sectors of the economy or of the stock market, like, say, consumer product companies or pharmaceutical companies or any other chunk of the market that shares enough with each other to be classed together. Alternative assets, such as commodities or foreign currencies can also revert to the mean.

The theory applies to more than just prices, the volatility of a given asset can mean revert, which can matter for trading and pricing more exotic financial products like options and other derivatives.

Mean Reversion Strategies

With any generality or principle of the market comes the obvious question: Is there a strategy here? Can this be traded?

Mean reversion trading is a strategy based on reversion to the mean happening, basically that stocks or some asset will return to its typical, long-run historical behavior.

Actually working out a mean reversion strategy is not as simple as thinking a certain stock is out of whack and waiting for things to get back to normal, it requires the ability to flag patterns to make an educated guess about when mean reversion will happen.

After all, if you just know that a stock is going to revert to the mean, you can still pile up large losses or miss out on potential returns you can’t time the reversion correctly — go too early and you’ll have to eat the stock being the “wrong” price before reversion to the mean happens, go too late and the gains have already evaporated as the change in price or returns has already occurred.

The Risks of Mean Reversion Strategy

Mean reversion strategies depend on statistical and historical regularites staying, well, regular. There are some that are pretty well validated, although with sharp and scary exceptions, like that stocks tend to go up over time and outperform other asset classes. But mean reversion involves certain relationships between stocks and assets staying true over time.

In some cases, mean reversion never occurs. Companies or sectors can have continually growing returns over a long period of time if there’s some kind of structural shift in the economy or market in which they operate. This can mean that returns increase over time or stay quite high.

This can happen for a few reasons. A company could gain or lose a dominant position in a given market, technological changes can advantage certain firms and disadvantage others, such that returns move permanently (or at least close enough to permanently for a given investment strategy) to a higher level and lower to another. Or there could be a global pandemic that permanently changes the way that companies do business, or long-run inflation that impacts profitability.

How to Implement a Mean Reversion Strategy

There are some basic statistical and financial tools to help create mean reversion strategy. As always, active trading and trying to time the market is risky and sometimes the whole market moves up and down and that can swamp whatever strategy you might have for an individual stock or sector.

Part of implementing a mean reversion strategy is getting a sense of stock trends or a trend trading strategy, whether past movement in a stock up or down might indicate that it may continue in that direction.

This can involve trying to discern bullish indicators for stocks, giving you a sense of when stock returns may have the potential to go up. Often traders combine this strategy with forms of technical analysis, including the use of candlestick patterns.

Alternatively, you will need to have a sense of when a stock is underperforming in order to profit from buying it before it reverts to the mean upwards.

Factors in Creating a Mean Reversion Strategy

There are many factors that institutional and retail investors need to consider when devising a mean reversion strategy.

Determining the Mean

In this case, you’ll need to think about what period of time you are using to determine a stock or sector’s “normal” or “average” behavior. This matters because it will determine how long you decide to hold a stock or when you plan to sell it before or after the reversion to the mean occurs.

Timing

To execute a mean reversion strategy, you have to know when a stock’s price movement may be sufficient to execute the trade. It helps to determine this point in advance.

Determine the Bounds

What is the “normal” behavior, whether it’s price-to-equity ratio, volatility, or some other metric you’re looking at. To determine whether something is far beyond its mean, either high or low, you need a good sense of its normal range.

Qualitative Factors

Mean reversion and trading reversion to the mean is, of course, a quantitative endeavor. You need to compile statistics and make projections going forward in order to implement the strategy. But you also need to know what’s going on in the “real world” beyond the statistics.

If something is driving prices or volatility or some other metric higher or lower that’s likely to persist over time, mean reversion may not be a great bet. If, however, there’s something truly transient that’s the catalyst for large moves up and down that will then revert to the mean, then maybe the strategy is more likely to work.

Exit Strategy

As with most investments, it’s helpful to have an exit strategy determined ahead of time. This can help you limit your losses in the case that the asset ultimately does not revert to the mean.

The Takeaway

Mean reversion refers to an asset’s tendency to stick to typical value increases over time. Again, while volatility may play a role in short-term price or value changes, many assets will follow a long-term appreciation line, and despite short-term rises or falls in price, they may revert to the mean.

Traders who follow mean reversion strategies assume that a specific stock or sector will return to its long-term characteristics. The strategy can be helpful when determining an investing strategy for either individual assets or for a market, overall, though there is no guarantee of future results.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

FAQ

What does mean reversion refer to in investing in simple terms?

In investing, mean reversion holds that while a market or an asset may go up and down in the short-term, over time, it will (theoretically) return to its long-term trend.

Does mean reversion only happen to stocks?

Mean reversion applies not only to individual stocks, but also to sectors, commodities, and foreign currencies.

What factors should investors consider when creating a mean reversion strategy?

Investors should think about or consider variables such as determining the actual mean (or “normal” conditions, they’re comparing the out-of-the-norm price behavior to). They should also consider timing, bounds, various qualitative factors, and an exit strategy.

Photo credit: iStock/LaylaBird

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

SOIN-Q425-059

Jan

2026

A man sits at a desk with a cup of coffee, tablet, and phone. He’s writing in a notebook about investing vs. speculation.

Investing vs. Speculation: Understanding the Core Differences

By SoFi Editors | 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.

The primary differences between investing and speculating are the degree of risk and the time frame involved. Investing is typically a longer-term strategy that involves less risk than speculating — which is a short-term, high-risk approach to profiting from quick changes in price.

Whether you’re interested in investing or speculating can also determine the types of assets you might invest in, as well as the strategies you might use.

Table of Contents

Historical Perspectives on Investing and Speculation
Key Differences Between Investing and Speculating
Real-World Implications of Investment vs Speculation
Strategic Approaches to Investment
When Does Speculation Make Sense?
FAQ

Key Points

• The fundamental differences between investing and speculating involve the time frame (long-term vs. short-term) and the degree of risk (lower vs. higher risk).

• Investing typically involves buying researched assets with the goal of long-term price appreciation.

• Speculation is a short-term, high-risk strategy focused on profiting from quick price changes.

• Traditional investors rely on tools like fundamental analysis to evaluate a business’s health and employ a buy-and-hold strategy, whereas speculators focus on technical analysis and market timing for immediate gains.

• Investment carries a reasonable likelihood of profit over time, while speculation is associated with higher volatility and the risk of loss.

Defining Investing and Speculation

Speculating usually describes scenarios when there’s a high chance the investment will deliver losses, but also cases where the investment could result in a high profit. High-risk, potentially high-reward investments may include commodities, derivatives, futures, and more.

In contrast, investing generally refers to transactions where an individual has researched an asset, and puts money into it with the hope that prices will rise over time.

There are no guarantees, of course, and all types of investing include some form of risk. Individuals may find ways to speculate or invest with an online investing platform or through a regular broker.

Examples of Investments and Speculative Investments

Assets that are thought of as more traditional types of investments include publicly traded stocks, mutual funds, exchange-traded funds (ETFs), bonds (e.g. U.S. Treasurys, municipal bonds, high-grade corporate bonds), and real estate.

Even some so-called alternative investments would be considered more long-term and less speculative: e.g., jewelry, art, collectibles.

Assets that are almost always considered speculative include: junk bonds, options, futures, forex and foreign currencies, and investments in startup companies.

Sometimes it isn’t as simple as saying that all investments in the stock market, or types of ETFs or mutual funds, hold the same amount of risk, or are definitely classified as investments. Even within certain asset classes, there can be large variations in risk exposure.

The Traditional Approach to Investing

When it comes to the more traditional approach to investing, individuals typically buy and hold assets in their investment portfolios or retirement accounts (e.g., when they open an IRA), with the aim of seeing long-term gains.

Traditional forms of investing focus on the performance of the underlying business or organization, not on the day-to-day or hour-by-hour price movements of an asset — which is more common with speculation.

For this reason, some traditional investors tend to rely on various forms of analysis (e.g., the fundamental analysis of stocks), as well as analytical tools and metrics to gauge the health of a company, asset, or market sector.
Recommended: Stock Market Basics

Speculation: A High-Risk, High-Reward Game

The difference between speculating and investing can be nuanced and a matter of opinion. (After all, some investors view investing in stocks as a form of gambling.) But when traders are speculating, they are typically seeking profits in a relatively short period of time: e.g., hours, days, or weeks.

In the case of commodities or futures trading, the time horizon might be longer, but the aim of making a big profit fairly quickly is at the heart of most speculation.

Speculators may also use leverage, a.k.a. margin trading, to boost their buying power and amplify gains where possible (although using leverage can also lead to steep losses).

The Psychology of Investing vs Speculating

The psychology of a typical investor is quite different from that of a speculative investor, and again revolves around the higher tolerance for risk in pursuit of a potentially bigger reward in a very short time frame.

Long-Term Investing	Speculating
Taking calculated or minimal risks	Willing to take on high-risk endeavors
Pursuit of reasonable gains	Pursuit of very high returns
Willing to invest for the long term	Willing to invest only for the short term
Uses a mix of traditional investments and strategies (e.g., stocks, bonds, funds)	Uses single strategies and may prefer derivatives or alternative investments
Infrequent use of leverage/margin	Frequent use of leverage/margin

Historical Perspectives on Investing and Speculation

The history of investing and speculating has long been entwined. In the earliest days of trading thousands of years ago, most markets were focused on the exchange of tangible commodities like livestock, grain, etc.

That said, some investors might put their money into global voyages or even wars with the hope of acquiring great wealth. Although the time frame for these investments was long-term, the risk of loss was very high. Thus, many early investors could be described as speculators.

Investing in forms of debt as a way to make money was also common, eventually leading to the bond market as we know it today.

The concept of investing in companies and focusing on longer-term gains took hold gradually. As markets became more sophisticated over the centuries, and a wider range of technologies, strategies, and financial products came into use, the division between investing and speculating became more distinct.

Recommended: What Causes a Stock Market Bubble?

Speculation History: Notable Market Bubbles and Crashes

The history of investing is rife with market bubbles, manias, and crashes. While the speculative market around tulip bulbs in 17th-century Holland is one extreme example, there have been many similar financial events in just the last 20 or 30 years — including the dot-com bubble and the Great Financial Crisis of 2008-09. Most of these were driven by speculation.

What marks a bubble is a well-established series of stages driven by investor emotions like exuberance (i.e., greed) followed by panic and loss. That’s because many investors tend to be irrational, especially when in pursuit of a quick profit that seems like “a sure thing.”

Some classic examples of financial bubbles that changed the course of history:

• The South Sea Bubble (U.K., 1711 to 1720) — The South Sea company was created in 1711 to help reduce national war debt. The company stock peaked in 1720 and then crashed, taking with it the fortunes of many.

• The Roaring Twenties (U.S., 1924 to 1929) — The 1920s saw a rapid expansion of the U.S. economy, thanks to both corporations’ and consumers’ growing use of credit. Stock market speculation reached a peak in 1929, followed by the infamous crash, and the Great Depression.

• Japanese Bubble Economy (1984 to 1989) — The Japanese economy experienced a historic two-decade period of growth beginning in the 1960s, that was further fueled by financial deregulation and widespread speculation that artificially inflated the worth of many corporations and land values. By late 1989, as the government raised interest rates, the economy fell into a prolonged slowdown that took years to recover from.

• Dot-Com Bubble (1995 to 2002) — Sparked by rapid internet adoption, the dot-com boom and bust saw the growth of tech companies in the late 1990s, when the Nasdaq rose 800%. But by October 2002 it had fallen 78% from that high mark.

Key Differences Between Investing and Speculating

What can be confusing for some investors is that there is an overlap between investing in the traditional sense, and speculative investing in higher-risk instruments. And some types of investing fall into the gray area between the two.

For example, options trading, commodities trading, or buying IPO stock are considered high-risk endeavors that should be reserved for more experienced investors. What makes these types of investments more speculative, again, is the shorter time frame and the overall risk level.

Time Horizon: Long-term Goals vs Quick Gains

As noted above, investors typically take a longer view and invest for a longer time frame; speculators seek quick-turn profits within a shorter period.

That’s because more traditional investors are inclined to seek profits over time, based on the quality of their investments. This strategy at its core is a way of managing risk in order to maximize potential gains.

Speculators are more aggressive: They’re geared toward quick profits, using a single strategy or asset to deliver an outsized gain — with a willingness to accept a much higher risk factor, and the potential for steep losses.

Fundamental Analysis vs. Market Timing

As a result of these two different mindsets, investors and speculators utilize different means of achieving their ends.

Investors focused on more traditional strategies might use tools like fundamental analysis to gauge the worthiness of an investment.

Speculators don’t necessarily base their choices on the quality of a certain asset. They’re more interested in the technical analysis of securities that will help them predict and, ideally, profit from short-term price movements. While buy-and-hold investors focus on time in the market, speculators are looking to time the market.

Real-World Implications of Investment vs Speculation

To better understand the respective value and impact of investing vs. speculating, it helps to consider the real-world implications of each strategy.

The Impact of Speculation on Markets

It’s important to remember that speculation occurs in many if not all market sectors. So speculation isn’t bad, nor does it always add to volatility — although in certain circumstances it can.

For example, some point to IPO shares as an example of how speculative investors, who are looking for quick profits, may help fuel the volatility of IPO stock.

Speculation does add liquidity to the markets, though, which facilitates trading. And speculative investors often inject cash into companies that need it, which provides a vital function in the economy.

Strategic Approaches to Investment

Whether an investor chooses a more traditional route or a more speculative one, or a combination of these strategies, comes down to that person’s skill, goals, and ability to tolerate risk.

Diversification and Asset Allocation

For more traditional, longer-term investors, there are two main tools in their toolkit that help manage risk over time.

• Diversification is the practice of investing in more than one asset class, and also diversifying within that asset class. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and potentially improve returns.

• Asset allocation is the practice of balancing a portfolio between more aggressive and more conservative holdings, also with the aim of growth while managing risk.

When Does Speculation Make Sense?

Speculation makes sense for a certain type of investor, with a certain level of experience and risk profile. It’s not so much that speculative investing always makes sense in Cases A, B, or C. It’s more about an investor mastering certain speculative strategies to the degree that they feel comfortable with the level of risk they’re taking on.

The Takeaway

The main way to differentiate between investment and speculation is through the lens of risk exposure. If an asset is purchased that carries a reasonable probability of profit over time without significant risk, it’s an investment. If an asset carries a higher likelihood of significant fluctuation and volatility in a short period of time, it is speculation.

A long-term commitment to a broad stock market investment, like an equity-based index fund, is generally considered an investment. Historical data shows us that the likelihood of seeing gains over long periods, like 20 years or more, is reasonable — although there is always the risk of loss.

Compare that with a trader who purchases a single stock with the expectation that the price will surge that very day or week — which is far more difficult to predict and has a much lower probability of success.

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

FAQ

Is speculation the same as gambling?

Not exactly. Gambling involves placing a bet or wager on a certain event or outcome, with the hope of winning money. Speculation involves some skill and the use of technical analysis in order to make a profit. But both involve the risk of total loss.

What is the psychology of investing vs speculating?

An investment mindset tends to be more risk-averse and focused on long-term goals. The psychology of a speculator tends to be comfortable with risk in order to use short-term strategies that may or may not be profitable.

What are the tools for investing vs speculating?

Investors often use fundamental analysis tools to gauge the health of a business. Speculators use different forms of technical and trend analysis to take advantage of price movements.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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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. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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