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Q: What is the difference between a cleared balance and an available balance?

Before a deposit fully clears and turns into cleared funds, the bank may make some of the deposit available by the start of the next business day. That partial deposit is known as available funds or an available balance.

Q: How long does it take to get money cleared?

Some deposits can happen as soon as the same day, with most happening the next business day. In some cases, though, a deposit can take as long as nine days to clear. Check with your bank to know their timelines.

Jun

2024

Cleared Funds: Definition and Breakdown of Funds Clearing Time

By Jacqueline DeMarco | Budgeting & Goals, Financial Independence, money | Comments Off

We live in a fast-paced world and are accustomed to immediate gratification. Just as we can get groceries delivered in minutes and order a new movie online with a few clicks, so too do we often expect our bank deposits to be available immediately.

But it doesn’t always work that way when it comes to finances. Some things do require a wait, even though it may seem like they should happen instantaneously. When money is put into a bank account, it can take a while for the deposited funds to appear and become available. Here’s a simple breakdown of how long it takes for funds to clear.

What Are Cleared Funds?

Depositing money into a bank account doesn’t always make those funds appear immediately. It can take time for the funds to clear and become available to use. This is because banks and credit unions may place a temporary hold on the deposit. When this happens, the account holder can see their “total balance” on their account and their “available balance.” The latter is the amount of the total balance minus any pending deposits. The available balance is, as the name indicates, what is available for use.

Why Banks Put a Hold on Deposits

One reason why banks don’t immediately declare deposits to be cleared funds is to help avoid issues that can arise when a deposit bounces. Having a brief waiting period helps protect customers from bank fraud and from paying unnecessary fees. If a bank were to allow a customer to spend funds from a check that ends up bouncing, the customer would then need to repay the bank the amount they deposited and probably pay an overdraft fee (even if the customer wasn’t at fault).

Some holds take longer than others. The federal government regulates the max amount of time a banking institution can hold onto the funds before they make them available to the account holder. Banks and credit unions also have their own policies regarding how long it will take for funds to become available after a deposit, which can be shorter than federal regulations. It can be helpful to review your bank’s policies for holding deposits so you can get a better idea of when cleared funds will become available. That way, you won’t accidentally overdraw your account.

How Do Cleared Funds Work?

Cleared funds appear in a bank account, such as a checking account, after the holding period ends. Usually, this holding period lasts until the next business day, but it can take longer. Weekends and holidays can slow this process down. The type of deposit made can also affect the timeline.

Here’s a specific example: If you deposit a check via an ATM that is not part of your bank’s network, you will probably have to wait a while to access the money. It may take up to five days before that check becomes available cash in your account.

Compare that to the case of electronic deposits made via the Automated Clearing House (ACH). The funds can actually clear and become available as soon as the same day. Having a paycheck deposited via direct deposit can help you access your money a lot faster than if you deposited a check at an ATM.

Breakdown of Times of Cleared Funds

All banks and credit unions have their own timeline they follow surrounding cleared funds. In addition, the federal government sets a maximum limit for how long they can make consumers wait to access their deposit.

Here’s a quick breakdown of the federally allowed wait times for different types of transactions, from wiring money to check deposits.

Type of Deposit	Timeline
Direct Deposit	Up to the second business day
Wire Transfer	Up to the second business day
Paper check (less than $200)^*	Next Business Day
Cash^*	Same day or next business day
U.S. Treasury check^*	Next Business Day
U.S. Postal Service money order^*	Next business day
State or local government check^*	Next business day
Casher’s, certified, or teller’s check^*	Next business day
Mobile check deposit	Up to second business day
Federal Reserve and Federal Home Loan checks^*	Next business day
Any other checks or non-U.S. Postal Service money orders	Second business day
Deposits made at an ATM owned by the customer’s financial institution	Second business day
Deposits made at an ATM not owned by the customer’s financial institution	Fifth business day

*Deposited in person.

It’s worth noting that these are the maximum hold times allowed; in many cases these deposits happen much quicker. Again, it’s worth reviewing the bank’s funds availability policy. This will be listed in the account agreement given to you, the account holder, when you opened an account. You can also ask the bank for a copy of their holding policies or look online for it.

When Can You Withdrawal Cleared Funds?

Deposits often clear in segments. That is, a portion of the funds will become available in your checking account before the whole amount deposited is ready for use. In most cases, the bank has to allow the customer to access $225 from the deposit at the start of the next business day. You could either withdraw cash or write a check. Usually the rest of the deposit is available on the second business day, unless something occurs to trigger a delay.

Cleared Funds vs Available Funds

The terms “cleared funds” and “available funds” both refer to funds that are available for immediate withdrawal or use. It’s important to keep in mind that simply depositing a check doesn’t mean you can use the money right away.

• Regarding a deposit, the $225 that must be made available by the next business day is known as your cleared or available funds. So on the next day, you can go ahead and use that amount.

• However, the rest of your deposit may not yet be available. If you try to draw against it, you are risking overdraft and charges. The full amount of the deposit may take up to a few more days to become ready for use.

Reasons Why Deposits May Be Delayed Until They Become Cleared Funds

There are a few different reasons why deposits can be delayed on their path to becoming cleared funds. Let’s examine some of these.

Deposits Over $5,000

When it comes to large deposits (excluding cash or electronic payments), the bank is typically required to make the first $5,525 of the deposit available by the second business day and the remainder available on the seventh business day, or later.

Brand New Customer Accounts

Newer customer accounts (less than 30 days old) can experience deposit delays up to nine days. Although with official checks and electronic payments, partial funds can be available the next day. (If you are in this situation and in a rush to make a payment, you can look into other ways to send money to another’s bank account, such as P2P apps. These can draw upon other available funds.)

Post-Dated or Fraudulent Checks

If a bank has reason to suspect a deposit is suspicious (such as if a check appears to be fraudulent), then it may hold the funds for longer than normal. A couple of examples of what might cause this kind of hold:

• A check is post-dated, meaning it’s been filled out to show a date that is in the future.

• A check is more than 60 days old.

The Takeaway

Cleared funds are the funds that become available once a deposit to a bank account clears. That means the money is ready for use. The timeline for funds clearing depends on several factors, such as where, when, and how the deposit was made and how large the amount is. Some funds may clear right away, while others can take a few days. However, federal laws are in place regarding how long a bank can wait to clear funds. By understanding this process, you can likely manage your financial life a little better and avoid situations that involve overdrafts or bounced checks.

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FAQ

What is the difference between a cleared balance and an available balance?

A cleared balance (or cleared funds) and an available balance are the same thing — it’s the amount of money in your account that is available for immediate withdrawal or use.

How long does it take to get money cleared?

Some deposits clear as soon as the same day, but most generally clear the next business day. In some cases, though, a deposit can take as long as nine days to clear. Check with your bank to know their timelines.

Can you reverse a cleared check?

Once a check has cleared, there is little that can be done to reverse the transaction. If, however, a cleared check is to be found fraudulent, it may be possible for a bank to intervene.

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Jun

2024

What Is Margin Equity & Margin Equity Percentage?

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

Investors who trade using margin, or funds they’ve borrowed from their broker, do so via a margin account. The amount of money in that account is their margin equity, and their margin equity percentage is the portion of funds in that account that they own (versus funds they’ve borrowed).

It can be important for investors who use margin to understand both margin equity and margin percentage — and their importance when trading or investing with a margin brokerage account.

What Is Margin Equity?

Margin equity is the amount of money in a margin trading account at any given time. A margin account is a stock brokerage account that allows the account holder to borrow up to a specific amount of money from the brokerage firm.

Margin accounts can be a powerful investment tool for sophisticated investors comfortable with higher levels or risk because they have to put up less of their own money in order to make a trade.

Investors can use funds in a margin account to invest in more financial securities, such as stocks, bonds, or funds, that are paid for with funds that exist in the margin account. Money in a margin account is typically in either cash or securities.

Using the value of those assets, a margin account investor can borrow up to 50% of the amount of the cash needed to buy a stock or other security. The securities broker charges interest on any money borrowed in a margin account, plus a commission for executing the trade.

The goal for any margin account investor is to earn back enough profit from a margin account trade to cover the costs of interest on the borrowed margin account funds. If an investor loses money on a margin account trade using borrowed funds, they still have to repay those funds, with interest.

💡 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.

Recommend: What Is Margin Trading and How Does It Work?

Margin Account Rules

The Financial Industry Regulatory Authority (FINRA) sets the minimum balance of a margin account at $2,000. And a brokerage firm may have its own maximum fund limits based on the ability of the investor to prove they can repay any money borrowed from the broker via a margin account.

Any time a margin buying investor wants to buy a new security and requires borrowed margin account funds to do so, the amount of cash the investor puts on the table is known as the margin requirement.

To determine an account’s margin equity, you’d first add up the cash amount borrowed from the brokerage firm and the value of “covered call” options the investor has sold. Any unleveraged assets (like cash or stocks) left in the margin account after the above assets are subtracted is margin equity.

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.

What Is Margin Equity Percentage?

Margin equity percentage is the portion of unleveraged assets in the account. The process of calculating margin equity percentage is similar to using debt-to-equity ratios.
Here’s an example:

Let’s say the investor buys $10,000 in stocks and funds and has borrowed $5,000 in margin account funds from the broker. The value of that $10,000 investment has increased to $11,000, as the assets purchased have increased by $1,000. The margin loan hasn’t changed – it’s still $5,000. Thus, the investor margin equity in the account stands at $6,000.
If that original $10,000 investment had resulted in a $1,000 loss, the margin equity portion of the account stands at $4,000 ($5,000 – $1,000 = $4,000.)

In the example above, the equity margin percentage is represented by the investors margin equity divided by the value of the margin account.

Using the same figures in the example where the account grows by $1,000 ($10,000 + $1,000), $6,000 divided into $11,000 is 54.5%. Using the same figures where the account declines by $1,000, and the equity value of the margin account is $4,000 and divided by $9,000 (the total amount of money left in the margin account) the margin equity percentage is 44.4%.

💡 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 Importance of Knowing Your Margin Equity and Margin Equity Percentage

Knowing your margin equity and margin equity percentage can help you understand the level of risk that you’re taking in the account. That can help you determine whether you might need to make changes in order to boost your maintenance margin, or the minimum account balance needed to avoid a “margin call.”

Brokerage firms issue margin calls if an investor’s funds fall below the required maintenance margin. If you can’t meet a margin call, the brokerage firm can shut down your margin account and hold you personally responsible for any losses incurred in the account (and charge you additional fees and commissions, as well.)

The Takeaway

As discussed, the existing balance in a margin account is their margin equity, and their margin equity percentage is the portion of funds in that account that they own (versus funds they’ve borrowed).

Investors who choose to trade on margin should keep an eye on their margin equity and margin equity percentage as one metric on measuring the performance and investment risk of that account. A margin account with a higher equity percentage has lower levels of debt, making a margin call less likely.

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%*

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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.
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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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Jun

2024

FINRA vs the SEC

By Paulina Likos | Growing Wealth, invest, Investing | Comments Off

The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are critical regulating entities for the financial services industry in the United States. They oversee financial markets to ensure that they are fair and orderly, and to protect investors. The role of financial regulators is to facilitate a sound financial services industry that consists of markets, exchanges, and firms that comply with their laws and regulations.

As regulators, the SEC and FINRA exist to keep market participants safe from financial fraud and to help participants to manage their investment risk. There are many reasons why investors should understand the roles and responsibilities of both the SEC and FINRA, as well as how these regulatory bodies differ.

What Is the Financial Industry Regulatory Authority (FINRA)?

FINRA is a government-authorized, not-for-profit organization that oversees U.S. broker-dealers. The organization’s purpose is to protect investors and uphold the integrity of financial markets to ensure they operate fairly. FINRA oversees hundreds of thousands of brokers throughout the U.S., and monitors billions of daily market events.

The SEC supervises FINRA in writing and enforcing investing rules that all registered broker-dealers in the U.S. must follow. FINRA makes sure that these firms comply with these rules, as it facilitates market transparency and educates investors.

💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

FINRA Regulates Margin Accounts

FINRA also regulates margin accounts, which involve a customer borrowing funds from a firm to make trades. Under FINRA margin requirements, some securities cannot be purchased on margin, in which case a cash account must be used to deposit 100% of the purchase price.

FINRA rules require traders to have 25% or more of the current market value of securities in the account, otherwise they may be required to deposit more funds or securities to meet the 25% threshold. If this requirement is not met, the firm may need to liquidate the securities to bring the account to the required level.

What Is the Securities and Exchange Commission (SEC)?

The SEC is a market regulator whose purpose is to protect investors, maintain fair markets, and facilitate ways for businesses to access capital. This regulatory body consists of 11 regional offices and 6 divisions. It requires public companies, asset managers, and investment professionals to disclose important financial information, so investors are equipped to make the best investment decisions.

The SEC will also enforce federal securities laws to keep lawbreakers accountable in the name of protecting investors. In order to maintain fair and efficient markets, the SEC monitors the market and adjusts rules and regulations according to the evolving market environment.

FINRA vs the SEC

Both institutions were created to protect investors against investment fraud and maintain the integrity of U.S. financial markets, but there are differences between these regulatory agencies.

How are FINRA and the SEC Different?

The SEC was created under the Securities Exchange Act of 1934 and one of its responsibilities is to oversee FINRA, which was created in 2007. FINRA is a self-regulatory organization that oversees and regulates its member’s actions. Unlike the SEC, FINRA is not mandated by the U.S. government. Rather, it’s a private, or self-regulatory organization (SRO) consisting of the registered broker-dealers that FINRA oversees.

The SEC, on the other hand, focuses more on protecting the individual investor. The SEC was born at the advent of the Great Depression in 1929 with the goal of restoring investors’ confidence in financial markets, as well as enforcing the rules. FINRA’s role is narrower. It revolves around regulating brokerage firms and handles the testing and licensing requirements, such as the series 7 exam. All broker dealers must be licensed and registered by FINRA.

How They Are Similar

Both FINRA and the SEC are responsible for protecting investors. Both organizations play important roles in upholding the integrity of the U.S. financial system and take action to protect the public from fraud and other financial bad practices. And both agencies offer tools and insights that help educate investors about how to secure their financial future.

The SEC is the ultimate regulatory watchdog of financial markets, and FINRA regulates the securities industry by overseeing stockbrokers. The work that comes out of the SEC and FINRA helps these agencies to function smoothly. The SEC reviews FINRA’s regulatory work — like managing required industry examinations and inspecting securities firms — which is vital to protecting investors and monitoring financial markets.

FINRA vs the SEC: A Quick Comparison

	FINRA	The SEC
What Is It?	A government-authorized not-for-profit that oversees U.S. broker dealers (BDs)	A U.S. government agency; ultimate regulatory watchdog of financial markets
What is it’s purpose?	Both uphold integrity of financial markets; maintain fair/ orderly markets; specific regulator for margin accounts	Focuses more on protecting individual investors; created to restore investors’ confidence in financial markets; helps firms to access capital
When was it created?	Created in 2007	Created with the Securities Exchange Act of 1934
Relationship with U.S. Government	Not mandated by U.S. government; a private SRO; consists of registered BDs	A U.S. government agency; born of Great Depression,1929
Function?	Enforces rules; but narrower role than SEC’s; regulates BDs; manages testing/ licensing requirements (e.g., series 7 exam); all BDs must be licensed by FINRA	Enforces rules; oversees FINRA; creates and enforces securities laws
Public resources?	Yes, offers tools and insights that help educate investors about how to secure their financial future	Yes, offers tools and insights that help educate investors about how to secure their financial future

How to Avoid Trouble With FINRA and the SEC

The best way to avoid trouble with FINRA and the SEC is to abide by their rules and regulations. And, if you give your money to an investment or financial professional to manage, you also may want to confirm that this professional is registered with the SEC and licensed to do business in your particular state. It also could be worthwhile to research whether they have ever been disciplined by the regulatory agencies, or if there are any prior complaints against these professionals.

Cash Accounts vs Margin Accounts

Two popular accounts that are typically opened by market participants are either cash accounts or margin accounts. Each type of account comes with its own regulations. With margin accounts — which are regulated by FINRA along with other financial institutions — you have the ability to borrow funds, but with a cash account, you cannot borrow funds.

For investors using cash accounts to purchase securities, there are regulations to abide by. To avoid violations, remember that you can’t borrow funds from your brokerage firm to pay for transactions in your cash account. Transactions using borrowed funds can only be made in a margin account.

The Takeaway

The SEC and FINRA exist to manage U.S. financial markets with investor protection top of mind. Their rules and regulations can adjust according to how the market is evolving. Understanding their mandates and goals is a great tool for investors to understand their rights as market participants in the event they fall victim to fraud.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

Does FINRA approve SEC rules?

No. The SEC is the oversight authority over FINRA, not the other way around.

Is FINRA part of the US federal government?

No. FINRA is an independent, private entity, while the SEC is a government-mandated organization.

Does FINRA report to the SEC?

FINRA is a self-regulatory organization that operates under the purview of the SEC.

Photo credit: iStock/damircudic

SoFi Invest®

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

Jun

2024

Cross Margin and Isolated Margin in Trading

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

There are two common ways to use margin in a trading account: Cross margin and isolated margin. Cross margin involves margin that is shared between open positions. Isolated margin, on the other hand, is margin assigned to a single position that is restricted from being shared.

Cross margin may help prevent quick liquidations and has a better capability to withstand portfolio losses. Isolated margin offers better flexibility in that other portfolio holdings will not be affected if a single position is liquidated.

What Is Cross Margin?

Cross margin was introduced in the late 1980s as a way to reduce systematic risk in the market and to help traders better manage their portfolios when engaging in margin trading.

At the institutional level, cross margin offsets the value of hedged positions maintained by firms at multiple clearinghouses. Cross margining recognizes intermarket hedged positions, thus it allows for reduced initial margin requirements, fewer margin variations, and smaller net settlements.

For individual traders, cross margin provides more leeway in how open positions in a portfolio move. Cross margin takes excess margin from one margin account and gives it to another to satisfy maintenance margin requirements. That sharing of margin allows the trader to use all available margin balances across their accounts.

How Does Cross Margin Work?

Cross margin is not a simple calculation, and it runs on sophisticated algorithms. By sharing margin across accounts, traders can access more exposure without depositing more capital. Clearinghouses, central counterparties, and brokers determine cross margin amounts and automatically move margin between accounts that have registered for the service.

Traders might prefer cross margining, as a single losing position might not be liquidated quickly when market conditions change. Excess margin is transferred from another account to meet a minor shortfall in minimum maintenance. Cross margin helps to avoid quick margin calls and forced liquidations.

How to Use Cross Margin

Cross margin is best used when a trader has multiple margin trading accounts. A cash account and margin account work differently, and cross vs. isolated margin only apply to the latter type. For traders concerned about a single position being stopped out, it is generally better for them to use cross margin vs. isolated margin, as the former is a tool to help prevent unnecessary forced liquidations. So, a trader must trade with a broker who offers this service.

Volatile markets demonstrate the benefits of cross vs. isolated margin. With cross margin, when there are extreme movements in single securities, it is hard to keep a handle on individual positions’ margin requirements. Cross margining can calculate amounts automatically and move excess margin to other accounts that need it.

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.

What Is Isolated Margin?

Isolated margin is the margin assigned to a single position that is restricted to a specific amount. When the allocated margin drops below an unrealized profit and loss threshold or the maintenance margin requirement, the position is automatically liquidated.

The upshot is that other positions in the account are not affected. Isolated vs. cross margin tends to offer better flexibility because it can divide the trader’s funds, but stop-outs can happen quickly in volatile markets. Isolated margin vs. cross margin are different from each other, and both are used in crypto trading. It’s important to know what decentralized exchanges are when using either margin type when buying and selling crypto.

How Does Isolated Margin Work?

Isolated margin works by setting aside a margin amount for a single position. Volatile and speculative positions are sometimes good candidates for the use of isolated margin. It can be helpful when you don’t want other portfolio holdings to be impacted by a change in the value or margin requirements from that single position.

How to Use Isolated Margin

Traders have the flexibility to adjust their isolated margin amounts, which can be useful when managing their portfolio positions. You should consider isolated margin when you want more flexibility with a single position and seek to restrict a potential loss to only a small piece of your account. Isolated vs. cross margin can also require more nimble attention to the market, as you might need to actively adjust the isolated margin amount.

Cross- vs Isolated-Margin Compared

Let’s review the similarities and differences in cross vs. isolated margin. In general, cross margin is preferable for long-term strategies, as market- and single-asset volatility could always strike. Cross margin helps portfolios endure volatility with fewer automated stop-outs. The downside is that if there is an extremely volatile event, and liquidations occur, then total portfolio losses could be severe.

Similarities

Initial and maintenance margin rules apply to your account whether you use cross margin or isolated margin. The two strategies help to reduce the risk that your overall portfolio will experience fast liquidations.

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

Differences

The key difference between the two is that cross margin shares margin between positions and accounts. This can be a helpful feature for long-term investors and during periods of market volatility. Overall, cross margin can be a better risk-management tool for complex portfolios that consist of cryptocurrencies, options, and other derivatives.

Cross Margin	Isolated Margin
Margin shared between open positions	Restricts margin to single positions
Reduces the risk of liquidations	Tighter liquidation thresholds — more stop-outs possible
Ideal when used with intermarket hedged positions, as margin requirements can be offsetting	Traders can actively manage margin amounts on single positions

Advantages and Disadvantages of Cross Margin

There are advantages and disadvantages of cross margin — here’s a comparison:

Cross Margin Advantages	Cross Margin Disadvantages
The entire portfolio can be used to margin a position, as excess margin is transferred from one position to another	Cross margin amounts cannot be adjusted like isolated margin amounts can
The available balance can be added to isolated holdings	Higher liquidation total portfolio losses if the market moves against the trader in an extreme way
Useful in a volatile market to avoid quick stop-outs	One position change can negatively impact other holdings

Advantages and Disadvantages of Isolated Margin

Similarly, there are upsides and drawbacks to isolated margin:

Isolated Margin Advantages	Isolated Margin Disadvantages
Liability is limited to the initial margin posted	Excess margin won’t be transferred to a losing position
Ideal for a single speculative position	Volatility can cause fast liquidations
Dividing funds between assets can reduce risk of major loss across a portfolio	Leverage can be adjusted quickly

The Takeaway

Cross margining is a feature that increases a firm’s or individual trader’s liquidity and trading capability by reducing margin requirements and lowering net settlement values. It provides flexibility when owning many positions. Isolated margin is the margin assigned to just one position — if it is liquidated, the account positions are not affected. Conversely, isolated margin is margin assigned to a single position that is restricted from being shared.

It’s important that traders who engage in margin trading understand the concept of cross- vs. isolated margin. If you feel like you’re in over your head while trading on margin, it may be a good idea to consult with a financial professional for guidance.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

How is cross margin calculated?

In options trading, cross margin is calculated by clearinghouses and their clearing members, including prime brokerages that offer margin services. At the end of each trading day, organizations such as the Intercontinental Exchange and the Options Clearing Corporation (OCC) perform routing calculations and run reports for their clearing members.

Is isolated margin the same as isolated leverage?

Isolated margin and isolated leverage are similar concepts. Isolated leverage is sometimes employed in cryptocurrency trading. In isolated leverage mode, each cryptocurrency pair has a specific isolated margin account. Each margin account can only use margin on a specific trading pair.

What is the main benefit of cross margin?

Cross margining is when excess margin is transferred to another margin account to satisfy maintenance margin requirements. It allows traders to use their available margin balances across all their accounts. It makes it possible to have more exposure without extreme risk of liquidation should the market move against the trader.

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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.

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.
*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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SOIN-Q224-1912605-V1

Jun

2024

Guide to Zero-Coupon Certificates of Deposit (CDs)

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

A zero-coupon certificate of deposit or zero-coupon CD is a type of CD that’s purchased at a discount and pays out interest at maturity. Zero-coupon CDs can offer higher yields than standard CDs for investors who have the patience to wait until maturity to collect their original deposit and the interest earned.

Zero-coupon certificates of deposit are similar to bonds in that both are considered lower-risk, fixed-income instruments, but they serve different purposes in a portfolio. Understanding how a zero-coupon CD works can make it easier to decide if it’s a good investment for you.

What Is a Zero-Coupon CD?

To understand zero-coupon CDs, it’s important to know how a regular certificate of deposit works. A CD account, also referred to as a time-deposit or term-deposit account, is designed to hold money for a specified period of time. While the money is in the CD, it earns interest at a rate determined by the CD issuer — and the investor cannot add to the account or withdraw from it without penalty.

CDs are FDIC or NCUA insured when held at a member bank or credit union. That means deposits are insured up to $250,000.

CDs are some of the most common interest-bearing accounts banks offer, along with savings accounts and money market accounts (MMAs).

A zero-coupon certificate of deposit does not pay periodic interest. Instead, the interest is paid out at the end of the CD’s maturity term. This can allow the purchaser of the CD to potentially earn a higher rate of return because zero-coupon CDs are sold at a discount to face value, but the investor is paid the full face value at maturity.

By comparison, traditional certificates of deposit pay interest periodically. For example, you might open a CD at your bank with interest that compounds daily. Other CDs can compound monthly. Either way, you’d receive an interest payment in your CD account for each month that you hold it until it matures.

Once the CD matures, you’ll be able to withdraw the initial amount you deposited along with the compound interest. You could also roll the entire amount into a new CD if you’d prefer.

Remember: Withdrawing money from a CD early can trigger an early withdrawal penalty that’s typically equal to some of the interest earned.

How Do Zero-Coupon CDs Work?

Ordinarily when you buy a CD, you’d deposit an amount equal to or greater than the minimum deposit specified by the bank. You’d then earn interest on that amount for the entirety of the CD’s maturity term.

With zero-coupon CD accounts, though, you’re purchasing the CDs for less than their face value. But at the end of the CD’s term, you’d be paid out the full face value of the CD. The discount — and your interest earned — is the difference between what you pay for the CD and what you collect at maturity. So you can easily see at a glance how much you’ll earn from a zero-coupon CD investment.

In a sense, that’s similar to how the coupon rate of a bond works. A bond’s coupon is the annual interest rate that’s paid out, typically on a semiannual basis. The coupon rate is always tied to a bond’s face value. So a $1,000 bond with a 5.00% interest rate has a 5.00% coupon rate, meaning a $50 annual payout until it matures.

Real World Example of a Zero-Coupon CD

Here’s a simple example of how a zero-coupon CD works. Say your bank offers a zero-coupon certificate of deposit with a face value of $10,000. You have the opportunity to purchase the CD for $8,000, a discount of $2,000. The CD has a maturity term of five years.

You wouldn’t receive any interest payments from the CD until maturity. And since the CD has a set term, you wouldn’t be able to withdraw money from the account early. But assuming your CD is held at an FDIC- or NCUA-member institution, the risk of losing money is very low.

At the end of the five years, the bank pays you the full $10,000 face value of the CD. So you’ve essentially received $400 per year in interest income for the duration of the CD’s maturity term — or 5.00% per year. You can then use that money to purchase another zero-coupon CD or invest it any other way you’d like.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

Tips When Investing in a Zero-Coupon CD

If you’re interested in zero-coupon CDs, there are a few things to consider to make sure they’re a good investment for you. Specifically, it’s important to look at:

• What the CD is selling for (in other words, how big of a discount you’re getting to its face value)

• How long you’ll have to hold the CD until it reaches maturity

• The face value amount of the CD (and what the bank will pay you in full, once it matures)

It’s easy to be tempted by a zero-coupon certificate of deposit that offers a steep discount between the face value and the amount paid out at maturity. But consider what kind of trade-off you might be making in terms of how long you have to hold the CD.

If you don’t have the patience to wait out a longer maturity term, or you need the money in the shorter term, then the prospect of higher returns may hold less sway for you. Also, keep in mind what kind of liquidity you’re looking for. If you think you might need to withdraw savings for any reason before maturity, then a standard CD could be a better fit.

Comparing zero-coupon CD offerings at different banks can help you find one that fits your needs and goals. You may also consider other types of cash equivalents, such as money market funds or short-term government bonds if you’re looking for alternatives to zero-coupon CDs.

Pros of Zero-Coupon CDs

Zero-coupon CDs have some features that could make them more attractive than other types of CDs. The main advantages of investing in zero coupon certificates of deposit include:

• Higher return potential than regular CDs

• Guaranteed returns, since you’re unable to withdraw money before maturity

• Suited for longer-term goals

• Can be federally insured

Zero-coupon CDs are lower-risk investments, which can make them more appealing than bonds. While bonds are considered lower-risk investments generally, if the bond issuer defaults, then you might walk away from your investment with nothing.

A zero-coupon certificate of deposit, on the other hand, does not carry this same default risk because your money is insured up to $250,000. There is, however, a risk that the CD issuer could “call” the CD before it matures (see more about this in the next section).

Cons of Zero-Coupon CDs

Every investment has features that may be sticking points for investors. If you’re wondering what the downsides of zero-coupon CDs are, here are a few things to consider:

• No periodic interest payments

• No liquidity, since you’re required to keep your money in the CD until maturity

• Some zero-coupon CDs may be callable, which means the issuer can redeem them before maturity, and the investor won’t get the full face value

• Taxes are due on the interest that accrues annually, even though the interest isn’t paid out until maturity

It may be helpful to talk to your financial advisor or a tax professional about the tax implications of zero-coupon CDs. It’s possible that the added “income” from these CDs that you have to report each year could increase your tax liability.

How to Collect Interest on Zero-Coupon CDs

Since zero-coupon CDs only pay out at interest at the end of the maturity term, all you have to do to collect the interest is wait until the CD matures. You can direct the bank that issued the CD to deposit the principal and interest into a savings account or another bank account. Or you can use the interest and principal to purchase new CDs.

It’s important to ask the bank what options you’ll have for collecting the interest when the CD matures to make sure renewal isn’t automatic. With regular CDs, banks may give you a window leading up to maturity in which you can specify what you’d like to do with the money in your account. If you don’t ask for the money to be out to you it may be rolled over to a new CD instead.

How to Value Zero-Coupon CDs

The face value of a zero-coupon CD is the amount that’s paid to you at maturity. Banks should specify what the face value of the CD is before you purchase it so you understand how much you’re going to get back later.

In terms of whether a specific zero-coupon CD is worth the money, it helps to look at how much of a discount you’re getting and what that equates to in terms of average interest earned during each year of maturity.

Purchasing a $10,000 zero-coupon CD for $8,000, for example, means you’re getting it at 20% below face value. Buying a $5,000 zero-coupon CD for $4,500, on the other hand, means you’re only getting a 10% discount.

Of course, you’ll also want to keep the maturity term in perspective when assessing what a zero-coupon CD is worth to you personally. Getting a 10% discount for a CD with a three-year maturity term, for example, may trump a 20% discount for a five-year CD, especially if you don’t want to tie up your money for that long.

The Takeaway

Investing in zero-coupon CDs could be a good fit if you’re looking for a lower-risk way to save money for a long-term financial goal, and you’d like a higher yield than most other cash equivalents.

Zero-coupon CDs are sold at a discount to face value, and while the investor doesn’t accrue interest payments annually, they get the full face value at maturity — which often adds up to a higher yield than many savings vehicles. And because the difference between the discount and the face value is clear, zero-coupon CDs are predictable investments (e.g. you buy a $5,000 CD for $4,000, but you collect $5,000 at maturity).

As with any investment, it’s important for investors to know the terms before they commit any funds. For example, zero-coupon CDs don’t pay periodic interest, but the account holder is expected to pay taxes on the amount of interest earned each year (even though they don’t collect it until they cash out or roll over the CD).

If you’re eager to earn a higher rate on your savings, you’ve got a lot of options to explore — including a high-yield bank account or a regular CD.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

What is a coupon on a CD?

The coupon on a CD is its periodic interest payment. When a CD is zero coupon, that means it doesn’t pay out interest monthly or annually. Instead, the investor gets the full amount of interest earned paid out to them when the CD reaches maturity.

Is a certificate of deposit a zero-coupon bond?

Certificates of deposit and bonds are two different types of savings vehicles. While a CD can be zero-coupon the same way that a bond can, your money is not invested in the same way. CD accounts also don’t carry the same types of default risk that bonds can present.

Are CDs safer than bonds?

CDs can be safer than bonds since CDs don’t carry default risk. A bond is only as good as the entity that issues it. If the issuer defaults, then bond investors can lose money. CDs, on the other hand, are issued by banks and typically covered by FDIC insurance which generally makes them safer investments.

Photo credit: iStock/Joyce Diva

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® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

SOBK-Q224-1916941-V1

Cleared Funds: Definition and Breakdown of Funds Clearing Time

What Are Cleared Funds?

Why Banks Put a Hold on Deposits

How Do Cleared Funds Work?

Breakdown of Times of Cleared Funds

Get up to $300 when you bank with SoFi.

When Can You Withdrawal Cleared Funds?

Cleared Funds vs Available Funds

Reasons Why Deposits May Be Delayed Until They Become Cleared Funds

Deposits Over $5,000

Brand New Customer Accounts

Post-Dated or Fraudulent Checks

The Takeaway

FAQ

What is the difference between a cleared balance and an available balance?

How long does it take to get money cleared?

Can you reverse a cleared check?

What Is Margin Equity & Margin Equity Percentage?

What Is Margin Equity?

Margin Account Rules

Increase your buying power with a margin loan from SoFi.

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

What Is Margin Equity Percentage?

The Importance of Knowing Your Margin Equity and Margin Equity Percentage

The Takeaway

FINRA vs the SEC

What Is the Financial Industry Regulatory Authority (FINRA)?

FINRA Regulates Margin Accounts

What Is the Securities and Exchange Commission (SEC)?

FINRA vs the SEC

How are FINRA and the SEC Different?

How They Are Similar

FINRA vs the SEC: A Quick Comparison

How to Avoid Trouble With FINRA and the SEC

Cash Accounts vs Margin Accounts

The Takeaway

FAQ

Does FINRA approve SEC rules?

Is FINRA part of the US federal government?

Does FINRA report to the SEC?

Cross Margin and Isolated Margin in Trading

What Is Cross Margin?

How Does Cross Margin Work?

How to Use Cross Margin

Increase your buying power with a margin loan from SoFi.

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

What Is Isolated Margin?

How Does Isolated Margin Work?

How to Use Isolated Margin

Cross- vs Isolated-Margin Compared

Similarities

Differences

Advantages and Disadvantages of Cross Margin

Advantages and Disadvantages of Isolated Margin

The Takeaway

FAQ

How is cross margin calculated?

Is isolated margin the same as isolated leverage?

What is the main benefit of cross margin?

Guide to Zero-Coupon Certificates of Deposit (CDs)

What Is a Zero-Coupon CD?

How Do Zero-Coupon CDs Work?

Real World Example of a Zero-Coupon CD

Tips When Investing in a Zero-Coupon CD

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Pros of Zero-Coupon CDs

Cons of Zero-Coupon CDs

How to Collect Interest on Zero-Coupon CDs

How to Value Zero-Coupon CDs

The Takeaway

FAQ

What is a coupon on a CD?

Is a certificate of deposit a zero-coupon bond?

Are CDs safer than bonds?

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