InvestGen Archives

Feb

2025

What Are Margin Rates?

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

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

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

Key Points

• Margin rates represent the interest charged on borrowed funds used for trading securities and can vary between different brokerages based on several factors.

• A margin account allows investors to purchase securities with borrowed money, enabling them to increase their buying power but also introducing additional risks.

• Factors influencing margin rates include the broker call rate, demand for margin loans, inflation, and the account balance maintained by the investor.

• Margin rates accrue daily and are charged monthly, meaning that the longer an investor holds a margin loan, the more interest they will pay.

• Understanding margin rates and their implications is crucial for investors, as these rates directly impact the profitability of margin trading strategies.

Understanding Margin Rates

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

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

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

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

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

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How Margin Rates Work

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

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

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Factors That Affect Margin Rate

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

Broker Call Rate

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

Supply and Demand

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

Inflation and Monetary Policy

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

Account Balance

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

How Can Margin Rates Affect You?

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

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

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

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

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

When Is Margin Rate Charged?

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

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

How Is Margin Rate Calculated?

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

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

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

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Test your understanding of what you just read.

The Takeaway

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

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

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FAQ

Are margin rates yearly? Daily?

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

What does margin rate tell you?

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

About the author

Rebecca Lake

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

You may also be interested in:

Margin Trading: What It Is and How It Works

Margin Account: What It Is and How It Works

What You Need to Know About Margin Balance

About the author

Rebecca Lake

Photo credit: iStock/Drazen

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

SOIN1023006

Feb

2025

Rate of Return (RoR): Formula and Calculation Examples

By Kenny Zhu | Growing Wealth, invest, Investing | Comments Off

Calculating rate of return, as it relates to investing, is a way for investors or traders to get a sense of how much money they stand to gain or lose from their investments. It’s a relatively simple formula and calculation, and can help investors evaluate their overall performance in the markets. It does have some shortcomings, however, such as not accounting for the time value of money or the timing of cash flows. So, there are alternative calculations out there to help get even more accurate results.

Key Points

• The Rate of Return (RoR) measures an investment’s gain or loss as a percentage of its initial value over a specific period.

• Calculating RoR involves identifying the initial and end values, applying the formula, and can be done manually or using tools like Excel.

• RoR helps investors evaluate investment performance, compare different investments, and make informed decisions about resource allocation.

• Understanding RoR is crucial for assessing investment performance, aligning with financial goals, and determining market performance relative to other opportunities.

What Is Rate of Return?

Rate of return (RoR) is a measure of an investment’s gain or loss, expressed as a percentage of its initial value, over a given period of time. If calculated correctly, your rate of return will be expressed as a percentage of your initial investment. Positive rate of return calculations indicate a net gain on your investment, while negative results will indicate a loss.

Don’t confuse this with the expected rate of return, which forecasts your expected returns using probability and historical performance.

When using the rate of return formula, your chosen time period is referred to as your “holding period.” Regardless of whether your holding period lasts days, months, or even years. It’s important that you keep the time periods consistent when comparing investment performance.

How to Calculate Rate of Return

You can calculate the rate of return on your online investing or other type of investing activity by comparing the difference between its current value and its initial value, and then dividing the result by its initial value.

Multiplying the result of that rate of return formula by 100 will net you your rate of return as a percentage. You’ll know whether you made money on your investment depending on whether your result comes in as positive or negative.

Rate of Return Formula

The standard rate of return formula can be represented as follows:

R = [ ( Ve – Vb ) / Vb ] x 100

In this equation:

R = Rate of return

Ve = End of period value

Vb = Beginning of period value

The aforementioned formula can be applied to any holding period to find your rate of return “R” over that timespan.

“Ve,” your end of period value, should represent the value of your investment, including any interest or dividends earned over your holding period.

Finally “Vb” should represent the value of your initial investment. It will be used as the relative basis on which your investment returns are calculated.

Example of Calculating Rate of Return

To help you understand how to calculate the rate of return, we’ll walk you through an example. Again, here’s the formula:

R = [ ( Ve – Vb ) / Vb ] x 100

Let’s say an investor buys an investment for $125 a share which pays no dividends. This $125 investment will be your beginning of period value (“Vb”).

After one year, the value of the investment rises to $150 and the investor chooses to sell it. Given that $150 represents the value of the investment at the end of the holding period, $150 will be your end of period value (“Ve”).

To calculate the rate of return, enter the values for Vb and Ve into the rate of return formula. With the correct values in place, your equation should look like this:

R = [ ( $150 – $125 ) / $125 ] X 100

Solving out this formula using order of operations, your calculations should proceed as follows:

R = [ $25 / $125 ] X 100

R = 0.2 X 100

R = 20%

If done correctly, the formula should calculate a one year rate of return of 20%, based on the beginning and end of period values provided.

Considerations When Using Rate of Return

The main advantages of the rate of return calculation is that it’s simple and easy to calculate. It gives you a straightforward method to measure the profitability of an investment over any time period.

However, its simplicity does result in some shortcomings, particularly when it comes to more complex investments with numerous cash flows. We dive into these limitations below.

Recommended: What Is a Good Rate of Return?

What are the Limitations of Simple Rate of Return?

The main limitations of the simple rate of return calculation are that it ignores the time value of money and timing of cash flows.

The time value of money is an important concept when it comes to finance, as it explains that money today is always worth more than the same sum of money paid in the future. This is due to the inherent earnings potential of cash held now.

In tandem with the concept above, the simple rate of return calculation also fails to account for the timing of cash flows.

Cash flows are particularly important when dealing with more complex portfolios or investments that might have multiple reinvestment periods over time or multiple dividend payouts.

The simple rate of return calculation, in some ways, oversimplifies the rate of return into a simple accounting measure over an arbitrary amount of time. To address these shortcomings, professionals typically use alternate measures like internal rate of rate (IRR) and annualized rate of return.

Annualized Rate of Return Formula

The annualized rate of return is a slightly more complicated formula that solves the compatibility issues of the simple rate of return calculation by standardizing all calculations over an annual period.

The annualized rate of return formula can be exhibited as follows.

Ra = ( Ve / Vb ) 1 / n – 1 X 100

Where,

Ra = Annualized Rate of Return

Ve = End of period value

Vb = Beginning of period value

n = number of years in holding period

Annualized rate of return (Ra) standardizes your rate of return on an annual basis; this allows you to make fair comparisons with other annualized performance figures.

“Ve,” your end of period value, represents the value of your investment at the end of the holding period, including any interest or dividends earned.

“Vb” represents the value of your initial investment.

Other Types of Return Formulas

There are a multitude of other return metrics that can help you evaluate performance.

While the calculations for these metrics fall outside the scope of this reading, we touch on some of the most commonly used ones and why they’re used.

• Internal Rate of Return (IRR): This represents the expected annual compound growth rate of a specific investment and is usually used to help determine whether an investment is worthwhile.

• Return on Invested Capital (ROIC): Measures a firm’s profitability in relation to the total debt and equity invested by stakeholders.

• Return on Equity (ROE): Measures a firm’s net income in relation to the total value of its shareholder’s equity.

How Investors Can Use Rate of Return

Retail investors, institutional investors, and even corporate decision makers use the rate of return to gauge the performance of their investments over time. It’s useful when compared against a benchmark index, return expectations, or other investment options to gauge how your investment performed on a relative basis.

When comparing investment returns, it’s important to make sure you’re making fair comparisons to ensure you’re making apples-to-apples comparisons. For example, the S&P 500 might not serve as a fair benchmark for a portfolio invested 100% in international equities, as these are substantially different investment types. Benchmark comparisons give meaning to your rate of return and help you evaluate whether you’re outperforming on a relative basis.

Test your understanding of what you just read.

The Takeaway

Knowing how to calculate your rate of return gives you a useful tool for evaluating your investments’ performance. The best part about the rate of return calculation is that it can be done over almost any timespan, provided the returns you’re trying to compare have the same holding period.

Investors can calculate rate of return by hand, or by using an online spreadsheet. The same is true for annualized rate of return — which helps to standardize return rates over longer periods. Those are fairly simple ways to gauge investment returns, but there are a number of other metrics that help you assess and compare investment returns, so be sure to use the tool that aligns best with what you need to know.

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

Photo credit: iStock/AleksandarNakic

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

Feb

2025

SPAN Margin: How It Works, Pros & Cons

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Terminology | 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.

Many brokerage accounts require traders to maintain a margin account when trading options, which involves depositing funds or securities as collateral to reduce the risk of potential losses.

The SPAN system determines margin requirements on options and futures trading accounts by considering key factors, such as volatility, price changes, and portfolio composition to conduct a one-day risk global assessment.

In this sense, options margin is quite different from the margin accounts used for trading stocks and other securities, where margin refers to the use of debt to increase a position.

Key Points

• SPAN stands for Standardized Portfolio Analysis of Risk, and is used by brokerages, investment banks, and exchanges to estimate a portfolio’s worst-case risk scenario for options and futures trading.

• The SPAN system incorporates factors like market volatility, price changes, time decay, and portfolio composition to ensure margin requirements align with a trader’s risk exposure, so there is enough collateral to cover potential losses.

• The SPAN margin calculation evaluates risk scenarios using sophisticated algorithms that automate the margin-setting process.

• Advantages of using SPAN include a holistic portfolio approach and potentially lower margin requirements; disadvantages involve fluctuations in daily margin requirements due to changing market conditions.

• Though the SPAN risk assessment and modeling method was developed for the derivatives markets, it is now employed as a risk-management tool for other financial instruments as well.

What Does SPAN Stand For?

SPAN stands for standardized portfolio analysis of risk, and is a framework used by exchanges and financial institutions to ensure that options and futures traders have enough collateral to cover potential losses.

Today, many derivative exchanges use the SPAN system for risk analysis.

What Is SPAN Margin?

The SPAN margin calculation helps options traders understand risk in their portfolios, and assists brokers in managing risk by ensuring that options and futures margin traders have enough collateral in their accounts to cover potential losses.

The SPAN system relies on algorithmic calculations to estimate a portfolio’s one-day worst-case risk scenario.
SPAN margin is calculated using key inputs such as the strike price, time decay, market volatility, price changes, and position offsets, among other factors.

What Is a Stock Margin Account?

The margin in an options or futures account is different from how a stock margin account functions when making stock trades on margin. When trading stocks and other securities, margin allows traders to use leverage (i.e., borrow funds) to increase their position. The risk of using a margin account is the potential for steep losses, possibly exceeding the initial investment.

By contrast, SPAN is used by options and futures exchanges around the world to determine a trader’s one-day worst-case scenario based on their portfolio positions. This risk modeling ensures the correct amount of collateral is deposited.

Margin requirements can be determined in an automated way from the calculation’s output.

How Does SPAN Margin Work?

The SPAN margin calculation uses modeled risk scenarios to determine margin requirements on options and futures. Some key variables included in the algorithm are strike prices, risk-free interest rates, price changes in the underlying assets, volatility shifts, and the effect of time decay on options.

Not all options positions have margin requirements. Buying options, for example, typically does not require margin, while selling (or writing) options requires a deposit to mitigate potential risks.

In essence, the options seller exposes the broker to risk when they trade. To reduce the risk that the trader won’t be able to pay back the lender, margin requirements establish minimum deposits that must be kept with the broker. (This is different from the margin requirements needed in a stock trading account.)

Instead of relying on fixed or static figures, the SPAN system automates the margin-setting process, relying on sophisticated algorithms and a range of inputs. SPAN margin looks at the worst-case scenario in terms of one-day risk, so the margin requirement output will change each day.

The analysis is done from a total-portfolio perspective since all assets are considered. For example, the SPAN margin calculation can take excess margin from one position and apply it to another.

Pros and Cons of SPAN Margin

There are upsides and downsides to SPAN margin in options and futures trading.

The Advantages

The key advantage of SPAN margins is that it is intended to cover potential losses.

Net option sellers benefit from SPAN’s holistic portfolio approach. SPAN combines options positions when assessing risk. If you have an options position with a substantial risk in isolation, but another options position that offsets that risk, SPAN considers both. The effect is a potentially lower margin requirement.

On top of that, futures options exchanges that use the SPAN margin calculation allow Treasury bills to be margined.

The Downsides

Changing market conditions can result in significant fluctuations in daily margin requirements.SPAN margin isn’t without its challenges. One big drawback is how much margin requirements can shift from day to day. If the market gets volatile or prices move suddenly, you might find yourself scrambling to meet a higher margin call to keep your positions open.

Another issue is the complexity. SPAN’s calculations aren’t always easy to follow, especially for newer traders. Unlike simpler, fixed-margin systems, SPAN relies on a lot of variables, so you might not always know what to expect with your margin needs.

Although SPAN’s portfolio-wide approach is helpful, it can sometimes create confusion. Margin offsets across different positions might be hard to follow unless you’re closely tracking how everything is allocated. This makes it important to stay on top of your portfolio and understand how SPAN applies to your trades.

The Takeaway

SPAN margin is a helpful risk-management tool for options trading. Algorithms determine margin requirements based on a one-day risk analysis of a trader’s account, taking into consideration factors such as market volatility and position size.

By considering the entire portfolio, SPAN helps ensure that margin requirements are in line with a trader’s risk exposure. This provides a more dynamic, accurate approach to managing risk.

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FAQ

What does SPAN stand for in margin trading?

SPAN margin stands for “standardized portfolio analysis of risk.” It is a system used by many options and futures exchanges worldwide to gauge a portfolio’s risk level, and ensure that the trader has enough collateral to cover potential losses.

How is SPAN margin used?

SPAN margin is used to manage risk. It calculates the amount of good-faith deposit a trader must add to their account in order to engage in options or futures trading. To help ensure that traders maintain adequate collateral for their positions, mitigating risks to the broker, exchanges use the SPAN system to calculate a worst possible one-day outcome and set a margin requirement accordingly.

What is a SPAN calculation?

SPAN is calculated using risk assessments. That means an array of possible outcomes is analyzed based on different market conditions using the assets in a portfolio. These risk scenarios specify certain changes in variables such as price changes, volatility shifts, and decreasing time to expiration in options trading.

Photo credit: iStock/NakoPhotography

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.

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

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.

SOIN-Q125-097

Feb

2025

What Is Margin Level and How Do You Calculate It?

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

Margin level is a risk-management indicator that helps you understand what influence the currently opened positions have on your account.

The margin level in your options trading account is a formula that tells you how much of your funds are available to open new trades. The higher your margin level percentage, the more funds are available to trade. If the margin level drops too low, you could receive a margin call.

Key Points

• Margin level serves as a risk-management indicator, reflecting the relationship between equity in a trading account and the utilized margin, expressed as a percentage.

• A margin level of 100% indicates that the total equity is equal to the used margin; falling below this threshold may trigger a margin call from brokers.

• Calculating margin level involves dividing equity by used margin and multiplying by 100, with a 0% margin level signifying no open positions.

• Understanding margin level is crucial for traders, as it determines the ability to open new positions and manage potential risks associated with margin trading.

• Trading on margin offers buying power but introduces greater risks; thus, it is essential for traders to manage their positions and leverage carefully.

What Is Margin Level?

Your margin level percentage is a measure of the relationship between the equity in your trading or brokerage account and how much margin is in use. The margin level calculation is expressed as a percentage: (equity / margin) x 100.

It’s helpful to think of margin level as a reading of your trading account’s health. A margin level percentage of 0% means you have no open positions. A margin level of 100% means that the amount of a portfolio’s equity and used margin are equal. Equity is the cash available to trade, plus any unrealized profits and losses on open positions. Many brokers will not allow investors to make new opening trades when the margin level on their options trading account is 100% or less.

When margin level falls below 100%, the broker might issue a margin call. Unless the market moves back in your favor, you must deposit more funds (or assets) into your account when you are hit with a margin call. You can also satisfy a margin call by exiting your current holdings.

The margin level percentage depends on various factors. The volume of your positions and their potential effect on the market can affect your margin level calculation; as can the amount of leverage you use.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

💡 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.

What Does Margin Level Really Do?

To understand what margin level means, it’s important first to grasp the concept of margin in options trading.

Margin is the amount of cash or securities a trader must deposit in their account before being able to write (or sell) options. You can think of it as a good faith deposit or a form of collateral. The Federal Reserve Board’s Reg T sets margin requirements.

Margin works differently in options and futures accounts than in stock trading
accounts. Margin debt in stock trading refers to the amount of borrowed funds used to buy new shares. This is also referred to as using leverage.

The margin level calculation tells you how much of your funds are available to use for new opening trades. The higher your margin level, the more “free margin” you have. Free margin is the amount of money available to place new trades. Margin is composed of “used” and “free” amounts. Used margin is the aggregate of all the required margin on your existing positions. Free margin, on the other hand, is the difference between equity and used margin.

Margin level also can inform you of how much wiggle room you have in your options trading account, or other types of accounts. A very high margin level percentage means you have a large amount of equity relative to the total amount of required margin. A low margin level calculation tells you that your account might not be far from getting a margin call.

Calculating Margin Level

Calculating margin level is straightforward: Divide the equity by the amount of used margin; then multiple that quotient by 100:

Margin level = (equity / margin) x 100

If you don’t have any open positions, then your margin level calculation will be zero. This can be confusing because usually, a low margin level means your account might be at risk for a margin call. A 0% margin level is the safest and lowest-risk margin level you can have, because in that scenario, you’d have no open positions.

Margin Level Example

Suppose you deposit $10,000 into your account. Before you make any trades, your margin level is 0%, as you don’t have any used margin (the divisor in the earlier-mentioned equation is zero). Your first buy is a call option on shares of XYZ stock, and you pay a $5,000 premium. Your margin level calculation is now 200% ($10,000 / $5,000 = 200%).

Now let’s say you open another $5,000 options position. Your margin level declines to 100% ($10,000 / $10,000 = 100%). We will assume that is the broker’s minimum margin level before a margin call is issued. Later, we’ll detail what happens if your margin level falls below the critical 100% threshold.

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

Why Understanding Margin Level Is Important

The margin level percentage is important, as brokers use this figure to determine whether you can open new positions. Many brokerage firms set a minimum margin percentage at 100%. So if your margin percentage drops below that threshold, then you will encounter a margin call — or even a forced liquidation — on one or more of your open trades. If you want to take on new positions, then you’d be forced to sell an existing holding or add more funds to your account.

Margin Level Below 100%

Taking our earlier example a step further, If the market moves against you, and your option values fall to $9,000 on the market, your margin level calculation would decline to below the minimum margin level ($9,000 / $10,000 = 90%). The broker then could issue a margin call.

You have two choices: either sell an existing position or deposit more assets into the account. If you do not act promptly, the broker can sell one of your positions automatically.

Your margin level could fall below 100% based on small moves in the assets you own. Broad market conditions, like volatility, also could affect your account negatively. In an extreme example, Silver Thursday rocked the silver trading market and caused long futures and options positions on silver to suffer severe losses. In turn, this triggered an onslaught of margin calls in the precious metals markets. The moral of the story: It’s important to manage risks carefully when using leverage.

If you’re interested in trading on margin, or just want to know more about it, you’ll need to understand the difference between marginable and non-marginable securities.

Test your understanding of what you just read.

The Takeaway

As discussed, the margin level in your options trading account is a formula that tells you how much of your funds are available to open new trades. Trading on margin is an advanced strategy that comes with greater risk than trading other securities, like stocks or ETFs, for example. But while the risks are greater, so are the potential rewards (and losses).

For experienced traders, using margin can enhance buying power. But using margin and leverage introduces additional risk into the mix, which investors should be aware of.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

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

Photo credit: iStock/fizkes

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.

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.

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.

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.

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.
SOIN-Q224-1871555-V1

Feb

2025

How to Calculate Portfolio Beta

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

Table of Contents

How to Calculate Beta of a Portfolio
4 Ways to Characterize Beta
How to Calculate an Individual Stock’s Beta
Alpha vs Beta vs Smart Beta
Important Things to Know About Beta
The Takeaway

Portfolio beta refers to a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. While past performance does not indicate future returns, knowing a portfolio’s beta can help investors understand the price variability of their stocks, or how much their holdings may move if there’s stock volatility or big gains in a benchmark index like the S&P 500.

Investors often consider beta a measure of systematic risk, or risk that stems from the entire market and that investors can not diversify away. Macro events such as interest-rate or economic changes often fall into the category of systematic risk, while idiosyncratic, stock-specific risk includes events like a change in company management, new competitors, changed regulation, or product recalls.

Key Points

• Portfolio beta is a metric used to measure the sensitivity of a portfolio’s returns to market movements, indicating its systematic risk.

• To calculate the beta of a portfolio, the beta of each stock is multiplied by its proportional value in the portfolio, and these products are then summed.

• Stocks with a beta greater than one are more volatile than the market, while those with a beta less than one are less volatile.

• Negative beta values indicate an inverse relationship to the market, which can be characteristic of assets like gold or defensive stocks.

• Understanding a portfolio’s beta is crucial for investors aiming to manage risk in alignment with their investment strategy and market outlook.

How to Calculate Beta of a Portfolio

The Beta of a portfolio formula requires relatively simple math, as long as investors know the Beta for each stock that they hold and the portion of your portfolio that each stock comprises.

Here are the steps you’d follow to calculate the Beta of a hypothetical portfolio:

1. Calculate the total value of each stock in the portfolio by multiplying the number of shares that you own of the stock by the price of its shares:

Stock ABB: 500 shares X $20 a share each = $10,000.

2. Figure out what proportion each stock in their portfolio represents by dividing the stock’s total value by the portfolio’s total value:

Stock ABB’s total value of $10,000/Portfolio’s total value of $80,000 = 0.125.

3. Multiply each stock’s fractional share by its Beta. This will calculate the stock’s weighted beta:

Stock ABB’s beta of 1.2 X its fractional portfolio of 0.125 = 0.15.

4. Add up the individual weighted betas.

Here is the whole hypothetical portfolio with a total beta of 1.22, benchmarked to the S&P 500. That means when the index moves 1%, this portfolio as a whole is 22% more risky than the index.

Stock	Value	Portfolio Share	Stock Beta	Weighted Beta
ABB	$10,000	0.125	1.20	0.15
CDD	$30,000	0.375	0.85	0.319
EFF	$15,000	0.1875	1.65	0.309
GHH	$25,000	0.3125	1.42	0.44375
			Sum	1.22

4 Ways to Characterize Beta

Investors always measure a portfolio’s beta against a benchmark index, which they give a value of 1. Stocks that have a beta higher than one are more volatile than the overall market, and those with a beta of less than one are less volatile than the overall market.

Understanding beta is part of fundamental stock analysis. Once you know the beta of your portfolio, you can make changes in order to increase or decrease its risk based on your overall investment strategy by changing your asset allocation.

There are four ways to characterize beta:

High Beta

A high beta stock — one that tends to rise and fall along with the market often — has a value of greater than 1. So if a stock has a beta of 1.2 and is benchmarked to the S&P 500, it is 20% more volatile than the broader measure.

If the S&P 500 rises or falls 10%, then the stock would conversely rise or fall 12%. The same would be true for portfolio beta. While there’s more downside risk with high-beta stocks, they can also generate bigger returns when the market rallies – a principle of Modern Portfolio Theory.

Low Beta

A low beta stock with a beta of 0.5 would be half as volatile as the market. So if the S&P 500 moved 1%, the stock would post a 0.5% swing. Such a stock may have less volatility, but it also may have less potential to post large gains as well.

Still, investors often prefer lower volatility securities. Low beta investment strategies have shown strong risk-adjusted returns over time, too.

Negative Beta

Stocks or portfolios with a negative beta value inversely correlate with the rest of the market. So when the S&P 500 rises, shares of these companies would go down or vice versa.

Gold, for instance, often moves in the opposite direction as stocks, since investors tend to turn to the metal as a haven during stock volatility. Therefore, a portfolio of gold-mining companies could have a negative beta.

So-called defensive stocks like utility companies also sometimes have negative beta, as investors buy their shares when seeking assets less tied to the health of the economy. A downside to negative beta is that expected returns on negative beta securities tend to be weak – even less than the risk-free interest rate.

Zero Beta

A stock or portfolio can also have a beta of zero, which means it’s uncorrelated with the market. Some hedge funds seek a market-neutral strategy. Being market-neutral means attempting to perform completely indifferent to how an index like the S&P 500 behaves.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

How to Calculate an Individual Stock’s Beta

For investors, calculating the beta of all their stock holdings can be time consuming, and typically, financial data or brokerage firms offer beta values for stocks.

But if you wanted to calculate beta for an individual stock, you’d divide a measure of a stock’s returns relative to the broader market over a given time frame by a measure of the market’s return by its mean, also over a specific time frame. Here is the formula:

Beta = covariance/variance

Covariance is a measure of a security’s returns relative to the market’s returns.

Variance is a measure of the market’s return relative to its mean or average.

Alpha vs Beta vs Smart Beta

Beta is one of the Option Greeks, terminology frequently used by traders to refer to characteristics of specific securities or derivatives in the market. Another commonly used Greek term is Alpha. While beta refers to an asset’s volatility relative to the broader market, Alpha is a measure of outperformance relative to the rest of the market.

Beta also comes up a lot in the exchange-traded fund or ETF industry. Smart Beta ETFs are funds that incorporate rules- or factor-based strategies.

What Impacts Beta?

A variety of factors impact an asset’s beta. In general, stocks seen as riskier than average typically feature higher betas. Stock-specific factors such as debt levels, aggressive management, bold projects, volatile cash flows, and even ESG factors can influence a stock’s idiosyncratic risk. Higher business risk, while stock-specific, can lead to a more volatile stock price than the overall market, hence a higher beta.

Higher betas often appear in particular sectors. There are even investment fund strategies that play on beta – you can buy funds that exclusively own high beta or low beta stocks. A stock’s sector, industry, geographic location, and market cap size all impact a stock’s volatility and beta.

Cyclical and growth sectors like energy, industrials, information technology, and consumer discretionary often feature high betas. Utilities, consumer staples, real estate, and much of the healthcare sector typically have low beta.

Small caps and stocks domiciled in emerging-market economies also often have a higher beta (compared to the U.S. large-cap S&P 500).

💡 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).

Important Things to Know About Beta

1. A stock’s beta may change over time. Because beta relies on historical price data, it is subject to change.

2. Beta is not a complete measure of risk. It can be a useful way for investors to estimate short-term risk but it’s less helpful when it comes to considering a long-term investment because the macroeconomic environment and company’s fundamentals may change. In some cases, beta is not the best measure of a stock or a portfolio’s risk.

3. Beta is an input when investors are using the Capital Asset Pricing Model (CAPM) — a way to measure the expected return of assets taking into account systematic risk. It’s a method that also looks at the cost of capital for investors.

4. The estimated beta of a stock will be less helpful for companies that do not trade as frequently. Thin liquidity for a stock may bias its beta value since there is less robust historical price data.

5. Beta does not offer a complete picture of a stock’s risk profile as it’s linked to systematic risk. Investors must also consider stock-specific risk when managing their portfolios.

Test your understanding of what you just read.

The Takeaway

As discussed, beta is a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. Knowing stock holdings’ betas can be important information when you’re building your portfolios.

You can calculate their portfolio beta using simple math as long as you’re able to obtain the individual betas for your stock holdings. While beta is a helpful tool to try to gauge potential volatility in a portfolio, its reliance on historical data makes it limited in measuring the complete risk profile of an asset or portfolio.

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

FAQ

What is a good beta for a portfolio?

In a general sense, a good beta for a portfolio would be 1. That’s only a general guideline or rule of thumb, however, as it means that a portfolio’s value is roughly as volatile as the market overall.

What does a beta of 1.3 mean?

A beta of 1.3 means that a portfolio’s value is 30% more volatile than the overall market, which means its value will swing more wildly than the market.

Why is market portfolio beta 1?

Beta measures a portfolio or asset’s sensitivity relative to the overall market. If a portfolio’s beta is 1, it is equally as volatile as the market, not more or less so.

How do I reduce my portfolio beta?

Perhaps the simplest way to reduce your overall portfolio’s beta is to replace higher-beta assets within the portfolio with assets that have lower associated beta.

Is it possible to have zero beta portfolio?

It is possible, and would amount to a zero-beta portfolio, which means the portfolio itself has no systemic risk whatsoever. In other words, this portfolio would have no relationship to the overall movements of the market, and likely have low returns.

What is the difference between stock beta and portfolio beta?

A stock beta is a measure of an individual stock’s volatility, while portfolio beta is a measure of an overall investment portfolio’s volatility.

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.

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.

[cd_ETFs]

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.

SOIN0124081

Understanding Margin Rates

How Margin Rates Work

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

Factors That Affect Margin Rate

Broker Call Rate

Supply and Demand

Inflation and Monetary Policy

Account Balance

How Can Margin Rates Affect You?

When Is Margin Rate Charged?

How Is Margin Rate Calculated?

The Takeaway

FAQ

Are margin rates yearly? Daily?

What does margin rate tell you?

You may also be interested in:

What Is Rate of Return?

How to Calculate Rate of Return

Rate of Return Formula

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Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Example of Calculating Rate of Return

Considerations When Using Rate of Return

What are the Limitations of Simple Rate of Return?

Annualized Rate of Return Formula

Other Types of Return Formulas

How Investors Can Use Rate of Return

The Takeaway

What Does SPAN Stand For?

What Is SPAN Margin?

What Is a Stock Margin Account?

How Does SPAN Margin Work?

Pros and Cons of SPAN Margin

The Advantages

The Downsides

The Takeaway

FAQ

What does SPAN stand for in margin trading?

How is SPAN margin used?

What is a SPAN calculation?

What Is Margin Level?

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

What Does Margin Level Really Do?

Calculating Margin Level

Margin Level Example

Why Understanding Margin Level Is Important

Margin Level Below 100%

The Takeaway

How to Calculate Beta of a Portfolio

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

4 Ways to Characterize Beta

High Beta

Low Beta

Negative Beta

Zero Beta

How to Calculate an Individual Stock’s Beta

Alpha vs Beta vs Smart Beta

What Impacts Beta?

Important Things to Know About Beta

The Takeaway

FAQ

What is a good beta for a portfolio?

What does a beta of 1.3 mean?

Why is market portfolio beta 1?

How do I reduce my portfolio beta?

Is it possible to have zero beta portfolio?

What is the difference between stock beta and portfolio beta?

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