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What’s Your Margin to Equity Ratio?

January 11, 2022 by Daniels Trading| Tips & Strategies

A futures contract is a highly leveraged financial derivatives product. And, while the added leverage boosts the trader’s capital efficiency, it can also lead to exorbitant losses. Two ways that astute traders manage their use of futures leverage are with the margin to equity ratio (ME) and the margin equity percentage.

What is margin equity percentage and the margin to equity ratio (ME)?

The margin to equity ratio is the percentage of margin requirements with respect to account equity. It’s calculated using this formula: Required Margin ÷ Account Balance = ME

Also known as the margin account ratio or the safe leverage ratio forex (or safe leverage futures or safe leverage stocks), ME gives traders a good idea of their risk exposure. To illustrate, assume that Erin the day trader buys one lot of E-mini S&P 500 futures. Given an account balance of $5,000 and the E-mini S&P’s intraday margin of $500 per contract, Erin’s ME is 1/10 ($500 ÷ $5000). This is a solid value and gives Erin several advantages:

  • The low margin equity level promotes staying power in the market.
  • Erin won’t receive an equity maintenance call as many pattern day traders do.
  • The 1/10 ME is well below the standard margin trading ratio of the E-mini S&P 500, which is vastly higher ($50 current market price). This is extremely beneficial because trades become higher risk as they approach 100 margin equity.

Another way that Erin can measure risk exposure is with margin equity percentage. Essentially, this is another way of looking at ME. Let’s say that Erin is trading the same $5,000 account and buys two December E-mini S&P 500 contracts. Erin’s equity percentage becomes 20 percent: ($500 × 2 lots) ÷ $5,000.

Confused? Check out these FAQs.

As you can see, the financial markets have a language all their own. Let’s answer a few FAQs that relate to the margin to equity ratio, margin equity percentage, and other topics in the realm of financial risk management.

What does equity mean in forex, futures, and stock trading?

Equity is the amount of money one has in their trading account at a given time.

What is margin equity?

Margin equity is the amount of money in one’s trading account considering any fees and the unrealized P&L of open positions.

What is equity percentage?

Equity percentage is the trader’s equity divided by the account’s notional value.

How do I calculate margin level percentage?

Margin level percentage is the trader’s equity divided by their used margin: (Equity ÷ Used Margin) × 100. In the example above, Erin’s margin level percentage when buying two lots of E-mini S&P 500 is 500 percent: ($5000 ÷ $1000) × 100. Generally, values under 100 percent are prohibited. This is evidenced by the equity percentage TD that Ameritrade and the futures margin requirements that Thinkorswim require of their clients.

What does net liquidating value mean?

Net liquidating value is the monetary worth of the trading account if all positions are closed at the current market price.

What is a stock margin ratio?

The stock margin ratio is the equities trader’s available margin with respect to their account balance. In the U.S., the stock margin ratio is typically 2-to-1. This value is dramatically lower than TOS futures margin requirements or Etrade futures margins. For example, the 50 percent required equities margin is far greater than the standard 3 percent to 12 percent of a StoneX, TOS, or Etrade futures margin.

Although ratio analysis can be a bit intimidating, applying the margin to equity ratio and margin equity percentage concepts is fairly straightforward. Once you learn how to calculate the numbers, comparing such line items as “net liquidating value TD Ameritrade” to “net liquidating value Thinkorswim” becomes routine. Answering questions such as “What is margin equity in TD Ameritrade?” “Are Thinkorswim futures margins competitive?” and “How do Etrade futures margin requirements impact my account” is a snap.

Get started with ratio analysis.

To learn more about risk management via portfolio diversification, check out the free StoneX online course, “Futures vs. ETFs.” This powerful tutorial covers key topics such as capital efficiency, market liquidity, fees, and the tax implications of each product. Be sure to claim your seat in the “Futures vs. ETFs” classroom before you place another trade!

This blog was originally published October 13, 2011 and has been updated for accuracy and comprehensiveness.

Futures vs. ETFs Online Course

Filed Under: Tips & Strategies

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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