What margin trading is and how it works
Margin trading means borrowing money from your broker to buy stocks or other securities. You put up some of your own cash — called the margin — and the broker lends you the rest. You own the securities you buy, but the broker holds them as collateral for the loan. If the stock price rises, you keep the profit on the full amount you bought, not just the amount you put in. If the price falls, you lose money on the full amount, and you still owe the broker the loan plus interest.
The mechanics are straightforward: you open a margin account with a broker, deposit cash, and request to buy more stock than your cash alone would cover. The broker transfers the borrowed money to your account. You buy the stock. The stock sits in your account as collateral. You pay interest on the borrowed amount, usually calculated daily and added to your account monthly. When you sell the stock, the proceeds go to your broker first to repay the loan and interest, and whatever is left goes to you.
The appeal is leverage — the ability to control a larger position with less of your own money. The risk is that losses are also magnified. A 10 percent drop in a stock you bought with your own money costs you 10 percent of what you invested. A 10 percent drop in a stock you bought half with borrowed money costs you 20 percent of what you put in.
Key Takeaways
- Margin accounts let you borrow from your broker to buy securities, but the securities themselves serve as collateral for the loan.
- You pay interest on the borrowed amount, and that interest accrues daily and is typically charged to your account monthly.
- Profits and losses are calculated on the full purchase price, not just the amount you deposited, which magnifies both gains and losses.
- Brokers can force you to sell positions or deposit more cash if your account value falls below the maintenance margin requirement.
- Margin trading is not available to all account types and requires a separate process and approval from your broker.
Initial margin and maintenance margin requirements
When you open a margin account, your broker sets two thresholds: initial margin and maintenance margin. Initial margin is the minimum percentage of the purchase price you must put up in cash before the broker will lend you the rest. Maintenance margin is the minimum percentage of your account value that must remain as equity after the purchase.
The Financial Industry Regulatory Authority (FINRA) sets a floor: initial margin must be at least 50 percent of the purchase price, and maintenance margin must be at least 25 percent of the market value of the securities. Individual brokers often require higher percentages. For example, a broker might require 60 percent initial margin and 30 percent maintenance margin. These percentages vary by broker and sometimes by the specific stock you are buying.
If your account value drops and your equity falls below the maintenance margin threshold, your broker will issue a margin call. This means you must either deposit more cash or sell some securities to bring your account back into compliance. If you do not act, the broker can sell your positions without your permission to raise the cash needed.
How interest charges work on borrowed funds
The interest rate you pay on borrowed money is called the margin interest rate or broker call rate. This rate is not fixed — it changes based on the amount you borrow, current market conditions, and your broker's policies. Brokers typically charge higher rates on smaller borrowed amounts and lower rates on larger balances, similar to how banks tier interest rates.
Interest accrues daily on the outstanding loan balance and is usually charged to your account once a month. If you borrow $10,000 at an annual rate of 8 percent, you owe roughly $67 per month in interest (though the exact amount depends on the daily balance and the number of days in the month). The interest is deducted from your cash balance in your margin account, which reduces the amount of equity you have and can trigger a margin call if your balance falls too low.
You can check your broker's current margin interest rates on their website or by calling. Rates change frequently, so the rate you see today may not be the rate you pay next month if you maintain the loan.
Margin calls and forced liquidation
A margin call happens when the value of your securities falls enough that your account equity drops below the maintenance margin requirement. At that point, your broker notifies you that you must deposit cash or sell securities to restore your equity to the required level. The broker typically gives you a few business days to respond, though this timeline varies.
If you do not meet the margin call, your broker has the right to sell your positions without asking your permission. This is called forced liquidation. The broker will sell enough securities to bring your account back into compliance. You have no control over which securities are sold or at what price. If the market is moving quickly, forced sales can happen at unfavorable prices, locking in losses.
Margin calls can happen even if your stocks have not fallen much. If you borrowed heavily and the market drops 5 or 10 percent, your equity can fall below the maintenance threshold quickly. This is why margin trading amplifies risk — a modest market move can force you to sell at the worst time.
Types of securities you can buy on margin
Not every security can be purchased on margin. Brokers maintain a list of marginable securities — stocks and some exchange-traded funds (ETFs) that meet certain liquidity and price standards. Large-cap stocks listed on major exchanges are almost always marginable. Penny stocks, thinly traded stocks, and most bonds are not.
Your broker publishes its marginable securities list online. Before you buy a stock on margin, check the list to confirm the stock qualifies. If you try to buy a non-marginable security in a margin account, the broker will either reject the order or require you to pay cash for the full purchase price.
Options and futures have their own margin rules, separate from stock margin. Mutual funds cannot be bought on margin at all. If you hold mutual funds in a margin account, they do not count toward your margin buying power.
How margin buying power is calculated
Your buying power is the total dollar amount of securities you can purchase in a margin account. It is not the same as your cash balance. Buying power is calculated by taking your cash and adding the amount you can borrow based on the initial margin requirement.
If you have $10,000 in cash and your broker requires 50 percent initial margin, your buying power is $20,000 — you can buy $20,000 worth of marginable securities because the broker will lend you the other $10,000. If your broker requires 60 percent initial margin, your buying power on the same $10,000 is roughly $16,667, because you must put up 60 percent of the purchase price yourself.
As your account value changes, your buying power changes too. If your securities gain value, your buying power increases. If they lose value, your buying power decreases. This is why a margin account can feel like a moving target — the amount you can borrow is not fixed; it depends on what your current holdings are worth.
Risks specific to margin trading
The primary risk is that losses are magnified. If you buy $20,000 of stock with $10,000 of your own money and $10,000 borrowed, a 50 percent drop in the stock price wipes out your entire $10,000 investment — a 100 percent loss on your money. You still owe the broker the $10,000 loan plus interest, so you end up with a negative balance.
A second risk is forced liquidation at the worst time. When the market is falling and margin calls are being issued across the industry, brokers are selling securities simultaneously. This can accelerate price declines and force you to sell at lower prices than you would have chosen.
A third risk is that margin interest compounds your losses. If your stock falls and you cannot meet the margin call, you must either deposit cash (which you may not have) or sell at a loss. Meanwhile, you are still paying interest on the borrowed amount, which increases your total loss.
Frequently Asked Questions
Can I lose more money than I invested in a margin account?
Yes. If you buy $20,000 of stock with $10,000 of your own money and the stock falls to zero, you lose your $10,000 plus you still owe the broker $10,000 in principal and interest. You would have a negative account balance. In practice, your broker will force you to sell before the stock reaches zero, but losses can still exceed your initial investment.
What happens if I cannot meet a margin call?
Your broker will sell your securities without your permission to raise the cash needed to bring your account into compliance. You have no control over which positions are sold or the sale price. If the forced sale does not raise enough cash, you will owe your broker the difference.
Is margin trading the same as day trading?
No. Margin trading is borrowing money to buy securities and holding them. Day trading is buying and selling securities within the same day. You can day trade without margin, and you can use margin without day trading. However, day traders often use margin to increase their buying power for intraday positions.
Do I pay taxes on margin interest?
Margin interest is tax-deductible if you use the borrowed money to buy investments held for income or growth. You report it as an investment expense on your tax return. Consult a tax professional about your specific situation, as rules vary based on your income and the type of investments you hold.
Can I use margin to buy stocks in a retirement account?
No. Retirement accounts like IRAs and 401(k)s do not allow margin trading. You can only buy securities with cash you have already deposited. Some brokerage accounts tied to retirement plans offer margin-like features, but they are subject to different rules and restrictions.