Margin is borrowed money a broker lends you to buy more securities than you could with cash alone

When you trade on margin, you put down a portion of the purchase price yourself and borrow the rest from your broker. If you have $5,000 in your account and your broker offers 2:1 margin, you can buy $10,000 worth of stock — you pay $5,000 and borrow $5,000. The borrowed amount is margin. You pay interest on what you borrow, and you must maintain a minimum account balance (called maintenance margin) or your broker can force you to sell positions to cover the loan.

Margin amplifies both gains and losses. If the stock you bought with margin rises 20 percent, your $5,000 investment grows to $6,000 — a 20 percent gain on your own money. But if it falls 20 percent, your $5,000 shrinks to $4,000 — also a 20 percent loss on your own money. If the stock falls far enough, you owe your broker money even after selling, because the sale price no longer covers the loan.

Key Takeaways

  • Margin is a loan from your broker that lets you control more securities than your cash balance would normally allow.
  • You pay interest on the borrowed amount, and interest rates vary by broker and by how much you borrow.
  • Your broker can force you to sell positions if your account value falls below the maintenance margin requirement, even if you do not want to sell.
  • Losses on margin trades can exceed your initial investment, meaning you can owe your broker money after a position closes.
  • Margin requirements and rules differ between stock trading, options, and futures, and between brokers.

How margin accounts differ from cash accounts

A cash account holds only money you have deposited. You can only buy securities with cash you own. A margin account is a credit line — your broker lends you money to buy more. The difference shows up when ready in what you can purchase and how fast you can trade.

In a cash account, if you sell a stock on Monday, the cash from that sale settles (arrives in your account) on Wednesday. You cannot use that cash to buy something else until Wednesday. In a margin account, you can use unsettled cash to buy the same day, because your broker is lending you the difference. This speed comes at a cost: margin interest, maintenance requirements, and the risk of forced liquidation.

Initial margin and maintenance margin are two separate requirements

Initial margin is the percentage of a purchase price you must put down when you open a position. For stocks, the Federal Reserve sets a minimum of 50 percent — you must deposit at least half the purchase price yourself. Your broker may require more. If you want to buy $10,000 of stock and your broker requires 60 percent initial margin, you deposit $6,000 and borrow $4,000.

Maintenance margin is the minimum percentage of your position value you must keep in your account at all times. The Financial Industry Regulatory Authority (FINRA) sets a floor of 25 percent for stocks, but brokers often require 30 percent or higher. If your account falls below maintenance margin, your broker issues a margin call — a demand to deposit more cash or close positions. If you do not respond, your broker will sell your holdings without asking you, starting with the positions that lose money fastest.

The gap between initial and maintenance margin is where forced selling happens. You might meet initial margin when you buy, but if the position drops in value, maintenance margin shrinks faster than your account balance does, triggering a call.

Interest rates and fees on borrowed margin

Brokers charge interest on the amount you borrow, similar to a loan. The rate varies by broker, by how much you borrow, and by current market conditions. A broker might charge 6 percent annually on balances under $25,000 and 4 percent on larger balances. Some brokers offer tiered rates that drop as your account grows.

Interest accrues daily and is usually deducted from your account monthly or when you close the position. If you borrow $5,000 at 6 percent for one month, you owe roughly $25 in interest. Over a year, that same $5,000 costs $300. The longer you hold a margin position, the more interest compounds.

Beyond interest, some brokers charge fees for margin accounts themselves, though this is less common. Always check your broker's margin disclosure document, which lists the exact rates and any account minimums.

Margin calls and forced liquidation

A margin call happens when your account equity falls below the maintenance margin threshold. Your broker notifies you and gives you a important date — usually one to five business days — to deposit cash or sell positions. The exact important date is in your margin agreement with the broker.

If you do not act, your broker will liquidate (sell) your positions automatically. Brokers typically sell the positions with the largest losses first, to raise cash fastest. You have no control over which securities are sold or at what price. If the market is moving against you, forced selling can lock in losses at the worst moment.

A margin call does not mean you have broken a rule — it means market movement has changed the math. A stock you bought on margin can drop 30 percent in a week due to company news or sector decline, triggering a call even though you did nothing wrong.

Margin rules vary by security type and broker

Stock margin is regulated by the Federal Reserve and FINRA, so requirements are similar across brokers. Options margin is stricter and more complex — buying a call option on margin requires more collateral than buying the stock itself. Selling options (writing calls or puts) requires even more, because your potential loss is theoretically unlimited.

Futures contracts use leverage instead of margin, but the concept is similar — you control a large contract value with a small deposit. A single E-mini S&P 500 futures contract controls $150,000 of index value but might require only $12,000 in account equity. Losses can exceed your deposit in a single day.

Brokers also set their own rules above the legal minimums. One broker might require 60 percent initial margin on stocks while another requires 50 percent. Some brokers restrict margin on penny stocks or volatile securities. Check your broker's margin policy before opening an account if margin trading is part of your plan.

When margin amplifies losses beyond your deposit

The most important risk to understand: you can lose more than you invested. If you deposit $5,000 and borrow $5,000 to buy $10,000 of stock, and the stock falls to $3,000, you still owe your broker $5,000. You have lost $7,000 — more than your original $5,000 deposit. Your broker will demand you cover the difference, or will sell other positions in your account to do so.

This risk is real but manageable. It happens most often when a single position drops sharply and you do not respond to a margin call quickly. Traders who use margin typically set stop-loss orders (automatic sell orders at a set price) to limit losses before they reach this point. Others use margin only for small portions of their portfolio, so a loss in one position does not wipe out the whole account.

Frequently Asked Questions

Can I use margin to buy any security?

No. Stocks and most exchange-traded funds (ETFs) can be bought on margin. Bonds, mutual funds, and penny stocks often cannot, or have stricter requirements. Your broker's margin list shows which securities are marginable. Some brokers restrict margin on volatile or newly listed stocks.

What happens if I cannot meet a margin call?

Your broker will sell your positions without your permission to raise the cash you owe. They typically sell the positions with the largest losses first. You have no say in which securities are sold or at what price. After liquidation, if you still owe money, your broker may freeze your account or pursue collection.

Is margin interest tax-deductible?

Margin interest may be deductible as an investment expense if you itemize deductions on your tax return, but rules are strict and limits explore. Consult a tax professional about your specific situation, as deductibility depends on your income level and the type of investments you hold.

How is margin different from a line of credit?

Margin is a loan tied to your securities holdings — your broker lends based on what you own and can seize those holdings if you do not repay. A line of credit is unsecured debt with a fixed payment schedule. Margin interest rates and requirements change with market conditions; a line of credit rate is usually fixed.

Can I use margin in a retirement account?

No. Individual Retirement Accounts (IRAs), 401(k)s, and other tax-advantaged retirement accounts do not allow margin trading. You can only trade with cash you have deposited. This rule exists to protect retirement savings from leverage risk.