A margin account lets you borrow money from your broker to buy more securities than you could pay for with cash alone

A margin account is a brokerage account that allows you to borrow funds from your broker to purchase stocks, bonds, or other investments. Instead of paying the full price upfront with your own money, you put down a percentage of the cost—called the margin requirement—and the broker lends you the rest. You pay interest on the borrowed amount, similar to how a loan works.

The key difference from a regular cash account is leverage. With a cash account, you can only buy what you have money for. With a margin account, you can control a larger position with less of your own capital. This amplifies both gains and losses, which is why margin trading carries more risk than buying securities outright.

Key Takeaways

  • A margin account requires you to deposit an initial margin—typically 50% of the purchase price—and the broker lends you the remainder.
  • You pay interest on the borrowed amount, and that interest rate varies by broker and market conditions.
  • If your account value drops below the maintenance margin requirement, your broker can force you to deposit more money or sell positions without your permission.
  • Margin accounts are riskier than cash accounts because losses are magnified when you use borrowed money.
  • Not all securities can be purchased on margin; your broker will have a list of marginable securities.

How the initial margin requirement works

When you open a margin account, your broker sets an initial margin requirement—the minimum percentage of the purchase price you must pay with your own money. The Federal Reserve sets a baseline of 50%, meaning you must put down at least half the cost of a security yourself. Many brokers require 50%, though some may require more depending on the security or market conditions.

If you want to buy $10,000 worth of stock with a 50% initial margin requirement, you deposit $5,000 of your own money and borrow $5,000 from your broker. You own the full $10,000 position, but you only risked $5,000 of your capital. If the stock rises to $11,000, your $5,000 investment is now worth $6,000—a 20% gain on your money. If it falls to $9,000, your $5,000 is now worth $4,000—a 20% loss.

Maintenance margin and margin calls

After you buy on margin, your broker monitors the value of your account continuously. The maintenance margin is the minimum percentage of your account value you must keep in equity (your own money) at all times. The Federal Reserve sets this at 25%, but most brokers require 30% to 40% to give themselves a buffer.

If your account value drops and your equity falls below the maintenance margin threshold, your broker issues a margin call. This means you must deposit more cash into your account when ready to bring your equity back above the maintenance level. If you do not deposit the money, your broker can sell your positions without asking your permission to raise the cash. This forced liquidation can lock in losses and may happen at the worst possible time for your portfolio.

Using the earlier example: if you borrowed $5,000 to buy $10,000 of stock and the stock drops to $6,000, your equity is now $1,000 (the $6,000 position minus the $5,000 you owe). At a 30% maintenance margin requirement, you need to maintain $1,800 in equity. Your account is now below that threshold, and your broker will demand you deposit $800 or face forced sales.

Interest costs on borrowed funds

Your broker charges you interest on the money you borrow, called the margin interest rate or debit balance interest. This rate is not fixed and changes based on how much you borrow, current market rates, and your broker's policies. Rates typically range from 5% to 12% annually, though they can be higher or lower depending on market conditions and your broker.

The interest accrues daily and is usually charged to your account monthly. If you borrow $5,000 at 8% annual interest, you pay roughly $33 per month in interest costs. Over a year, that is $400 in interest alone—money you must earn back before your trade becomes profitable. This cost eats into your returns and is one reason margin trading is riskier than using only your own cash.

Which securities can be bought on margin

Not every security is marginable. Your broker maintains a list of securities you can purchase on margin, typically including large-cap stocks, many exchange-traded funds (ETFs), and some bonds. Penny stocks, newly issued securities, and highly volatile stocks are often not marginable because they carry too much risk for the broker.

Before you place a margin trade, check your broker's marginable securities list. Attempting to buy a non-marginable security on margin will be rejected. Some brokers also restrict margin on certain securities during periods of high volatility or low liquidity, so the list can change.

The risks of using margin

Margin amplifies both wins and losses. A 20% gain on a $5,000 investment becomes a 40% gain when you use $5,000 of borrowed money to control a $10,000 position. But a 20% loss becomes a 40% loss on your capital. Losses can exceed your initial deposit if the security drops far enough, meaning you could owe your broker money even after selling the position.

Margin calls force you to act at times you may not want to. If you receive a margin call during a market downturn, you must either deposit cash you may not have available or watch your broker liquidate positions at the worst possible prices. This forced selling can turn a temporary loss into a permanent one.

Interest costs compound over time. If you hold a margin position for months or years, the accumulated interest can significantly reduce your returns. A position that gains 8% annually but costs 8% in margin interest breaks even before commissions and taxes.

Margin accounts versus cash accounts

A cash account requires you to pay the full price of any security with money you have on hand. You cannot borrow. Settlement takes two business days after you sell, and you cannot use the proceeds to buy again until the sale settles. This is slower but eliminates the risk of margin calls and interest costs.

A margin account lets you buy when ready with borrowed money and settle later. You can use the same cash multiple times in a short period (called day trading buying power), which is useful for active traders. The tradeoff is the risk of margin calls, interest charges, and the possibility of losing more than you invested.

Frequently Asked Questions

Can I lose more money than I deposited in a margin account?

Yes. If a security drops sharply, your losses can exceed your initial deposit. For example, if you deposit $5,000 and borrow $5,000 to buy $10,000 of stock that falls to $3,000, you still owe the broker $5,000 but only have $3,000 in assets. You would owe $2,000 out of pocket. This is called being "underwater" on a margin position.

What happens if I cannot meet a margin call?

Your broker will sell your positions without your permission to raise the cash needed to meet the call. The broker chooses which positions to sell and may do so at unfavorable prices. You are responsible for any losses from the forced liquidation, and you may still owe money if the sales do not raise enough cash.

Do I pay taxes on margin interest?

Margin interest is tax-deductible if you use the borrowed money to purchase investments held for income or appreciation. You cannot deduct margin interest used to buy tax-exempt securities. Keep records of your margin interest charges; your broker will report them on a statement you can use when filing taxes.

Can I use margin to buy any stock?

No. Your broker maintains a list of marginable securities. Penny stocks, newly issued stocks, and highly volatile securities are typically not marginable. Some brokers also restrict margin on certain securities during market stress or low-liquidity periods. Check your broker's marginable securities list before attempting a margin trade.

Is margin the same as short selling?

No. Margin lets you borrow money to buy securities you expect to rise in value. Short selling lets you borrow securities themselves to sell them, betting the price will fall. Both involve borrowing and both carry risk, but they are opposite strategies. Margin is a long position; short selling is a short position.