Margin is borrowed money your broker lends you to buy securities you cannot fully pay for yourself

When you buy a stock or bond with margin, you put down part of the purchase price in cash — called your margin deposit or initial margin — and your broker lends you the rest. You own the security when ready, but you owe the broker money plus interest on the loan. The securities you buy sit as collateral; if their value drops far enough, your broker can force you to sell them or deposit more cash to cover the gap.

Margin is not a special account type or a program you join. It is a borrowing arrangement available through most brokerages. You can use it to buy stocks, bonds, exchange-traded funds, and some other securities. You cannot use margin to buy mutual funds, cryptocurrencies, or initial public offerings.

The core appeal is leverage: a small amount of your own money controls a larger position. If the security rises 10 percent, your profit on the borrowed portion is larger than it would be if you had paid cash. The danger is equally sharp — a 10 percent drop wipes out your deposit faster and can trigger forced sales or additional cash demands.

Key Takeaways

  • Margin is a loan from your broker, secured by the securities you buy, that lets you purchase more than you could pay for in cash.
  • Your broker sets an initial margin requirement — usually 50 percent for stocks — meaning you must deposit at least half the purchase price yourself.
  • If your account value falls below the maintenance margin level (typically 25 to 30 percent), your broker can force you to sell securities or deposit cash without asking permission.
  • You pay interest on the borrowed amount, and that interest accrues daily, reducing your net profit or increasing your loss.
  • Margin amplifies both gains and losses, so a small price move can wipe out your entire deposit or force you into a sale at the worst time.

How the margin deposit and loan work together

Suppose you want to buy 100 shares of a stock trading at $50 per share — a $5,000 purchase. With a 50 percent initial margin requirement, you deposit $2,500 of your own money and your broker lends you $2,500. You own all 100 shares and can sell them anytime, but you owe the broker $2,500 plus interest.

If the stock rises to $60 per share, your 100 shares are now worth $6,000. You still owe $2,500 to the broker. Your equity in the account is $3,500 — the $6,000 value minus the $2,500 debt. Your $2,500 deposit has grown to $3,500, a 40 percent gain. If you had bought the same 100 shares with cash, a $10 rise would have been a 20 percent gain on your $5,000.

The reverse happens if the stock falls. At $40 per share, your 100 shares are worth $4,000. You still owe $2,500. Your equity is now $1,500. Your $2,500 deposit has shrunk to $1,500, a 40 percent loss. A $10 drop cost you 40 percent of your money, not 20 percent.

Initial margin and maintenance margin are two different thresholds

Initial margin is the percentage of the purchase price you must deposit when you first buy a security. The Federal Reserve sets a minimum of 50 percent for stocks, but your broker can require more. Some brokers require 60 or 70 percent for volatile stocks or smaller companies. You choose whether to use margin or pay cash; if you use it, you must meet the initial requirement before the trade settles.

Maintenance margin is the minimum percentage of your account value that must remain as your own equity after the purchase. The Federal Reserve sets a minimum of 25 percent, but most brokers require 30 to 35 percent. This threshold matters because it determines when your broker can force action.

Using the earlier example: you bought 100 shares at $50 with $2,500 down and $2,500 borrowed. Your account value is $5,000 and your equity is $2,500 — exactly 50 percent. Your maintenance margin requirement is probably 30 percent, meaning your equity must stay above $1,500 (30 percent of $5,000). If the stock falls to $35 per share, your account is worth $3,500, you still owe $2,500, and your equity is $1,000. That is 28.6 percent — below the 30 percent threshold. Your broker will issue a margin call.

A margin call forces you to deposit cash or sell securities

When your account equity falls below the maintenance margin percentage, your broker sends a margin call — a demand that you either deposit cash to bring your equity back above the threshold, or authorize the broker to sell enough of your securities to do so. You typically have a few business days to respond, though some brokers allow only hours.

If you do not respond, your broker will sell your securities without asking. They will usually sell the positions with the largest gains first to minimize losses, but they are not required to. You have no say in which securities are sold or at what price. If the market is falling fast, the forced sale might happen at the worst possible moment.

In the example above, your equity is $1,000 and you need it to be at least $1,500 to stay above 30 percent maintenance. You can deposit $500 to bring your equity to $1,500, or your broker can sell $833 worth of shares (which reduces both your account value and your debt by that amount, leaving you with $2,667 in value, $1,667 in debt, and $1,000 in equity — still below 30 percent, so the math is more complex in practice). The easiest path is to deposit cash.

Interest accrues daily on the borrowed amount

Your broker charges interest on the margin loan, calculated as an annual rate but accrued daily. The rate varies by broker and by the size of your loan. Larger accounts often receive lower rates. Rates typically range from 4 to 12 percent per year, though they can be higher during periods of high interest rates or for smaller loans.

Interest is deducted from your account automatically. If you borrow $2,500 at 8 percent annual interest, you owe about $0.55 per day in interest (8 percent of $2,500 divided by 365 days). Over a year, that is $200 in interest charges. If the security does not rise enough to cover the interest and your other costs, you lose money even if the price stays flat.

Some brokers offer lower margin rates for customers who maintain large account balances or who use other services like advisory accounts. Check your broker's current rates before opening a margin position, because the interest cost can be the difference between profit and loss on a small price move.

Margin requirements vary by security type and market conditions

The Federal Reserve sets minimum margin requirements, but brokers can set higher ones, and requirements can change. Stocks typically have a 50 percent initial margin requirement. Bonds often have lower requirements — sometimes 20 to 30 percent — because they are less volatile. Options and futures have their own margin rules, which are more complex and vary widely by contract.

During periods of high market volatility, brokers sometimes raise margin requirements temporarily. If you hold a margin position and your broker raises the requirement, you may receive a margin call even though the security price has not moved. This happened to many traders during the 2008 financial crisis and again during the March 2020 market drop.

Penny stocks, small-cap stocks, and stocks with low trading volume often have higher margin requirements or are not marginable at all. Your broker will tell you whether a specific security can be bought on margin and what the requirement is before you place the order.

Margin is different from options, short selling, and day trading

Margin is borrowing money to buy a security you expect to rise. Short selling is borrowing a security itself to sell it, hoping to buy it back cheaper — the opposite direction. Both use leverage and both can trigger margin calls, but they work differently. Margin lets you own more shares; short selling lets you profit from a price drop.

Options are contracts that give you the right to buy or sell a security at a set price. You can buy options with margin, but the margin rules for options are different from the rules for stocks. Options are riskier because they expire and can lose all their value.

Day trading — buying and selling the same security within one trading day — has its own margin rule. The SEC requires day traders to maintain a minimum account balance of $25,000 and limits how much margin they can use. This rule applies only if you make more than three day trades in a five-day period in a margin account.

Frequently Asked Questions

What happens if I cannot pay back the margin loan?

Your broker will force-sell your securities to recover the loan amount. If the sale does not cover the full debt — for example, if the market drops sharply overnight — you owe the difference. This is called a margin deficit. Your broker will demand payment, and if you do not pay, they can pursue collection or report it to credit agencies.

Can I use margin to buy any stock?

No. Your broker maintains a list of marginable securities. Most large-cap stocks are marginable, but penny stocks, very new stocks, and stocks with low trading volume usually are not. Your broker will tell you before you place an order whether a stock can be bought on margin.

Is margin the same as a cash advance or credit card?

No. Margin is a loan secured by the securities in your account. A cash advance or credit card is unsecured debt. Margin interest rates are usually lower, but your broker can force you to sell your securities without permission if your account value drops. Credit card companies cannot seize your assets.

What is the difference between buying on margin and using leverage in options?

Buying on margin means borrowing cash to buy securities you own outright. Options give you leverage without borrowing — a small payment controls a larger position. But options expire and can become worthless, while a margined stock can recover. Both amplify gains and losses.

Can I use margin in a retirement account like an IRA?

No. IRAs do not allow margin. You can only trade with cash you have deposited. Some retirement accounts like SEP-IRAs held at certain brokers may have different rules, so check with your broker about your specific account type.