Margin trading lets you borrow money from your broker to buy more stocks than you could pay for outright

When you buy stocks on margin, you put down a portion of the purchase price yourself — called your margin — and your broker lends you the rest. If you have $5,000 in your account and want to buy $10,000 worth of stock, you use your $5,000 and borrow $5,000 from the broker. You own the full $10,000 in shares, but you owe the broker the borrowed amount plus interest.

The appeal is straightforward: you control more stock with less of your own money, which means larger gains if the stock price rises. The danger is equally straightforward: you still owe the full borrowed amount even if the stock price falls, which means larger losses. A 20% drop in a stock you bought outright costs you 20% of your investment. A 20% drop in a stock you bought on margin can wipe out your entire down payment and leave you owing the broker money.

Key Takeaways

  • Margin is the cash you deposit; the broker lends you the rest, and you pay interest on the borrowed amount.
  • Your broker sets a maintenance margin requirement — usually 25% to 30% — meaning your account equity must stay above that percentage of the total position value or you face a margin call.
  • A margin call forces you to deposit more cash or sell holdings immediately, often at unfavorable prices, if your account falls below the maintenance threshold.
  • Margin amplifies both gains and losses, so a small price move against you can eliminate your entire investment and create debt to the broker.

How the initial margin requirement works

Before you can borrow, your broker requires you to deposit a minimum amount of your own money. This is the initial margin requirement, and it varies by security and broker but is typically 50% for stocks. That means you must put down at least half the purchase price yourself; the broker will lend you the other half.

Some brokers allow lower initial margins on certain stocks or for experienced traders, but the SEC and FINRA set a floor: you cannot borrow more than 50% of the purchase price for most stocks. Penny stocks, newly issued stocks, and other volatile securities often have higher requirements — sometimes 75% or even 100%, which means no margin at all.

Maintenance margin and margin calls

After you buy on margin, your broker monitors your account continuously. The maintenance margin requirement is the minimum percentage of equity you must keep in your account relative to the total value of your positions. Most brokers set this at 25% to 30%, though some require more.

If your account equity falls below the maintenance threshold — usually because the stock price dropped — your broker issues a margin call. You then have a set number of days, often just a few, to deposit cash or sell holdings to bring your account back above the maintenance level. If you do not act, the broker will sell your positions automatically, usually at whatever price the market offers at that moment. You remain responsible for any losses, and you still owe interest on the borrowed funds.

Example: You buy $10,000 of stock with $5,000 of your own money and $5,000 borrowed. Your account equity is $5,000 (50%). If the stock drops to $7,000, your equity is now $2,000 (about 29%). If your broker's maintenance requirement is 30%, you are below the threshold and receive a margin call. You must deposit $1,000 or sell $3,333 worth of stock to get back to 30% equity.

Interest and fees on borrowed money

Your broker charges interest on the amount you borrow, similar to a loan. The rate varies by broker and by how much you borrow — larger balances sometimes get lower rates — but typical rates range from 5% to 12% annually, depending on market conditions and your broker's pricing. Some brokers charge different rates based on the size of your margin balance or your account status.

Interest accrues daily and is usually deducted from your account monthly or quarterly. If you hold a margin position for a long time, the interest cost can significantly reduce your overall return, even if the stock price rises. You also pay any dividends owed on borrowed shares to the lender, and you may face additional fees if you fail a margin call or if your account falls below a minimum balance.

How losses accelerate on margin

Margin amplifies losses because you are controlling more money than you own. If you invest $5,000 of your own money in a stock that drops 50%, you lose $2,500 — half your investment. If you buy $10,000 of the same stock on 50% margin (using $5,000 of your own money and $5,000 borrowed), a 50% drop means the stock is now worth $5,000. You still owe the broker $5,000, so your equity is zero. You have lost 100% of your own money.

If the stock drops below $5,000, you owe the broker more than the stock is worth. You must cover the shortfall out of other funds in your account or face forced liquidation of other positions. In extreme cases, you can end up owing the broker money even after your margin positions are sold.

Margin requirements for different account types

Not all accounts can use margin. You need a margin account, which is different from a standard cash account. Opening a margin account requires a minimum deposit — often $2,000 to $5,000, depending on the broker — and you must sign an agreement acknowledging the risks and the broker's right to liquidate your positions without your permission.

Day traders and active traders often use margin because they can close positions quickly and repay borrowed funds within the same trading day. Long-term investors typically avoid it because the interest costs and risks outweigh the benefit of controlling extra shares. Some brokers offer different margin rates or requirements for different account types or trading strategies.

Shorting stock and margin

Margin is also required if you want to short a stock — betting that its price will fall. When you short, you borrow shares from your broker, sell them immediately, and hope to buy them back later at a lower price. The difference is your profit. You must maintain a margin account and meet maintenance requirements just as you would with a long position, but the dynamics work in reverse: if the stock price rises instead of falling, your losses mount and you face a margin call.

Shorting on margin is riskier than buying on margin because stock prices can theoretically rise indefinitely, whereas they can only fall to zero. Your potential loss on a short position is unlimited, whereas your loss on a long position is capped at your initial investment (though you can owe the broker money if you do not meet a margin call).

Frequently Asked Questions

What happens if I cannot meet a margin call?

Your broker will liquidate your positions automatically to raise the required cash. They sell holdings at market price without waiting for your approval, and you are responsible for any losses. If the liquidation does not raise enough cash, you owe the broker the shortfall plus any fees or interest charges.

Can I use margin to buy any stock?

No. Brokers set margin requirements per security, and some stocks cannot be bought on margin at all. Penny stocks, newly issued stocks, and highly volatile securities typically have higher requirements or are excluded entirely. Your broker's website lists which stocks are marginable and at what rate.

Is margin trading the same as day trading?

No. Margin is a borrowing tool; day trading is a strategy of buying and selling within the same day. You can day trade without margin (using only cash you own) or use margin for longer-term positions. However, day traders often use margin because it lets them control larger positions and close them quickly before interest costs accumulate.

How much interest will I pay on a margin loan?

Interest rates vary by broker and market conditions, typically ranging from 5% to 12% annually. Rates are often lower for larger balances and higher for smaller ones. Interest accrues daily and is usually charged monthly or quarterly. Check your broker's current margin rates before opening a margin account.

What is the difference between initial margin and maintenance margin?

Initial margin is what you must deposit to open a position — usually 50% of the purchase price. Maintenance margin is the minimum equity percentage you must keep in your account afterward — usually 25% to 30%. If your account falls below maintenance, you receive a margin call and must deposit cash or sell holdings immediately.