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

When you trade on margin, you put down a portion of the purchase price yourself — called the margin requirement — and your broker finances the rest. If you have $5,000 in your account and your broker requires 50% margin, you can buy $10,000 worth of stock. You own the securities, but the broker holds them as collateral and charges you interest on the borrowed amount.

The mechanics are straightforward: you place an order, the broker lends you the difference between what you deposit and the total purchase price, and you pay interest on that loan. The interest rate varies by broker and by how much you borrow. If the securities rise in value, your profit is larger than it would have been with cash alone — but if they fall, your loss is also larger, and you still owe the full borrowed amount plus interest.

Key Takeaways

  • Margin is a loan from your broker that lets you control more securities than your cash balance would normally allow, but you pay interest on the borrowed portion.
  • Your broker sets a minimum margin requirement — often 50% for stocks — meaning you must deposit at least that percentage of the purchase price yourself.
  • If your account value falls below the maintenance margin level (usually 25% to 30%), your broker can force you to deposit more money or sell positions without your permission.
  • Margin amplifies both gains and losses, so a 10% drop in a margined position can wipe out 20% or more of your actual cash deposit.

Initial margin versus maintenance margin

Brokers enforce two separate margin thresholds. Initial margin is what you must deposit to open a margined position — typically 50% for stocks, though it can be higher for volatile securities or lower for bonds. Once you own the position, maintenance margin is the minimum account value you must keep to hold it. Maintenance margin is usually 25% to 30% for stocks.

The difference matters because your account value fluctuates. You might meet the 50% initial requirement to buy, but if the stock drops 30%, your account equity falls below the 25% maintenance level. At that point, your broker issues a margin call — a demand that you deposit cash or sell securities to bring your account back above maintenance. If you do not respond within the timeframe your broker specifies (often one to three business days), the broker can liquidate your positions without asking permission.

How interest charges work

Margin interest is not a flat fee — it accrues daily on the balance you borrow. If you borrow $5,000 and your broker charges 8% annually, you owe roughly $1.10 per day in interest (8% ÷ 365 days). That interest compounds, so the longer you hold a margined position, the more you pay. Some brokers offer tiered rates: borrowing $10,000 might cost 6%, but borrowing $100,000 might cost 4%.

Interest rates change with market conditions and your broker's cost of capital. During periods of high interest rates, margin borrowing becomes more expensive. You can see your current margin interest rate in your account settings or by calling your broker — it is not hidden, but many traders do not check it until they receive a statement showing hundreds of dollars in charges.

Margin calls and forced liquidation

A margin call occurs when your account equity drops below the maintenance margin threshold. Your broker calculates this daily, usually after market close. If you fall short, you have a set number of days — typically one to three — to deposit cash or sell enough securities to restore your account to the required level.

If you do not act, your broker will sell your positions automatically, usually starting with the most liquid (easiest to sell) securities first. This forced sale happens at market price, which may be unfavorable if markets are moving fast. You remain responsible for any losses, and you still owe the margin interest that accrued up to the sale date. Some brokers charge a fee for forced liquidation on top of the interest.

Margin requirements vary by security type

Not all securities carry the same margin requirement. Stocks typically require 50% initial margin, but penny stocks, options, and volatile securities often require 75% or even 100% (meaning no margin at all). Bonds and Treasury securities usually allow higher leverage — sometimes 90% margin, meaning you only need to deposit 10%.

Your broker sets these requirements based on the security's volatility and liquidity. A highly liquid stock with a long trading history might allow 50% margin, while a newly listed or thinly traded stock might require 75%. Options have their own complex margin rules that depend on the strategy — a covered call requires less margin than a naked short call. Always check your broker's margin requirements before you trade, because they determine how much leverage you actually have access to.

What happens if you cannot meet a margin call

If you receive a margin call and cannot deposit the required cash, your broker will liquidate positions to cover the shortfall. The order of liquidation varies by broker — some sell the most liquid holdings first, others sell the positions with the largest losses to minimize damage, and some sell in the order you opened them.

Once liquidation occurs, you cannot reverse it. You own whatever remains in your account, and you owe any losses from the forced sale. If the liquidation does not raise enough cash to cover the margin debt, you owe your broker the difference — this is called a debit balance. Your broker can pursue collection, report the debt to credit agencies, or freeze your account until you pay.

Margin versus cash accounts

A cash account requires you to pay the full purchase price upfront — no borrowing, no margin calls, no interest charges. You can only buy what you have cash for. A margin account lets you borrow, but it comes with daily monitoring, interest costs, and the risk of forced liquidation.

Cash accounts are simpler and safer for beginners because you cannot lose more than you deposit. Margin accounts are for traders who understand leverage and actively manage their positions. Some brokers require a minimum account balance — often $2,000 to $25,000 — to open a margin account, and some restrict margin accounts for certain account types like IRAs.

Frequently Asked Questions

Can I lose more money than I deposited if I trade on margin?

Yes. If you deposit $5,000 and borrow $5,000 to buy $10,000 of stock, and the stock falls to $3,000, you have lost $7,000 — more than your original deposit. You still owe your broker the $5,000 you borrowed plus interest, so you end up with a negative account balance.

What is the difference between a margin call and a forced liquidation?

A margin call is a warning that your account has fallen below maintenance margin and you must deposit cash or sell securities within a set timeframe. Forced liquidation happens if you do not respond to the margin call — your broker sells your positions automatically to raise the required cash.

Do I pay interest on margin even if my position makes money?

Yes. Interest accrues daily on the borrowed amount regardless of whether your position is profitable. If you borrow $5,000 at 8% annually and the stock doubles, you still owe the interest. Your profit is reduced by the interest cost.

Can my broker change the margin requirement on a position I already own?

Yes. Brokers can raise margin requirements at any time, especially during volatile markets or for securities that become riskier. If your broker raises the requirement on a position you hold, you may receive a margin call even though your account value has not changed.

What happens to my margin debt if I file for bankruptcy?

Margin debt is treated like any other unsecured debt in bankruptcy. Your broker becomes a creditor and can file a claim. The specific outcome depends on your bankruptcy chapter and the total value of your estate, so you should consult a bankruptcy attorney if you face this situation.