Margin is borrowed money your broker lends you to buy more stock than you could afford with cash alone
When you trade on margin, you are using your own money plus a loan from your brokerage firm to purchase securities. The broker holds the securities as collateral for the loan. You pay interest on the borrowed amount, similar to a car loan or mortgage. The appeal is leverage — a smaller amount of your own cash can control a larger position in the market.
For example, if your broker offers 2:1 margin, you can buy $2,000 worth of stock by putting down $1,000 of your own money and borrowing $1,000 from the broker. If that stock rises to $2,200, your $1,000 investment is now worth $1,200 — a 20% gain on your money. But if the stock falls to $1,800, your $1,000 is now worth only $800 — a 20% loss. The borrowed money amplifies both gains and losses.
Key Takeaways
- Margin is a loan from your broker that lets you buy securities with borrowed money, using your cash as a down payment.
- Your broker charges interest on the borrowed amount and holds your securities as collateral, meaning they can force a sale if your account value drops too far.
- A margin call happens when your account equity falls below the maintenance requirement, and you must deposit cash or sell positions immediately or the broker will sell for you.
- Margin amplifies both profits and losses, so a small price move against you can wipe out your entire initial investment or leave you owing money to the broker.
- Different brokers set different margin requirements, and the Federal Reserve sets minimum standards that brokers must follow.
How margin requirements work
Your broker sets rules about how much you can borrow. The initial margin requirement is the minimum percentage of the purchase price you must pay with your own money. For stocks, this is often 50% — meaning you can borrow up to half the cost. For other securities like options or futures, the requirement is usually higher.
The maintenance margin requirement is the minimum percentage of your account value that must remain as equity at all times. If your account falls below this level, your broker issues a margin call. For stocks, maintenance margin is typically 25%, though some brokers require 30% or more. This is the threshold that triggers forced selling.
These minimums are set by the Federal Reserve and the Financial Industry Regulatory Authority (FINRA), but individual brokers can impose stricter rules. Before you open a margin account, your broker will show you their specific requirements in writing.
What happens during a margin call
A margin call occurs when the value of your securities drops enough that your account equity falls below the maintenance requirement. At that point, your broker demands that you deposit cash or sell positions to bring your account back into compliance — usually within a few business days.
If you do not respond, your broker has the legal right to liquidate your positions without your permission. They will sell whatever they need to sell, in whatever order they choose, to meet the requirement. You have no say in which securities are sold or at what price. This forced selling often happens at the worst time — when prices are falling and you are most underwater.
After a forced liquidation, you may still owe money to the broker if the sale proceeds do not cover your debt. You are liable for the full amount borrowed, plus interest and any fees the broker charges for the forced sale.
The cost of borrowing on margin
Your broker charges interest on the borrowed funds, called the margin interest rate or debit balance interest. This rate varies by broker and changes based on market conditions and the amount you borrow. Rates typically range from 5% to 12% annually, though they can be higher during periods of market stress or if you borrow a small amount.
The interest accrues daily and is usually charged monthly to your account. If you hold a margin position for a year, you are paying that interest for the entire year, which cuts into any gains you make. A stock that rises 8% in a year may net you only 2% after paying 6% in margin interest.
Some brokers offer lower rates for larger balances or offer promotional rates for new margin accounts. It is worth comparing rates across brokers if you plan to use margin regularly, because the difference can add up quickly over time.
Why margin amplifies losses more than gains
Leverage works both directions. A 10% rise in a stock you bought on 2:1 margin gives you a 20% return on your money. But a 10% fall costs you 20% of your investment. The problem is that losses can exceed 100% of what you put in.
If you buy $2,000 of stock with $1,000 of your own money and $1,000 borrowed, and the stock falls 60%, it is now worth $800. You still owe the broker $1,000 plus interest. Your $1,000 investment is gone, and you owe the broker $200 more. In a severe market move, you can lose more than you invested.
This is why margin is riskier than buying with cash. With cash, the worst outcome is losing what you put in. With margin, you can lose your investment and still owe money.
When brokers restrict or close margin accounts
Brokers monitor margin accounts closely and can restrict or close them if they see patterns they consider risky. Frequent margin calls, rapid trading, or large losses can trigger a review. Some brokers will freeze your account temporarily, preventing new trades until you deposit cash or reduce your positions.
If your account is closed for margin violations, you may be flagged in the industry database and have difficulty opening a margin account elsewhere. Some brokers will not accept customers who have been closed by competitors for margin abuse.
During market crashes or periods of extreme volatility, brokers sometimes raise margin requirements across the board or restrict margin trading in certain securities altogether. This happened during the 2008 financial crisis and again during the COVID-19 market shock in March 2020. When this happens, you may face a sudden margin call even though you did nothing different.
Margin versus cash accounts
A cash account requires you to pay the full price of any security with your own money. You cannot borrow. Settlement takes two business days, meaning you cannot use the proceeds from a sale to buy something else until the sale is complete. Cash accounts are slower and more restrictive, but you cannot lose more than you invested and you pay no interest.
A margin account lets you borrow and trade immediately, but you pay interest and face the risk of margin calls and forced liquidation. The trade-off is speed and leverage for safety and simplicity. Most active traders use margin accounts; most long-term buy-and-hold investors use cash accounts.
Switching from margin to cash requires closing all margin positions and paying off any debt to the broker. Some brokers allow you to convert, but others require you to close the account and open a new one.
Frequently Asked Questions
Can I lose more money than I invested if I trade on margin?
Yes. If your securities fall far enough, you can lose your entire investment and still owe the broker money. For example, if you invest $1,000 and borrow $1,000, and the stock falls 80%, you have lost your $1,000 and owe the broker $200 plus interest. You are personally liable for the full debt.
What is the difference between initial margin and maintenance margin?
Initial margin is what you must put down to open a position — typically 50% for stocks. Maintenance margin is the minimum you must keep in your account at all times — typically 25%. If your account falls below maintenance, you get a margin call. Initial margin is higher because it gives you a buffer before hitting maintenance.
How long can I hold a margin position?
You can hold a margin position indefinitely, as long as your account stays above the maintenance requirement. You pay interest every month for as long as you borrow. There is no time limit, but the longer you hold it, the more interest you pay.
Do I have to use margin if I open a margin account?
No. You can open a margin account and choose to trade with cash only. You will have access to margin if you need it, but you are not required to use it. However, some brokers charge a monthly fee for maintaining a margin account if you do not use it.
What happens if I cannot pay a margin call?
Your broker will liquidate your positions without your permission to cover the debt. They sell whatever they need to sell, in whatever order they choose, usually at unfavorable prices. If the sale does not cover what you owe, you remain liable for the remaining debt plus interest and fees.