A margin account lets you borrow money from your broker to buy stocks, using your existing investments as collateral

A margin account is a brokerage account that allows you to borrow cash from your broker to purchase securities. When you open a margin account, you deposit your own money — called the margin — and the broker lends you additional funds up to a set limit. You then use the total (your deposit plus the borrowed amount) to buy stocks, bonds, or other investments.

The key difference from a regular cash account is that you do not have to wait for settlement or have the full purchase price in hand. If you have $5,000 in a margin account with a 50% margin requirement, you can buy up to $10,000 worth of stock. The broker holds your securities as collateral against the loan and charges you interest on the borrowed amount.

Margin accounts are offered by most major brokers — Fidelity, Charles Schwab, E-Trade, Interactive Brokers, and others — but they are not automatic. You must request one, meet the broker's requirements (usually a minimum deposit of $2,000 to $25,000, depending on the firm), and sign a margin agreement that explains the terms and risks.

Key Takeaways

  • A margin account uses borrowed money from your broker to buy more securities than you could with cash alone, with your existing investments as collateral.
  • The broker sets a margin requirement — typically 50% for stocks — meaning you must deposit at least half the purchase price yourself.
  • 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 (usually 25% to 30%), your broker can force you to sell positions or deposit more cash to cover the shortfall.
  • Margin amplifies both gains and losses, so a 10% drop in stock price can wipe out 20% or more of your own money.

How the 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. For stocks, this is typically 50%, set by the Financial Industry Regulatory Authority (FINRA). This means if you want to buy $10,000 worth of stock, you must deposit at least $5,000 of your own cash.

After you buy the securities, your broker also enforces a maintenance margin — a lower threshold that your account equity must stay above. For stocks, this is usually 25% to 30%, though some brokers require 35% or higher. If your account value falls below this level because the stock price drops, your broker will issue a margin call. You then have a set number of days (often two to five business days) to either deposit more cash or sell enough securities to bring your account back into compliance.

Different securities have different margin requirements. Stocks typically allow 50% margin. Bonds and Treasury securities often allow higher margin (60% to 90%), meaning you can borrow more. Penny stocks, options, and cryptocurrencies often have stricter requirements or are not marginable at all. Your broker's website or account settings will show which holdings are marginable and what the requirement is for each.

Interest charges and borrowing costs

Borrowing money through a margin account is not free. Your broker charges margin interest — an annual rate applied to the amount you borrow. This rate varies by broker and changes based on market conditions and the amount you borrow. As of 2024, margin rates typically range from 7% to 12% annually, though some brokers offer lower rates for larger balances.

The interest accrues daily and is usually deducted from your account monthly or quarterly. If you borrow $5,000 at 10% annual interest, you would owe roughly $42 per month in interest charges. Over a year, that adds up. The longer you hold a margin position, the more interest you pay, which eats into your returns.

Some brokers offer tiered margin rates — lower rates if you borrow more or maintain a higher account balance. Others charge a flat rate regardless of balance. Before opening a margin account, check your broker's current margin rate and whether it changes based on market volatility or the Federal Reserve's interest rate decisions.

When a margin call happens and what it means

A margin call occurs when the value of your account falls below the maintenance margin threshold. This usually happens because the stocks you bought on margin have dropped in price. For example, if you bought $10,000 of stock with $5,000 of your own money and $5,000 borrowed, and the stock drops to $7,000, your equity is now only $2,000 — which is 28.6% of the position. If your broker's maintenance margin is 30%, you are below the requirement.

When a margin call is issued, your broker will notify you (by email, phone, or account alert) and give you a deadline — usually two to five business days — to fix the problem. You have three options: deposit more cash to bring your equity back above the maintenance level, sell securities to reduce the borrowed amount, or do a combination of both.

If you do not respond by the deadline, your broker has the right to liquidate positions — sell your securities without your permission — to raise enough cash to meet the requirement. This forced sale locks in your losses and may trigger tax consequences. The broker will typically sell the most liquid or lowest-performing holdings first, which may not be the positions you would have chosen to sell.

Leverage and amplified risk

Margin amplifies both gains and losses. This is the core trade-off. If you buy $10,000 of stock with $5,000 of your own money and the stock rises 20%, your position is now worth $12,000. Your $5,000 investment has grown to $7,000 — a 40% gain on your own capital. Without margin, the same 20% rise would have given you only a 20% gain.

But the reverse is also true. If the stock drops 20%, your position is worth $8,000. Your $5,000 investment is now worth $3,000 — a 40% loss. A 10% drop in the stock price wipes out 20% of your own money. A 25% drop could trigger a margin call. A 50% drop could wipe out your entire deposit and leave you owing the broker money.

This is why margin is considered high-risk. You are betting not only on the direction of the stock but also on the speed of the move. A stock can be fundamentally sound and still drop 15% in a week due to market panic, earnings miss, or sector rotation. If you are on margin, that 15% drop forces you to act immediately or face forced liquidation.

Who should and should not use margin

Margin is a tool for experienced traders who understand leverage and can tolerate rapid losses. It works best for traders who are actively managing positions, have cash reserves to meet margin calls, and are buying liquid stocks with low volatility. Day traders and swing traders often use margin because they hold positions for hours or days and can exit quickly if needed.

Margin is generally not appropriate for buy-and-hold investors, people with limited cash reserves, or anyone uncomfortable with the idea of forced liquidation. If you are saving for retirement and plan to hold stocks for 20 years, margin adds unnecessary cost and risk. If a margin call would force you to sell at a loss because you do not have cash to deposit, you should not open a margin account.

Beginners should also avoid margin until they have at least one to two years of trading experience and a clear understanding of how leverage works. Many brokers require you to pass a margin knowledge test or have a minimum account balance before opening a margin account, specifically to screen out inexperienced traders.

Frequently Asked Questions

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

Yes, in theory. If a stock you bought on margin drops sharply and you do not meet a margin call, your broker can liquidate your entire position and you could still owe money. In practice, brokers force liquidation before this happens. However, in extreme market conditions — such as a stock gap down at market open — your account can briefly go negative.

What is the difference between initial margin and maintenance margin?

Initial margin is what you must deposit to open a position (typically 50% for stocks). Maintenance margin is the minimum equity you must keep in the account after the purchase (typically 25% to 30%). Maintenance margin is lower because it is meant to protect the broker, not prevent you from trading.

Do I have to pay taxes on margin interest?

Yes. Margin interest is a deductible investment expense if you itemize deductions on your tax return. However, you can only deduct investment interest up to the amount of investment income you earned that year. Keep records of all margin interest charges from your broker's statements.

Can I use margin to buy any stock?

No. Penny stocks, most OTC stocks, and highly volatile stocks often have no margin or very high margin requirements (75% or higher). Your broker maintains a list of marginable securities. Call or check your broker's website to confirm whether a specific stock can be purchased on margin.

What happens if the stock market crashes while I am on margin?

If the market drops sharply, many margin accounts will receive calls simultaneously. Brokers may temporarily restrict margin or raise margin requirements during volatile periods. If you cannot meet the call, your positions will be liquidated. This is why margin is risky during market downturns — you are forced to sell at the worst time.