Margin is borrowed money your broker lends you to buy stocks or other investments

When you trade on margin, you are using your own cash plus money borrowed from your broker to make a purchase. Instead of saving up $10,000 to buy $10,000 worth of stock, you might put down $5,000 of your own money and borrow $5,000 from your broker. You own the full position, but you owe the borrowed amount back with interest.

The broker holds the securities you buy as collateral for the loan. If your investment gains value, you keep the profit on the full amount — but you also owe interest on what you borrowed. If the investment loses value, your losses are also on the full amount, which can wipe out your initial cash faster than if you had bought with cash alone.

Margin accounts are not the same as regular cash accounts. A cash account requires you to own the money before you buy. A margin account is a formal agreement with your broker that lets you borrow against the value of securities you already own.

Key Takeaways

  • Margin lets you borrow money from your broker to buy more securities than your cash alone would allow, but you pay interest on the borrowed amount.
  • Your broker sets a minimum amount you must keep in your account (the maintenance margin requirement), and if your account value drops below it, you face a margin call.
  • A margin call means you must deposit more cash or sell securities immediately, or your broker will sell your positions without your permission.
  • Margin amplifies both gains and losses — a 10% rise in a stock you bought on margin can double your profit, but a 10% fall can wipe out your entire initial investment.
  • Margin interest rates vary by broker and by how much you borrow, and the cost compounds daily or monthly depending on your agreement.

How the borrowed money and collateral work

When you open a margin account, you sign an agreement that gives your broker the right to hold your securities as collateral. This means the broker can sell your stocks without asking you if you fail to meet the account requirements. The broker is protecting itself against the risk that you cannot repay the loan.

The amount you can borrow depends on the value of securities already in your account. If you have $5,000 in stocks, your broker might let you borrow up to $5,000 more (a 50% margin requirement). Some brokers allow higher ratios for experienced traders, but the Federal Reserve sets a floor: you cannot borrow more than 50% of the purchase price of a stock you are buying.

Interest on the borrowed money is not fixed. Your broker charges a margin interest rate that changes based on how much you borrow and current market conditions. Rates typically range from 6% to 12% annually, but this varies widely by broker and by account size. The interest accrues daily and is usually deducted from your account monthly or when you close the position.

What a margin call is and when it happens

A margin call is a demand from your broker that you deposit more cash or sell securities because your account value has fallen below the maintenance margin requirement. The maintenance margin is the minimum percentage of your account that must be equity (your money, not borrowed money). Most brokers set this at 25%, though some require more.

Here is a concrete example: You deposit $10,000 and borrow $10,000 to buy $20,000 worth of stock. Your equity is $10,000 (50% of the account). If the stock drops to $16,000, your equity is now $6,000 ($16,000 minus the $10,000 you still owe). That is 37.5% of the account value, which is above the 25% minimum, so no call yet. But if the stock drops to $13,000, your equity is $3,000, which is only 23% of the account — below the 25% threshold. Your broker issues a margin call.

When a margin call happens, you have a short window — usually one to five business days, depending on your broker — to either deposit cash or sell enough securities to bring your equity back above the maintenance level. If you do not act, your broker will sell your positions automatically to raise the cash. You do not get to choose which securities are sold.

The math behind margin gains and losses

Margin magnifies returns in both directions. If you buy $20,000 worth of stock with $10,000 of your own money and $10,000 borrowed, and the stock rises 10%, it is now worth $22,000. You owe back $10,000, so your equity is $12,000 — a 20% gain on your $10,000 initial investment. The same 10% move with cash alone would have been a 10% gain.

The reverse is equally true. If that $20,000 stock drops 10% to $18,000, your equity is $8,000 after repaying the $10,000 loan. You have lost 20% of your initial $10,000 investment on a 10% market move. A 50% drop in the stock wipes out your entire $10,000 and leaves you owing your broker money.

This amplification is why margin is riskier than buying with cash. You can lose more than you invested. You also owe interest on the borrowed amount the entire time you hold the position, which eats into your gains if the stock moves sideways or rises slowly.

Margin interest rates and how they are calculated

Brokers do not charge a flat rate for margin loans. The rate depends on how much you borrow and the broker's current lending rates. Some brokers use a tiered system: borrowing $5,000 might cost 8%, while borrowing $50,000 might cost 6%. Others charge a base rate plus a spread based on your account size or trading activity.

Interest is calculated daily on the amount you owe. If you borrow $10,000 at 8% annual interest, you owe about $0.22 per day (8% divided by 365 days). This compounds — the interest is added to your balance, and you pay interest on the interest. Over a year, $10,000 borrowed at 8% costs about $830 in interest, not $800, because of compounding.

You can reduce interest costs by repaying the loan early or by closing the position. Some brokers offer lower rates if you maintain a large account balance or if you trade frequently. It is worth comparing margin rates across brokers if you plan to borrow regularly.

Why traders use margin and the risks involved

Traders use margin to control larger positions with less capital, hoping to earn bigger returns. A day trader might use margin to buy and sell stocks multiple times in a day, closing positions before the end of the trading session to avoid holding overnight. A swing trader might hold a position for days or weeks, using margin to increase exposure to a trade they believe will move in their favor.

The risks are real and often underestimated. Beyond the margin call, there is the cost of interest, which can turn a small loss into a larger one if you hold the position long. There is also the psychological pressure of watching a leveraged position move against you — losses feel sharper when your money is amplified. Many new traders use margin, lose money quickly, and then stop. Some lose more than they invested.

Margin is also restricted during market stress. During the 2020 market crash, some brokers raised margin requirements or restricted margin trading entirely to manage risk. If you are relying on margin to hold a position, you could be forced to sell at the worst time.

Frequently Asked Questions

Can I lose more money than I put in with margin?

Yes. If you borrow $10,000 and the investment drops 100%, you have lost your $10,000 and still owe the $10,000 you borrowed plus interest. In theory, you could owe more than you invested. In practice, your broker will issue a margin call and sell your position before losses get that extreme, but you can still lose significantly more than your initial cash.

What happens if I cannot meet a margin call?

Your broker will sell your securities without your permission to raise the cash needed to bring your account back into compliance. The broker chooses which positions to sell, not you. You may end up selling winners and keeping losers, which is the opposite of what you would choose. You also pay any transaction costs from the forced sale.

Is margin the same as a loan from a bank?

No. A bank loan is a separate transaction with its own terms and repayment schedule. Margin is a line of credit built into your brokerage account. You can borrow and repay continuously without reapplying. Interest rates are usually higher for margin than for bank loans, but the process is faster and more flexible.

Do I have to use margin if I have a margin account?

No. You can have a margin account and use only your own cash. You are not required to borrow. However, some brokers charge a small monthly fee for margin accounts that are not used, so it may be worth asking if you can downgrade to a cash account if you do not plan to borrow.

How long can I hold a margin position?

There is no time limit. You can hold a margin position for days, months, or years as long as you maintain the maintenance margin requirement and pay the interest. However, the longer you hold it, the more interest you pay, which reduces your overall return.