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

When you buy stock on margin, you put down a portion of the purchase price yourself—called the margin—and your broker lends you the rest. If you have $5,000 in your account and your broker allows a 50% margin, you can buy $10,000 worth of stock by borrowing $5,000. You own the full position, but you owe the borrowed amount back with interest.

The appeal is straightforward: you control a larger investment with less of your own money. If the stock rises, your profit is larger because it's calculated on the full $10,000 position, not just your $5,000. But the reverse is also true. If the stock falls, your loss is larger, and you still owe the full borrowed amount plus interest to your broker.

Key Takeaways

  • Margin is the cash you deposit; the broker lends you the rest to buy stock, and you pay interest on the borrowed amount.
  • A margin call happens when your account value drops below the broker's minimum requirement, and you must deposit more cash or sell positions immediately.
  • Different brokers set different margin requirements, typically between 25% and 50% of the purchase price, and these can change without notice.
  • Margin amplifies both gains and losses, so a 10% stock price drop can wipe out 50% or more of your own money if you bought on margin.

How margin requirements and maintenance levels work

Your broker sets an initial margin requirement—the minimum percentage of a purchase price you must pay yourself. This is usually 50%, meaning you can borrow up to 50% of what you're buying. Some brokers allow lower percentages for experienced traders, but federal rules set a floor at 50% for most stocks.

After you buy, your broker also sets a maintenance margin—the minimum percentage of your account value that must remain as your own cash. This is typically 25% to 30%. If your account value drops below this level because the stock price fell, your broker issues a margin call. You then have a set number of days (often three to five business days) to deposit cash or sell positions to bring your account back above the maintenance level. If you don't, your broker can sell your positions without asking you.

These percentages vary by broker and by the specific stock. Stocks that are more volatile or less liquid often have higher requirements. Your broker can also raise requirements at any time, which can trigger a margin call even if your stock hasn't moved.

Interest costs and how they reduce your profit

Borrowing from your broker is not free. You pay interest on the amount you borrow, usually calculated daily and charged monthly to your account. The interest rate varies by broker and by how much you borrow—borrowing more often means paying a higher rate. Rates typically range from 6% to 12% per year, though they can be higher during periods of market stress.

This interest cost eats into your profit. If you buy $10,000 of stock with $5,000 of your own money and $5,000 borrowed, and the stock rises 10% to $11,000, your profit is $1,000. But if you owe $400 in annual interest (8% on $5,000), your net profit is $600. The higher the interest rate and the longer you hold the position, the more this cost matters.

What happens during a margin call

A margin call is a demand from your broker to restore your account to the maintenance margin level. It happens when the value of your positions falls enough that your equity (your cash plus the current value of your stock minus what you owe) drops below the maintenance threshold.

You have limited time to respond—typically three to five business days, though some brokers allow less. Your options are to deposit cash, sell positions to raise cash, or transfer securities from another account. If you don't act, your broker will sell your positions automatically, usually starting with the most liquid (easiest to sell) holdings. You have no say in which positions are sold, and you pay any transaction costs. If the market is moving fast, your broker may sell at a worse price than you would have chosen.

A margin call can force you to lock in losses at the worst possible time. If you're holding a stock that has fallen 30% and you receive a margin call, you may be forced to sell that stock at the depressed price rather than waiting for a recovery.

The risk of losing more than your initial investment

This is the critical difference between margin trading and regular stock trading. When you buy stock with your own cash, the most you can lose is what you invested. When you buy on margin, you can lose more than your initial investment because you owe the borrowed amount regardless of what happens to the stock price.

Example: You deposit $5,000 and borrow $5,000 to buy $10,000 of stock at $100 per share (100 shares). The stock falls to $40 per share. Your 100 shares are now worth $4,000, but you still owe $5,000 to your broker. Your account equity is negative $1,000—you've lost not just your $5,000 but an additional $1,000 of money you don't have. You must deposit $1,000 to settle the debt, or your broker will sell the remaining shares and pursue you for the shortfall.

In extreme cases, if a stock gaps down sharply (falls suddenly between trading sessions), your account can go deeply negative before your broker can sell your positions. You would then owe your broker the full amount of that shortfall.

Comparing margin to other ways to amplify returns

Margin is one tool for controlling a larger position with less cash. Options contracts (calls and puts) are another—they give you the right to buy or sell a stock at a set price, and they require a smaller upfront payment than buying the stock outright. However, options expire and can become worthless, whereas margin is simply a loan that you must repay.

Futures contracts work similarly to options but are standardized and trade on exchanges. They also amplify gains and losses and require margin deposits, but the mechanics and risks differ from stock margin.

The key difference is that with margin, you own the stock and can hold it indefinitely (as long as you pay interest and maintain the margin level). With options and futures, time decay and expiration dates work against you. Margin is simpler but also more straightforward in its risks: you borrow money, you pay interest, and if the stock falls far enough, you face a margin call.

Frequently Asked Questions

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

Yes. If your stock falls far enough, your account equity can go negative, meaning you owe your broker money beyond your initial deposit. In a sharp market move, this can happen before your broker can sell your positions. You are responsible for the full shortfall.

What's the difference between initial margin and maintenance margin?

Initial margin is what you must put down to open a position (usually 50%). Maintenance margin is the minimum you must keep in your account after the purchase (usually 25% to 30%). If your account falls below maintenance, you get a margin call.

How long do I have to respond to a margin call?

Most brokers give three to five business days. Some may allow less. If you don't deposit cash or sell positions by the deadline, your broker will sell your holdings automatically, often at unfavorable prices, to raise the required funds.

Does the interest I pay on margin count as a tax deduction?

Margin interest may be deductible as an investment expense if you itemize deductions on your tax return, but rules vary by situation and change by year. Consult a tax professional about your specific circumstances.

What stocks can I buy on margin?

Most stocks listed on major exchanges can be bought on margin, but your broker sets which ones and at what margin percentage. Penny stocks, newly issued stocks, and highly volatile stocks often have higher margin requirements or cannot be margined at all.