Margin trading means borrowing money from your broker to buy more stock than you could pay for in cash

When you trade on margin, your broker lends you money so you can purchase securities — usually stocks or bonds — without having the full amount in your account. You put down a percentage of the purchase price yourself (called the margin requirement), and the broker covers the rest. You pay interest on the borrowed amount, similar to a loan.

The appeal is straightforward: if you have $5,000 in your account and want to buy $10,000 worth of stock, margin lets you do it. If that stock rises to $12,000, you keep the $2,000 gain on your $5,000 investment — a 40% return. But if the stock falls to $8,000, your $5,000 is now worth only $3,000, a 40% loss. Margin amplifies both wins and losses.

Not all brokers offer margin accounts, and not all securities can be bought on margin. Your broker sets the terms: how much you can borrow, what interest rate you pay, and what happens if your account value drops below a certain threshold.

Key Takeaways

  • Margin is a loan from your broker that lets you buy more securities than your cash balance allows, and you pay interest on the borrowed amount.
  • Your broker requires you to keep a minimum account value (the maintenance margin requirement), and if your account falls below it, the broker can force you to sell positions to raise cash.
  • Losses are magnified just as much as gains — a 50% drop in a stock you bought on margin can wipe out your entire investment and leave you owing the broker money.
  • Margin accounts require a signed agreement with your broker that spells out interest rates, borrowing limits, and what triggers a margin call.

How the margin requirement works

The initial margin requirement is the percentage of a purchase price you must pay yourself. For most stocks, this is 50% under current U.S. regulations — meaning if you want to buy $10,000 of stock, you must have at least $5,000 in your account. Your broker lends you the other $5,000.

The maintenance margin requirement is different and more important to understand. It is the minimum percentage of your total position value that must remain as your own money at all times. For stocks, this is typically 25%, though some brokers set it higher. If your account value drops below this level, your broker issues a margin call — a demand that you deposit more cash or sell securities to bring your account back into compliance.

Example: You buy $10,000 of stock with $5,000 of your own money and $5,000 borrowed. The maintenance margin is 25%, so you must keep at least $2,500 of your own money in the account at all times. If the stock drops to $8,000, your equity is now $3,000 ($8,000 minus the $5,000 you still owe). That is 37.5% of the position — still above 25%, so no margin call yet. But if the stock falls to $6,667, your equity drops to $1,667, which is exactly 25% of the position. Any further decline triggers a margin call.

What happens when you receive a margin call

A margin call means your broker is demanding that you restore your account to the maintenance margin level. You have two options: deposit cash, or sell securities. Most brokers give you a few business days, though some can demand payment immediately.

If you do not respond, your broker has the right to sell your positions without your permission — usually starting with the most liquid (easiest to sell) securities. You are responsible for any losses that result from forced sales, and you still owe the interest on any borrowed money. Some brokers also charge a fee for issuing the margin call itself.

Margin calls often happen during market downturns, when many investors face them at the same time. This can force you to sell at the worst possible moment — when prices are lowest — simply to meet the broker's requirement.

Interest and fees on borrowed money

Your broker charges interest on the money you borrow, calculated daily and usually deducted from your account monthly. The rate varies by broker and by how much you borrow. Brokers typically charge a lower rate for larger balances and a higher rate for smaller ones. Rates also change based on the overall interest rate environment.

You can find the margin interest rate in your broker's fee schedule or account agreement. Some brokers publish their rates online; others require you to call or log in to see your specific rate. The interest is not tax-deductible for most investors, though there are narrow exceptions if you borrowed to buy investments that generate taxable income.

Beyond interest, some brokers charge fees for maintaining a margin account, for issuing margin calls, or for forced liquidations. Read your account agreement carefully — these costs add up and reduce any gains you make.

The risks of margin trading

The most obvious risk is that losses are magnified. A 50% drop in a stock you bought with 50% margin wipes out 100% of your money. But there is a less obvious risk: you can lose more than you invested. If you buy $10,000 of stock with $5,000 of your own money and $5,000 borrowed, and the stock becomes worthless, you still owe the $5,000 to your broker. You are liable for the full debt.

Margin also forces you to make decisions under pressure. A margin call can force you to sell positions you intended to hold long-term, locking in losses and disrupting your strategy. During volatile markets, margin calls can cascade — you sell to meet one call, which triggers another, which forces more sales.

There is also the risk of misunderstanding your broker's terms. Different brokers have different maintenance margin requirements, different interest rates, and different rules about which securities can be bought on margin. A security that can be margined at one broker might not be at another. Always confirm the specific terms before you borrow.

Who should and should not use margin

Margin is a tool for experienced investors who understand leverage, can tolerate large swings in account value, and have a clear reason to borrow. It is not for investors who are learning, who trade infrequently, or who cannot afford to lose more than their initial investment.

Margin makes sense in specific situations: a short-term trader who expects a stock to rise sharply and wants to amplify the gain; an investor who needs cash temporarily and does not want to sell long-term holdings; or someone who wants to short-sell (bet that a stock will fall), which requires a margin account. For most buy-and-hold investors, margin adds cost and risk without a clear benefit.

If you are unsure whether margin is right for you, the safest answer is not to use it. A cash account — where you can only buy what you can afford — eliminates the risk of a margin call and the cost of interest.

How to open and manage a margin account

To open a margin account, you must sign an agreement with your broker that discloses the terms: interest rates, maintenance margin requirements, what happens in a margin call, and your liability if the account goes negative. The broker will ask about your investment experience and income to assess whether margin is appropriate for you.

Once the account is open, monitor your margin balance regularly — most brokers show it on your account dashboard. Know your maintenance margin requirement and calculate how far your positions can fall before triggering a call. Set a personal threshold (for example, 35% instead of the broker's 25%) and do not let your account approach it.

Keep cash on hand for margin calls. If you believe a position might fall sharply, deposit extra cash beforehand rather than waiting for a forced liquidation. And review your broker's fee schedule annually — rates and policies change, and you may find a better deal elsewhere.

Frequently Asked Questions

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

Yes. If you buy $10,000 of stock with $5,000 of your own money and the stock becomes worthless, you still owe your broker the $5,000 you borrowed. In extreme cases — for example, if you short-sell and the stock price rises sharply — losses can exceed your initial investment by a large amount.

What is the difference between initial margin and maintenance margin?

Initial margin is what you must put down to make the purchase — typically 50% of the stock price. Maintenance margin is the minimum percentage of your account value that must remain as your own money at all times — typically 25%. If your account falls below maintenance margin, you receive a margin call.

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

This depends on your broker's policy. Most brokers give you a few business days, but some can demand payment immediately or even liquidate positions without waiting. Check your account agreement or contact your broker to confirm their specific timeline.

Can I use margin to buy any stock?

No. Brokers set rules about which securities can be bought on margin. Stocks are usually marginable, but penny stocks, newly issued stocks, and some other securities are not. Your broker will tell you whether a specific security can be margined before you buy it.

Is margin interest tax-deductible?

For most investors, no. Margin interest is not deductible unless you borrowed specifically to buy investments that generate taxable income, which is rare and subject to strict rules. Consult a tax professional about your specific situation.