Buying stocks on margin means borrowing money from your brokerage to purchase more shares than you could afford with just your own cash. You put up a portion of the total cost, your broker lends you the rest, and you pay interest on the loan until you pay it back. It’s essentially investing with leverage, which amplifies both your gains and your losses.
How a Margin Trade Works
When you buy stock in a regular cash account, you pay the full price out of pocket. With a margin account, your broker covers part of the purchase. Under Federal Reserve Regulation T, you can borrow up to 50% of a stock’s purchase price. So if you want to buy $10,000 worth of stock, you need at least $5,000 of your own money. Your broker lends you the other $5,000.
The shares you buy, along with any other securities in your margin account, serve as collateral for the loan. This is similar to how a house secures a mortgage. If the value of your collateral drops too far, your broker will demand more money or start selling your holdings to protect itself.
To open a margin account, you typically need to apply separately from a standard brokerage account. Most brokers require a minimum deposit (often $2,000, though this varies), and you’ll sign a margin agreement that spells out the interest rate, the broker’s rights, and the conditions under which the broker can liquidate your positions.
Why Margin Amplifies Gains and Losses
The appeal of margin is straightforward: you control more stock with less of your own money. The SEC illustrates this with a simple example. Say you buy a stock at $50 per share. If it rises to $75, you’ve made $25 per share. In a cash account where you paid the full $50, that’s a 50% return. But if you bought on margin, putting up only $25 and borrowing the other $25, that same $25 gain is a 100% return on the cash you actually invested.
Now flip the scenario. If that $50 stock drops to $15, a cash investor loses 70% of their money. A margin investor loses far more than 100%. Your entire $25 investment is wiped out, and you still owe your broker the remaining $10 per share plus interest on the loan. You’ve lost more money than you started with.
This is the core risk of margin trading. Losses aren’t capped at what you invested. You can end up owing your broker money even after every share has been sold.
Interest Costs on Margin Loans
The money your broker lends you isn’t free. You pay interest on the borrowed amount for as long as the loan is outstanding. Rates vary by broker and by how much you borrow. As a reference point, one major brokerage charges annual rates ranging from about 5.14% on a $25,000 balance down to around 4.48% on balances of $3.5 million or more. Other brokers may charge significantly higher rates, sometimes 8% to 13% depending on the balance and the firm.
Interest accrues daily and is typically charged to your account monthly. If you hold a margin position for weeks or months, the interest eats into your returns. A stock that gains 10% over six months looks less impressive after you subtract 3% to 6% in borrowing costs. For short-term trades, the interest is minimal. For long-term holdings, it can meaningfully reduce your profits or deepen your losses.
Maintenance Requirements and Margin Calls
After you buy stock on margin, your account must maintain a minimum level of equity at all times. FINRA sets this floor at 25% of the total market value of your securities, but many brokers require 30% to 40%. Your equity is the current value of your holdings minus what you owe the broker.
Here’s a practical example. Suppose you buy $20,000 worth of stock using $10,000 of your own cash and $10,000 borrowed. If the stock drops to $14,000, your equity falls to $4,000 ($14,000 minus the $10,000 loan). That’s about 28.6% of the account value. If your broker requires 30% maintenance, you’re below the threshold.
When your equity dips below the maintenance requirement, the broker issues a margin call. This is a demand to deposit additional cash or securities into your account to bring it back above the minimum. You usually have a short window to respond, sometimes just a day or two. If you don’t act fast enough, the broker can sell securities in your account without your permission to cover the shortfall. You don’t get to choose which stocks are sold, and you’re responsible for any remaining balance if the sales don’t fully cover the debt.
Margin calls tend to come at the worst possible time, during market drops, when you’re least likely to want to sell. This forced selling can lock in losses that you might have recovered from if you’d been investing with cash alone.
What You Can and Can’t Buy on Margin
Not every security is eligible for margin trading. The Federal Reserve Board prohibits buying penny stocks (generally those trading under $5 per share) and over-the-counter bulletin board stocks on margin. Recent IPOs are also restricted, though they typically become marginable one business day after they begin trading on a secondary exchange.
Individual brokers can set their own additional restrictions. Many require a minimum share price of $3 or higher for a stock to be marginable. Highly volatile stocks, thinly traded securities, and certain mutual funds (particularly those held for fewer than 30 days) may also be excluded. If you try to buy a non-marginable security in a margin account, you’ll need to pay the full amount in cash.
When Margin Makes Sense
Margin is a tool, not a strategy in itself. Experienced investors sometimes use it for short-term opportunities when they’re confident in a trade and want to increase their position size. Others use it as a temporary bridge, buying shares before a cash transfer settles rather than missing a price they like.
Some investors maintain a small margin balance as a flexible line of credit, borrowing against their portfolio for non-investment expenses to avoid selling holdings and triggering taxes. In all of these cases, the key is keeping the borrowed amount small relative to the total account value so that normal market fluctuations don’t trigger a margin call.
Where margin gets dangerous is when investors borrow heavily to chase returns on speculative stocks. A 50% decline in a concentrated, fully margined position doesn’t just cut your portfolio in half. It can wipe you out entirely and leave you in debt to your broker. The amplification that makes margin attractive on the way up works identically on the way down.