Margin: How Borrowing from Your Broker Works
How Margin Works
When you open a margin account, your broker extends you a line of credit using the securities in your account as collateral. If you want to buy $20,000 worth of stock but only have $10,000 in cash, your broker lends you the other $10,000. You now own $20,000 in stock, owe $10,000 to the broker, and your equity is $10,000.
The key concept: your equity in a margin account equals the total market value of your holdings minus the amount you’ve borrowed. As prices move, your equity changes — and that’s where the risk lives.
Types of Margin Requirements
| Requirement | Who Sets It | Typical Level | What It Means |
|---|---|---|---|
| Minimum Margin | FINRA | $2,000 or 100% of purchase price (whichever is less) | The minimum deposit required to open a margin account. |
| Initial Margin (Reg T) | Federal Reserve | 50% | The percentage of a new purchase you must fund with your own equity. For a $10,000 buy, you need at least $5,000. |
| Maintenance Margin | FINRA / Broker | 25% (FINRA minimum); 30–40% at most brokers | The minimum equity percentage you must maintain at all times. Drop below this and you get a margin call. |
Margin Account Example
You deposit $10,000 cash and buy $20,000 worth of stock (borrowing $10,000 from the broker at, say, 8% annual interest). Here’s how your equity changes:
| Scenario | Stock Value | Loan Balance | Your Equity | Equity % | Return on Equity |
|---|---|---|---|---|---|
| Start | $20,000 | $10,000 | $10,000 | 50% | — |
| Stock rises 25% | $25,000 | $10,000 | $15,000 | 60% | +50% |
| Stock falls 25% | $15,000 | $10,000 | $5,000 | 33% | −50% |
| Stock falls 40% | $12,000 | $10,000 | $2,000 | 17% | −80% |
Notice the amplification: a 25% move in the stock produces a 50% move in your equity. That’s leverage working both ways. And at a 40% decline, your equity percentage (17%) is well below the 25% maintenance minimum — triggering a margin call.
The Cost of Margin
Margin isn’t free. Brokers charge interest on the borrowed amount, typically benchmarked to a base rate (like the federal funds rate) plus a spread. Rates vary significantly by broker and account size:
| Debit Balance | Typical Rate Range |
|---|---|
| Under $25,000 | 10–13% |
| $25,000 – $100,000 | 8–11% |
| $100,000 – $1M | 6–9% |
| Over $1M | 5–7% |
Margin interest accrues daily and is typically charged monthly. It’s a drag on returns that compounds over time — a critical factor that many new margin users underestimate.
Margin for Short Selling
Margin requirements also apply to short selling. When you short a stock, the proceeds from the sale stay in your account as collateral, but you must also deposit additional margin. The initial margin for short positions is typically 50% of the short sale value, and maintenance margin is usually 30% (higher than the 25% for long positions, reflecting the additional risk).
What Can You Buy on Margin?
Not all securities are marginable. Generally:
| Security Type | Marginable? | Notes |
|---|---|---|
| Most NYSE/Nasdaq stocks | Yes | Must be priced above $5/share at most brokers |
| ETFs | Yes | Leveraged ETFs may have higher margin requirements |
| Bonds | Most are | Treasuries have lower margin requirements than corporates |
| Penny stocks (under $5) | No | Too volatile for margin lending |
| IPO shares (first 30 days) | No | Not marginable until price stabilizes |
| Mutual funds | After 30 days | Must be held for 30 days before they can serve as collateral |
Margin Account vs. Cash Account
| Feature | Cash Account | Margin Account |
|---|---|---|
| Borrowing | Not allowed | Borrow up to 50% of purchase price |
| Short selling | Not allowed | Allowed |
| Max loss | Limited to amount invested | Can exceed amount invested |
| Interest charges | None | Charged on borrowed amount |
| Settlement | Must wait for trades to settle (T+1) | Can trade immediately with borrowed funds |
| PDT rule | Does not apply | Under $25,000 equity: limited to 3 day trades per 5 business days |
Key Takeaways
- Margin is money borrowed from your broker, using your securities as collateral — it’s a form of leverage.
- Regulation T sets the initial margin at 50%. FINRA requires maintenance margin of at least 25%, though most brokers set it higher.
- Margin amplifies both gains and losses — a 25% stock move becomes a 50% equity move at 2:1 leverage.
- Brokers charge interest on margin balances, ranging from roughly 5% to 13% depending on the balance and broker.
- If your equity falls below maintenance margin, you’ll face a margin call — and your broker can liquidate positions without waiting for you to respond.
- Not all securities are marginable — penny stocks, recent IPOs, and newly purchased mutual funds are typically excluded.
Frequently Asked Questions
Is a margin account risky?
A margin account is only risky if you actually borrow against it. You can hold a margin account and never use margin. The risk comes from leveraged positions, where losses can exceed your original deposit and trigger forced liquidation.
How much can I borrow on margin?
Under Regulation T, you can borrow up to 50% of the purchase price of marginable securities. So with $10,000 in equity, you can buy up to $20,000 worth of stock. Your broker may set stricter limits based on the specific securities or your account history.
What happens if I can’t meet a margin call?
If you don’t deposit additional funds or sell positions to restore your equity above the maintenance margin, your broker will liquidate enough of your holdings to bring the account back into compliance. They can do this without your permission and may choose which positions to sell. See margin call for a detailed breakdown.
Is margin interest tax-deductible?
Yes, margin interest is generally deductible as an investment expense, but only up to the amount of your net investment income for the year. You must itemize deductions on Schedule A to claim it. Consult a tax professional for your specific situation.
What is the Pattern Day Trader rule?
If you make four or more day trades within five business days in a margin account, and those trades represent more than 6% of your total trading activity, you’re classified as a Pattern Day Trader (PDT). You must then maintain at least $25,000 in equity at all times or face trading restrictions.