A margin account lets you borrow money from your broker to buy stocks or other securities

A margin account is a brokerage account where you can borrow cash from your broker to purchase investments. You put up some of your own money—called the margin—and the broker lends you the rest. The securities you buy sit as collateral for the loan. This is different from a regular cash account, where you can only spend money you already have.

The appeal is leverage: a smaller amount of your own cash can control a larger investment position. If the investment goes up, your gain is larger than it would have been with only your own money. But if the investment goes down, your loss is also larger—and you still owe the full amount you borrowed, plus interest.

Margin accounts are not free to open or use. Your broker charges interest on the borrowed money, and there are rules about how much you can borrow and what happens if your account value drops below a certain threshold.

Key Takeaways

  • A margin account requires you to deposit a minimum amount of your own money—typically $2,000 to $25,000 depending on the broker—before you can borrow.
  • Your broker charges interest on borrowed money, and the rate varies by broker and by how much you borrow.
  • If your account value falls below the broker's maintenance requirement, you face a margin call and must deposit more cash or sell positions immediately.
  • Margin amplifies both gains and losses, so a small drop in your investment can wipe out your entire deposit and leave you owing money.

Initial margin and maintenance margin are two different thresholds

When you open a margin account, your broker sets two requirements. Initial margin is the minimum amount of your own money you must deposit to start borrowing. This is usually 50% of the purchase price of the securities you want to buy, though brokers can require more. The Federal Reserve sets a floor at 50%, but individual brokers often require 60% to 100% of the purchase price upfront.

Maintenance margin is the minimum percentage of your account value that must be your own money at all times while you hold the position. This is typically 25% to 30% of the total value of your securities. If your account drops below this level—because the stocks fall in price—your broker will issue a margin call.

Example: You have $10,000 and want to buy $20,000 worth of stock. You deposit your $10,000 (50% initial margin) and borrow $10,000 from your broker. If the stock drops to $15,000 total value, your equity is now $5,000—which is 33% of the account. If maintenance margin is 25%, you are still okay. But if the stock drops to $13,000, your equity is $3,000, or 23% of the account. That triggers a margin call.

A margin call means you must act within one to five business days

When your account falls below maintenance margin, your broker sends a margin call—a demand that you deposit cash or sell securities to bring your account back into compliance. The broker sets the deadline, which is typically one to five business days. Some brokers give you less time.

You have two choices: deposit enough cash to restore your equity to the maintenance level, or sell enough securities to reduce the borrowed amount. If you do neither, your broker will sell your positions without asking you, starting with the ones that are easiest to sell. You pay any commissions or losses from forced sales, and you still owe the full amount you borrowed.

Margin calls can happen fast. A single bad day in the market can trigger one, especially if you borrowed close to the maximum allowed. You cannot wait for the market to recover—the broker's deadline is firm.

Interest rates on margin loans vary by broker and by balance

Your broker charges interest on the money you borrow, just like a loan. The rate is called the margin interest rate or debit balance interest. Rates vary widely: some brokers charge 6% to 12% annually, while others charge more. The rate often depends on how much you borrow—borrowing more may lower your rate slightly, or it may not.

Interest accrues daily and is usually charged to your account monthly. If you borrow $10,000 at 8% annual interest, you pay roughly $67 per month. That cost comes out of any dividends or gains you make, so it eats into your profit.

Margin interest is tax-deductible if you use the borrowed money to buy investments that produce taxable income, such as dividend-paying stocks. But if you use margin to buy tax-exempt bonds or growth stocks that pay no dividends, the interest may not be deductible. Consult a tax professional about your specific situation.

Brokers can restrict or close margin accounts during market stress

During periods of high volatility or market crashes, brokers can raise maintenance margin requirements, lower the amount you are allowed to borrow, or restrict which securities you can buy on margin. They can also close your margin account and force you to sell all positions, even if you have not received a margin call.

This happened widely during the 2008 financial crisis and again during the March 2020 COVID market drop. Brokers did this to protect themselves from the risk that customers would not be able to cover losses. The result was that some investors were forced to sell at the worst possible time.

Your broker agreement gives them the right to do this. You cannot prevent it, but you can reduce your risk by not borrowing the maximum amount allowed and by keeping a cash cushion in your account.

Margin accounts carry risks that cash accounts do not

The biggest risk is forced liquidation—your broker selling your positions without your permission to cover a margin call. You lose control of the timing and may sell at a loss. You also pay commissions on the forced sale.

A second risk is amplified losses. If you borrow to buy $20,000 of stock with $10,000 of your own money, a 50% drop in the stock price wipes out your entire $10,000 deposit. A 60% drop means you owe money to your broker after the forced sale.

A third risk is interest cost. Even if your investment stays flat, you are paying interest on the borrowed money. Over time, this drag can turn a small gain into a small loss.

A fourth risk is concentration. Margin accounts encourage you to put all your money into one or a few positions to maximize leverage. If those positions fall, you have no diversification to cushion the blow.

Frequently Asked Questions

Can I use a margin account for any type of investment?

No. Brokers restrict margin borrowing to stocks, exchange-traded funds, and some bonds. You cannot use margin to buy cryptocurrencies, penny stocks, or most mutual funds. Your broker publishes a list of marginable securities. Buying non-marginable securities in a margin account is allowed, but you must pay cash for them.

What happens if I cannot pay back the margin loan?

Your broker will sell your securities to recover the debt. If the sale does not cover the full amount owed, you remain liable for the shortfall. Your broker can pursue collection, report the debt to credit agencies, or take legal action. This is a real debt, not a loss you can simply walk away from.

Is margin the same as a line of credit?

Margin is a type of line of credit, but it is specific to securities trading. A margin account gives you access to borrowed money only for buying investments held in that account. Other lines of credit, like a home equity line or personal line of credit, can be used for any purpose and are not tied to investment collateral.

Can I use margin to buy stocks and then hold them long-term?

Yes, but you pay interest the entire time you hold the position. If you borrow $10,000 at 8% interest and hold the stock for five years, you pay roughly $4,000 in interest before you sell. Your investment needs to gain more than that just to break even on the borrowing cost.

What is the difference between margin and options trading?

Margin lets you borrow money to buy securities outright. Options trading lets you control a large position with a small upfront payment, but you do not own the underlying security and the contract expires. Options are riskier and more complex than margin. Both can result in losses larger than your initial deposit.