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

A margin account is a brokerage account where you can borrow cash from your broker to purchase securities. 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 buy what you have money for.

The appeal is leverage: with $5,000 of your own money, you might borrow another $5,000 and control $10,000 worth of stock. If that stock rises 20 percent, your $5,000 turns into $6,000 — a 20 percent gain on your own money. But if it falls 20 percent, your $5,000 becomes $4,000 — a 20 percent loss. The borrowed money amplifies both wins and losses.

Margin accounts are not free. Your broker charges interest on the borrowed amount, usually between 2 and 12 percent per year depending on how much you borrow and current market rates. You also face margin calls — demands to deposit more cash or sell positions — if your account value drops too far. Brokers set a minimum equity level (often 25 to 30 percent of the total account value) to keep lending to you.

Key Takeaways

  • A margin account requires you to maintain a minimum account value set by your broker, usually 25 to 30 percent of what you owe, or you face a margin call.
  • Interest rates on borrowed money range from roughly 2 to 12 percent annually and are charged daily, so borrowing costs add up quickly on large positions.
  • You can lose more than your initial investment because losses on borrowed money still have to be repaid to the broker.
  • Margin accounts are offered by most major brokers but require a separate application and a minimum account balance, often $2,000 or more.
  • Day traders and active investors use margin accounts; long-term buy-and-hold investors rarely need them and often avoid the extra risk and cost.

How much you can borrow and what triggers a margin call

Federal rules set a floor: you must put up at least 50 percent of the purchase price yourself (called initial margin). So to buy $10,000 of stock, you need at least $5,000 in the account. Your broker can require more — many demand 60 or 70 percent — and different securities have different minimums.

Once you own the position, your broker requires you to keep a minimum amount of equity in the account at all times. This is called maintenance margin and is usually 25 to 30 percent of the total value of your positions. If your account equity falls below that level — because the stock price drops — your broker issues a margin call. You then have a few days (often three to five business days) to deposit cash or sell enough securities to bring the account back into compliance.

If you do not meet a margin call, your broker can sell your positions without asking you. They will sell whatever brings the account back to the required level, which may mean liquidating your best positions first, not your worst. You pay any trading costs and taxes on those forced sales.

Interest charges and how they compound

Brokers charge interest on the amount you borrow, calculated daily and usually added to your account monthly. The rate depends on the size of your loan and current market conditions. A small margin loan might cost 8 to 10 percent annually; a large one might cost 2 to 4 percent. Some brokers offer tiered rates — the more you borrow, the lower the rate.

Interest accrues whether your position makes money or loses money. If you borrow $5,000 at 8 percent for a year, you owe $400 in interest alone, regardless of what happens to the stock. If the stock falls and you sell at a loss, you still owe the interest plus the principal. This is why margin works best for short-term trades where you expect quick gains large enough to cover the borrowing cost.

Some brokers offer margin interest rates that move with the federal funds rate, so your cost can change month to month. Others lock in a fixed rate. Check your broker's current rates before opening a margin account — they vary significantly and can make the difference between profit and loss on a trade.

Who offers margin accounts and what you need to open one

Nearly all major brokers — Fidelity, Charles Schwab, E-Trade, Interactive Brokers, TD Ameritrade — offer margin accounts. You cannot open one at every broker, though; some discount brokers or fractional-share platforms do not support borrowing.

To open a margin account, you typically need to:

  • Have an existing brokerage account with the firm.
  • Meet a minimum account balance, often $2,000 to $5,000.
  • Complete a margin agreement, which is a legal document explaining the terms, risks, and interest rates.
  • Pass a suitability review — the broker wants to confirm you understand the risks and have investment experience.

The application usually takes one to three business days. Some brokers offer instant approval if you meet their criteria; others require a manual review. Once approved, you can start borrowing immediately, though your first few trades may be subject to a settlement period before you can use the proceeds to buy more securities.

The risks of borrowing to invest

Leverage cuts both ways. A 10 percent gain on a $10,000 position funded with $5,000 of your own money and $5,000 borrowed is a 20 percent return on your cash. But a 10 percent loss is a 20 percent loss on your cash. Losses beyond your initial investment are possible: if you borrow $5,000 and the position falls 60 percent, you have lost $6,000 but only put up $5,000. You owe the broker $1,000 plus interest.

Margin calls can force you to sell at the worst time. If the market drops sharply, many investors face margin calls at once. You may be forced to liquidate positions you wanted to hold, locking in losses and missing the recovery. Brokers prioritize their own safety, not your long-term strategy.

Borrowing costs are real money that reduce your returns. On a position that gains 5 percent annually, paying 8 percent interest means you lose 3 percent per year just to carry the loan. This is why margin works only when you expect returns well above the borrowing cost — and expect them soon.

Margin accounts versus cash accounts

In a cash account, you can only buy securities with money you have on hand. Trades settle in two business days, and you cannot use unsettled cash to buy again immediately. This is slower but simpler: you cannot lose more than you invested, and you pay no interest.

In a margin account, you can borrow to buy, and settled cash is available to borrow against right away. You can trade more frequently and control larger positions. But you pay interest, face margin calls, and can lose more than your initial investment.

Most long-term investors use cash accounts. The interest cost and complexity of margin calls outweigh the benefit of leverage when you are holding for years. Day traders and active investors often use margin because they expect to close positions quickly and want the ability to trade large size with limited capital.

What happens if you cannot meet a margin call

If you do not deposit cash or sell securities within the time your broker allows — usually three to five business days — the broker will sell your positions without your permission. This is called a forced liquidation or margin liquidation.

The broker sells whatever is needed to bring the account back into compliance. They are not required to sell your worst positions first; they may sell the most liquid (easiest to sell) positions, which might be your best performers. You pay all trading commissions and any taxes on the sales. If the forced sale does not raise enough cash, you owe the broker the shortfall plus interest and any fees.

A forced liquidation can also trigger a good-faith violation if you bought securities with unsettled cash and then sold them before settlement. Repeated violations can result in your account being restricted to cash-only trading for 90 days.

Frequently Asked Questions

Can I lose more money than I put into a margin account?

Yes. If you borrow $5,000 and the position drops 80 percent, you have lost $8,000 but only invested $5,000. You owe the broker $3,000 plus interest. This is called being "underwater" on the loan. Your broker can pursue collection, and the loss can exceed your initial investment.

What is the difference between initial margin and maintenance margin?

Initial margin is what you must put up to buy a security — usually 50 percent federally, but brokers often require more. Maintenance margin is the minimum you must keep in the account afterward, usually 25 to 30 percent. If your account falls below maintenance, you get a margin call.

How often does interest get charged on a margin loan?

Interest accrues daily and is usually posted to your account monthly. Some brokers charge it more frequently. The daily rate is the annual rate divided by 360 or 365, depending on the broker. You can see the accrued interest in your account statement.

Can I use a margin account for retirement savings?

Margin is not allowed in IRAs or most retirement accounts. You can use it in taxable brokerage accounts. Using margin in a taxable account creates additional tax complexity because forced sales and interest charges affect your tax bill.

What happens to my margin loan if the stock I bought goes to zero?

You still owe the full amount you borrowed plus interest. If the stock becomes worthless, you have lost 100 percent of your investment and still must repay the loan. The broker can pursue collection through your other assets or legal action.