What Is a Margin Loan?
In plain English
A margin loan is credit extended by a brokerage firm that allows an investor to borrow against the value of securities held in their account, using those investments as collateral. Margin loans amplify purchasing power, letting investors buy more securities than they could with cash alone. However, they also amplify losses — if the portfolio value falls below a certain threshold, the broker can issue a margin call requiring immediate repayment.
How Does Borrowing on Margin Work?
Investors can typically borrow up to 50% of the purchase price of eligible securities under Regulation T. So with $10,000 in cash, you could buy up to $20,000 in securities. The securities in your account serve as collateral. You pay interest on the borrowed amount, which varies by broker and balance. Margin rates are often tied to a benchmark like the federal funds rate and can be significant, especially for longer-term holding.
What Is a Margin Call and Why Is It Dangerous?
A margin call occurs when the value of your account falls below the broker's maintenance margin requirement — typically 25% of the total market value of your securities. When this happens, the broker demands you deposit additional funds or securities, or they will liquidate positions at market price immediately — often at the worst possible time. Margin calls can force the sale of good assets during market downturns, crystallizing losses and eliminating recovery potential.
Who Should Use Margin Loans and Who Should Avoid Them?
Margin loans can be a tool for sophisticated investors who understand leverage, have high risk tolerance, and use margin for specific short-term strategies. They are inappropriate for most retail investors, those close to retirement, anyone investing in volatile assets, or people who cannot tolerate loss of their entire investment. The combination of amplified downside, interest costs, and margin call risk makes margin investing one of the more dangerous debt instruments available.
Frequently asked questions
What interest rate do margin loans charge?
Margin interest rates vary by broker and account size. Discount brokers typically charge 8–13% for smaller balances, with lower rates for larger accounts. Rates fluctuate with market benchmarks. Interest accrues daily and is typically deducted from the account monthly. The cost can significantly erode returns if borrowed funds are held long-term.
Can I lose more than I invested with a margin loan?
Yes, in some circumstances. If your investment falls in value faster than your broker can execute a margin call liquidation, your losses can exceed your initial equity. Most brokers act quickly, but extreme market volatility can result in account deficits. Margin investing carries the real possibility of owing money even after all positions are liquidated.
Keep exploring
Related terms
Interest Rate
An interest rate is the cost of borrowing money, expressed as a percentage of the principal. It determines how much extra you pay on top of what you borrowed.
Variable Interest Rate
A variable interest rate changes over time based on a benchmark rate like the prime rate or SOFR. It can save money when rates fall but creates payment uncertainty when rates rise.
Loan-to-Value Ratio
Loan-to-value ratio (LTV) compares the loan amount to the appraised value of the asset securing it. Lenders use LTV to assess risk and determine mortgage insurance requirements.
Promissory Note
A promissory note is a legal document in which a borrower formally promises to repay a specified amount under defined terms. It is the binding written contract that creates a debt obligation.