How Does a Margin Account Work?
When you open a margin account, your brokerage extends a line of credit based on the value of your holdings. Under Regulation T, you can borrow up to 50% of a stock's purchase price. You pay interest on the borrowed amount, and you must maintain a minimum equity level (maintenance margin) in your account at all times.
What Is a Margin Call?
A margin call occurs when your account equity falls below the brokerage's maintenance requirement — typically 25% to 40% of total holdings. You must deposit additional cash or sell securities to restore the required level. Failure to meet a margin call allows the brokerage to liquidate positions without your consent.
Who Should Consider Margin Trading?
Margin is best suited for experienced investors who understand the risks and have a clear strategy. Short-term traders may use margin to capitalize on brief opportunities. Long-term buy-and-hold investors generally should avoid margin because interest costs compound and market downturns can trigger forced selling at the worst possible time.
Frequently asked questions
How much interest do you pay on margin?
Margin interest rates vary by brokerage and loan size, typically ranging from 5% to 12% annually. Some brokerages offer lower rates for larger balances. Interest accrues daily and is charged monthly, reducing your net returns.
Can you lose more than you invest with margin?
Yes. If your leveraged positions decline sharply, losses can exceed your original investment. You remain liable for the borrowed amount plus interest, which is why margin trading carries substantially more risk than cash investing.