Margin finance is borrowing money from your brokerage, using the securities in your account as collateral, to buy more stock than your cash alone would cover. A standard margin account roughly doubles your purchasing power: deposit $10,000 and you can control up to $20,000 in stock, because federal rules set the minimum down payment at 50%. The leverage cuts both ways. The borrowed money has to be repaid whether your investments rise or fall, and if your holdings drop far enough, your broker can sell them without asking you first.
How the Leverage Math Works
When you buy on margin, you put up part of the purchase price and the broker lends you the rest. Your deposit is collateral. The borrowed amount sits in your account as a debit balance, accruing interest until you pay it down.
Say you deposit $5,000 and borrow another $5,000 to buy $10,000 of stock. If the stock rises 10%, the position is worth $11,000. Subtract the $5,000 loan and your equity is $6,000, a 20% gain on your original $5,000 before interest. That is leverage working for you.
The downside math is just as aggressive. A 10% drop leaves the position at $9,000. You still owe $5,000, so your equity shrinks to $4,000, a 20% loss. A modest market move becomes a much steeper swing for you personally. And unlike a cash account, where the worst case is losing what you put in, margin borrowing can leave you owing money to your broker.
Opening a Margin Account
You cannot trade on margin in a standard cash brokerage account. You need a dedicated margin account, which requires signing a margin agreement setting out the terms of the credit arrangement and committing you to the margin rules of the Federal Reserve, FINRA, and the brokerage itself.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
Before your first margin trade, you must deposit at least $2,000 in cash or eligible securities. This minimum comes from FINRA Rule 4210, and your broker can require more.2FINRA. FINRA Rule 4210 – Margin Requirements If the stock you want to buy costs less than $2,000, you only need enough cash to cover the full purchase price.
Your broker must also give you a margin disclosure statement at or before account opening. It spells out that you can lose more than you deposit, the firm can force-sell your securities without contacting you first, and you remain on the hook for any balance left after a forced sale.3FINRA. FINRA Rule 2264 – Margin Disclosure Statement
Initial Margin and Maintenance Margin
Two separate thresholds govern how much equity you need. The initial margin is what you must put up to open the trade. The maintenance margin is what you must keep in the account afterward. Both are stated as a percentage of the total market value of the securities you hold.
Initial Margin
The Federal Reserve’s Regulation T sets the minimum initial margin at 50% for most equity purchases. You fund at least half the purchase price with your own money and the broker lends the other half.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts Brokers can and often do demand more up front for volatile stocks, thinly traded issues, or concentrated positions. These stricter house requirements give the firm extra cushion against rapid price swings.
Maintenance Margin
Once the trade is open, FINRA Rule 4210 requires you to keep equity equal to at least 25% of the current market value of the securities in your account.2FINRA. FINRA Rule 4210 – Margin Requirements Equity is the market value of your holdings minus what you owe the broker. Divide that equity by the total market value and you get your margin percentage.
Most brokerage firms set their own maintenance thresholds between 30% and 40%, sometimes higher for riskier holdings.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts Fall below whatever threshold your broker uses, and you get a margin call.
What Happens During a Margin Call
A margin call is your broker telling you that your equity has slipped below the required maintenance level, usually because the market value of your holdings dropped. You then have to bring the account back into compliance quickly.
You generally have three ways to do that: deposit additional cash, transfer in fully paid marginable securities, or sell existing positions to pay down the loan. The timeline is tight. Under Regulation T, the standard payment period is the settlement cycle plus two business days, which works out to three business days after the T+1 settlement rules that took effect in 2024.4FINRA. 2025 Extensions of Time Filing Schedule Your broker can shorten that window further under its house rules.5FINRA. Know What Triggers a Margin Call
Forced Liquidation
This is where margin trading becomes genuinely dangerous. If you do not meet the call in time, your broker can sell securities in your account without asking permission and without advance notice. The broker chooses which positions to sell and in what order. You have no say.6U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
The proceeds go straight to your debit balance. If they do not cover the loan plus interest and fees, you still owe the difference, meaning you can lose more than your original deposit.3FINRA. FINRA Rule 2264 – Margin Disclosure Statement
A forced sale also creates a taxable event. Any gain or loss on the liquidated shares is treated the same as if you had sold voluntarily, so you may owe capital gains taxes on positions you did not want to close. If the sale produces a loss, that loss can offset other gains, but the timing is outside your control.
What Margin Loans Cost
Borrowing on margin is not free. Interest accrues daily on your outstanding debit balance and is typically charged to the account once a month. That monthly charge is added to the debit balance, so interest compounds and can gradually push the account toward a margin call even when your holdings stay flat.
Brokers calculate the charge using a 360-day year. Multiply your debit balance by the annual rate, divide by 360, then multiply by the number of days you carried the loan.
Most brokers use a tiered structure, with lower rates on larger balances. As of early 2026, margin rates at major brokerages range from roughly 5% for large balances at discount brokers to above 11% for smaller balances at full-service firms.7Interactive Brokers. US Margin Loan Rates Comparison The rate is usually a spread over the broker’s base rate, which tracks Federal Reserve policy. When the Fed raises rates, your margin loan gets more expensive.
The cost is a constant headwind. If your position earns 8% while the loan costs 7%, your net return on the borrowed portion is 1%. A leveraged position has to clear the interest rate before it starts actually making money on the borrowed capital.
Tax Treatment of Margin Interest
Margin interest is generally deductible as investment interest expense, but only up to the amount of your net investment income for the year.8Office of the Law Revision Counsel. 26 US Code 163 – Interest Net investment income includes taxable interest, non-qualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends do not count unless you elect to treat them as ordinary income, which means giving up the lower tax rate on those gains.
If your margin interest exceeds your net investment income in a given year, the excess carries forward indefinitely. You can deduct the leftover amount in any future year when you have enough investment income to absorb it.9Internal Revenue Service. Publication 550 – Investment Income and Expenses
To claim the deduction, you typically file IRS Form 4952 with your return. There is an exception: if your investment income from interest and ordinary dividends (minus qualified dividends) exceeds your investment interest expense, you have no other deductible investment expenses, and you have no carryforward from a prior year, you can skip the form and deduct the full amount directly.9Internal Revenue Service. Publication 550 – Investment Income and Expenses
Securities You Cannot Buy on Margin
Not everything qualifies for margin lending. Securities that do not meet the definition of a margin equity security under Regulation T are non-margin-eligible. To buy one of these in a margin account, you must put up 100% of the purchase price, and the position carries a 100% maintenance requirement, so it gives you no borrowing power.10FINRA. Treatment of Non-Margin Eligible Equity Securities
Common categories include stocks trading under $5 per share, newly issued IPO shares during their first trading days, and certain over-the-counter bulletin board securities. A broker may also flag specific stocks as non-marginable if they are especially volatile or come from distressed issuers. Check whether a security is marginable before building a leveraged strategy around it.
The Pattern Day Trader Threshold
If you use a margin account for frequent short-term trading, an extra layer of regulation kicks in. Execute four or more day trades within five business days, where those trades make up more than 6% of your total activity in the account during that period, and FINRA classifies you as a pattern day trader.11FINRA. Day Trading
That classification comes with a $25,000 minimum equity requirement, maintained in the margin account on every day you trade. Drop below $25,000 and you cannot day trade until you restore the balance. The threshold is set by FINRA Rule 4210 and applies no matter your broker’s house requirements, though your broker can set a higher floor.2FINRA. FINRA Rule 4210 – Margin Requirements
In exchange for the higher capital requirement, pattern day traders get more buying power. Standard margin accounts let you borrow up to 50% of a purchase. Pattern day trader accounts typically get four times the maintenance margin excess as buying power for day trades, effectively quadrupling the leverage available for positions opened and closed the same day. That extra leverage lets you lose money faster than in a standard margin account, which is exactly why the $25,000 minimum exists.