Margin and Margin Trading Explained

Margin is the equity an investor has in a brokerage account used as collateral when borrowing from a broker. Margin trading means borrowing that money to buy (or short) securities, amplifying both potential gains and losses. Margin can also refer more broadly to profit ratios in business or the interest add-on in adjustable-rate mortgages.

Key takeaways

• Margin trading increases buying power by letting you borrow from a broker, but it magnifies both gains and losses.
• A margin account is required; it uses your cash and securities as collateral and accrues interest on borrowed funds.
• Regulators and brokers set rules for initial and maintenance margin levels; failure to meet them can trigger margin calls and forced liquidations.
• Because interest accrues on borrowed funds, margin is generally better suited for shorter-term strategies.

How margin works

• Margin account: a brokerage account that permits borrowing to purchase securities. A standard cash account does not allow margin use.
• Initial margin: the portion of a purchase you must fund yourself (often up to 50% for stock purchases under U.S. rules, though brokers can set higher requirements).
• Maintenance margin: the minimum equity you must keep in the account. If equity falls below this level, the broker issues a margin call.
• Collateral and interest: securities you own act as collateral for the loan; borrowed amounts accrue interest that you must pay.

Step-by-step: buying on margin

1. Open a margin account with your broker and meet the minimum funding requirement (often at least $2,000, depending on the broker).
2. Deposit cash or marginable securities to serve as initial collateral.
3. Buy securities using your cash plus borrowed funds (typical initial rule allows borrowing up to ~50% of the purchase price).
4. Pay interest on the borrowed funds; principal is repaid when securities are sold or the loan is otherwise closed.
5. Monitor the account daily; if equity falls below maintenance levels, add funds or sell positions to meet a margin call.

Key elements to watch

• Minimum margin: the minimum deposit required to open a margin account (broker-dependent).
• Initial margin: the portion of a purchase you must finance with your own funds.
• Maintenance margin and margin calls: brokers may demand additional funds or sell holdings without consent if you fail to meet maintenance requirements.
• Marginable securities: not all assets are eligible for margin (many brokers exclude penny stocks, recent IPOs, or certain ETFs and crypto).

Pros and cons

Advantages
* Leverage increases purchasing power and can amplify returns.
* Often more flexible than other types of loans (no fixed repayment schedule in many cases).
* Rising collateral value can increase borrowing capacity.

Disadvantages
* Leverage also amplifies losses; you can lose more than your initial investment.
* Interest and fees accrue on borrowed amounts.
* Margin calls can force you to add capital or accept forced liquidations, possibly at unfavorable prices.
* Forced selling by large margin users can create negative market feedback for other leveraged investors.

Real-world example

If you deposit $10,000 into a margin account and your broker allows 50% initial margin, you have $20,000 in buying power. Buying $5,000 of stock still leaves $15,000 of buying power unused; you start borrowing only when purchases exceed your cash/equity. Buying power will change as market prices move.

Other uses of “margin”

• Accounting/business: gross profit margin, operating margin, and net profit margin measure profitability at different stages (revenue vs. cost of goods sold, operating expenses, and all expenses including taxes/interest).
• Mortgages: for adjustable-rate mortgages, the margin is the fixed percentage a lender adds to an index to set the borrower’s rate (e.g., index 6% + margin 4% = 10% rate).

Common questions

What does it mean to trade on margin?
* Trading on margin means borrowing from a brokerage to buy securities, using your account equity and holdings as collateral and paying interest on borrowed funds.

What is a margin call?
* A margin call is a broker’s demand that you add funds or sell assets after your account equity falls below the required maintenance level. If you don’t respond, the broker can sell positions to restore required equity.

What are the main risks?
* The primary risks are amplified losses, interest costs, margin calls, and forced liquidation. In extreme market moves you can owe more than your initial deposit.

Bottom line

Margin lets investors magnify investment exposure by borrowing against account equity, which can boost returns but also substantially increases risk and cost. Understand a broker’s margin rules, monitor positions closely, and consider margin primarily for strategies where you can manage leverage, interest expense, and the potential for rapid price moves.