A margin account is a brokerage account that lets you borrow money from your broker to buy securities, using the investments you already hold as collateral. Here is how margin accounts work in practice: you put up part of the purchase price, the broker lends you the rest, you pay interest on the loan, and the securities in the account back the debt. Federal rules require you to put up at least 50% of the purchase price yourself and keep at least 25% equity after that, though most brokerages set higher thresholds. The leverage cuts both ways. Your broker can sell your holdings without warning if the account falls short.
Opening the Account
Before you can trade on margin, you sign a margin agreement with your brokerage. It spells out how interest is calculated, your obligation to repay, and the fact that your securities serve as collateral.1SEC. Understanding Margin Accounts Buried in it is the firm’s right to liquidate your holdings if the account falls short. Read it before you sign.
FINRA requires at least $2,000 in equity before you can begin trading on margin, though you never need to deposit more than the cost of the securities you’re buying.2FINRA. 4210. Margin Requirements Many brokerages set their own minimums higher. The deposit can be cash or eligible securities you already own.
How Leverage Works
The appeal of a margin account is leverage. Deposit $10,000, borrow another $10,000 from your broker, and you control $20,000 in stock. That is 2-to-1 leverage. A 20% gain on $20,000 earns you $4,000 on your $10,000 of equity, a 40% return. A 20% decline wipes out $4,000, a 40% loss. The broker’s loan stays the same whatever the stock does. You owe it back whether the trade works or not.
In extreme moves, you can lose more than your entire deposit. If a $20,000 position drops to $8,000, your equity is negative $2,000: you have lost your original $10,000 and still owe the broker $2,000. Brokers try to liquidate before things get that bad, but overnight moves or gap-downs at the open can blow through your equity before anyone acts.
What You Have to Put Up and Keep
Two separate requirements apply at two different moments.
At purchase, the Federal Reserve’s Regulation T sets the initial margin. For stocks and most equity securities, it is 50% of the purchase price.3eCFR. 12 CFR 220.12 – Supplement: Margin Requirements To buy $16,000 of stock, you need at least $8,000 in equity, and the broker lends the rest. The 50% figure has been unchanged since 1974 and applies specifically to equity securities on national exchanges and the Nasdaq.4FINRA. Margin Regulation Non-equity securities like bonds have different requirements set by the broker in good faith. Regulation T is a floor, not a ceiling, so your brokerage may require more on volatile stocks or concentrated positions.
Once you own the securities, a second threshold takes over. FINRA Rule 4210 requires you to keep equity equal to at least 25% of the market value of long positions in the account.2FINRA. 4210. Margin Requirements The gap between the 50% you put up at purchase and the 25% maintenance floor is a buffer. Prices can decline before you face a margin call.
In practice, most brokerages set their house maintenance requirements between 30% and 40%, above the FINRA minimum, and higher still on individual securities they consider risky.2FINRA. 4210. Margin Requirements A diversified blue-chip ETF might carry a 30% requirement while a volatile biotech stock requires 50% or more. The brokerage can raise these requirements at any time, and that change alone can trigger a margin call even if the stock price has not moved.
What a Margin Call Means
When your equity drops below the maintenance requirement, you are in a margin call. You bring the account back by depositing cash, depositing more securities, or selling positions to cut the loan balance.
Here is what catches most people off guard. Your broker is not legally required to give you advance notice or a grace period before liquidating your positions.4FINRA. Margin Regulation Many firms extend a courtesy call and allow a few business days to meet the deficiency, but they can sell your securities immediately and without your permission.5FINRA. Know What Triggers a Margin Call The broker decides which positions to sell, and those decisions protect the firm’s loan, not your tax consequences or your best holdings.
If the liquidation does not cover the full loan balance, you still owe the difference. A margin call is a potential forced sale in the exact market conditions that caused the problem.
What You Pay for the Loan
Margin borrowing is not free. Your broker charges interest on the outstanding loan balance (the debit balance), and interest accrues daily.6Investor.gov. Investor Bulletin: Interested in Margin? Understand Interest Rates are tiered: larger balances typically qualify for lower rates, smaller balances pay more. As of late 2025, rates at major brokerages ranged roughly from 6% to 12% depending on the firm and balance size, with discount brokers that cater to active traders generally charging less than full-service firms.
Interest is usually posted monthly and deducted from your equity. If you do not cover it with cash or dividend income, it is added to the debit balance, so you pay interest on your interest.6Investor.gov. Investor Bulletin: Interested in Margin? Understand Interest This compounding quietly erodes your equity even in a flat market. An investment that returns 8% a year looks different when you are paying 10% on borrowed money to hold it.
Which Securities You Can Buy on Margin
Not everything in a brokerage account is eligible. Under Regulation T, marginable securities include stocks listed on national exchanges, Nasdaq-listed securities, registered mutual funds and unit investment trusts, non-equity securities like bonds, and certain foreign stocks.7eCFR. 12 CFR 220.2 – Definitions Anything outside those categories requires 100% cash; you cannot borrow against it.3eCFR. 12 CFR 220.12 – Supplement: Margin Requirements
Penny stocks and many over-the-counter securities that do not meet listing criteria are typically non-marginable because of volatility and thin trading. IPO shares are generally restricted from margin use during the first 30 days after issuance. Each brokerage also keeps its own list of restricted securities based on internal risk assessments, and those lists change. A stock that is marginable today can become non-marginable tomorrow.
The $25,000 Day-Trading Floor
If you make four or more day trades within five business days, your broker will flag you as a pattern day trader, unless those trades represent 6% or less of your total trading activity during that period.2FINRA. 4210. Margin Requirements Once flagged, you must keep at least $25,000 of equity in the margin account at all times. If equity drops below that, you cannot day trade until you restore the balance.8FINRA. Day Trading
The rule catches many newer traders by surprise. It applies whether you are profitable or not, the equity must be in the account before you place day trades, and the designation sticks until the broker removes it.
The framework may change. In September 2025, FINRA’s Board of Governors approved amendments to replace the pattern day trader rules, including the $25,000 minimum, with a new intraday margin system that applies existing maintenance requirements to intraday exposure.9FINRA. Report From FINRA Board of Governors Meeting – September 2025 The proposal was filed with the SEC in early 2026 and is pending.10Federal Register. Self-Regulatory Organizations; FINRA; Notice of Filing of Proposed Rule Change To Amend FINRA Rule 4210 Until the SEC acts, the $25,000 rule stays in effect.
Your Securities Are Collateral, Not Just Holdings
When you buy on margin, the securities in your account are not entirely under your control. Under SEC Rule 15c3-3, your broker can rehypothecate (pledge or lend) your margin securities up to 140% of your debit balance.11eCFR. 17 CFR 240.15c3-3 – Customer Protection With a $50,000 loan balance, the broker can use up to $70,000 of your securities as collateral for its own borrowing or lending.
Securities above that 140% threshold, called excess margin securities, must be segregated and held in your name or in a customer reserve account. The broker cannot pledge those for its own purposes.11eCFR. 17 CFR 240.15c3-3 – Customer Protection In a fully paid cash account, by contrast, the broker cannot rehypothecate your securities at all. The distinction matters most if the brokerage firm itself becomes insolvent, when rehypothecated securities can be harder to recover than segregated assets.
Deducting Margin Interest
Margin interest qualifies as investment interest expense under federal tax law. You can deduct it, but only up to your net investment income for the year.12Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest Net investment income covers things like interest, ordinary dividends, and short-term capital gains. If your margin interest exceeds that figure, the unused portion carries forward to future years.13IRS. Form 4952 – Investment Interest Expense Deduction
Qualified dividends and long-term capital gains do not count as investment income by default because they are taxed at preferential rates. You can elect to include them on Form 4952 to deduct more margin interest, but then those dividends or gains get taxed at ordinary income rates. For most investors, the election costs more than it saves.
You claim the deduction by filing Form 4952 with your return, and you must itemize. The standard deduction will not help you here.13IRS. Form 4952 – Investment Interest Expense Deduction