How Margin Accounts Work: Leverage, Calls, and Interest

A margin account is a brokerage account that lets you borrow money from your broker to buy securities, using the cash and eligible investments already in the account as collateral. Understanding how margin accounts work starts with three numbers: a $2,000 minimum equity requirement set by FINRA, a 50% cap on how much your broker can lend you for a new stock purchase under Regulation T, and a 25% floor on the equity you must keep in the account once your trades are open.¹² Miss that last one and your broker can sell your holdings without calling you first.

What You Need to Start Borrowing

FINRA requires at least $2,000 in equity before you can borrow a single dollar on margin.¹ Many firms set their own minimums higher, sometimes $5,000 or more, based on their risk tolerance and your financial profile.

Once you actually place a trade, Regulation T of the Federal Reserve Board limits how much of the purchase price your broker can lend you: 50% for most equity securities.² To buy $20,000 of stock, you put up at least $10,000 of your own cash or eligible securities, and your broker fronts the other $10,000 as a loan. Firms can require more than 50% for volatile stocks or penny stocks, but none can require less than Regulation T mandates.³

How Leverage Cuts Both Ways

The 50% initial margin rule gives you 2:1 leverage on most stocks. With $10,000 of equity you can control up to $20,000 of securities. Brokers call this your buying power, and it moves in real time with your portfolio’s value.

Say you buy $20,000 of stock, $10,000 yours and $10,000 borrowed. A 20% rise takes the position to $24,000; your equity is now $14,000, a 40% gain on your investment. A 20% drop takes it to $16,000; your equity falls to $6,000, a 40% loss. The loan does not shrink when the stock does. You owe your broker $10,000 either way.

When you sell, the broker gets paid first. Proceeds cover the loan and any accrued interest before anything reaches you, and if the sale doesn’t cover the loan, you owe the difference out of pocket.²

Interest on the Loan

Interest starts accruing as soon as your trade settles and borrowed funds are in play.⁴ The rate is typically the broker call rate (a benchmark rate banks charge brokers) plus a spread the firm sets. That spread usually narrows as your balance grows: someone borrowing $500,000 pays a lower spread than someone borrowing $25,000.

Interest is calculated daily on your outstanding debit balance and charged monthly, rolling into the loan itself. Unless you pay it down in cash, you end up paying interest on interest, which quietly erodes your equity. A $50,000 loan at 10% accrues roughly $14 a day in interest even when your positions haven’t moved. Held for months or years, that cost turns into a real drag on returns.

Maintenance Margin and What Triggers a Call

After a trade is open, you have to keep your account equity above a minimum percentage of your total holdings. FINRA sets this floor at 25% of current market value for long stock positions.¹ Most brokerages set their house maintenance requirements higher, commonly 30% to 40%, and can raise them at any time without advance written notice.⁵ Volatile or thinly traded stocks trigger substantially higher requirements at the broker’s discretion.

Here is how a call happens. You bought $20,000 of stock with $10,000 of your own money and $10,000 borrowed. The stock drops to $13,000. Your equity is now $3,000 ($13,000 minus the $10,000 loan), which is 23% of market value. At a 25% requirement you need $3,250 in equity, so you’d get a call for at least $250. At a 30% house requirement you’d need $3,900, and the call would be for $900.

A margin call is a demand to deposit additional cash or securities immediately. You are not entitled to an extension.⁵

Forced Liquidation

If you don’t meet the call promptly, your broker can sell securities in your account to bring it back into compliance. The firm doesn’t have to notify you before liquidating, doesn’t have to let you choose which positions get sold, and can sell enough to pay off the entire margin loan rather than just the shortfall.⁶ Investors have found positions sold out from under them during market dips.²

If the liquidation still doesn’t cover what you owe, you remain liable for the balance. Your account can end at zero or negative, and you’ll still owe the broker for the original loan.

Securities You Can’t Borrow Against

Not every security qualifies for margin borrowing. Ones that don’t meet Regulation T’s definition of a margin equity security can sit in a margin account, but you must put up 100% of their value.⁷ Common examples include stocks trading under $5, newly issued IPO shares during their initial trading period, and many over-the-counter securities that don’t trade on a major exchange.

The maintenance requirement on a long position in a non-marginable security is also 100% of market value, so there is no equity cushion your broker will accept against it.⁸ You can hold these securities in the account, but you’re paying for them in full.

If You Trade Frequently: Pattern Day Trader Rules

Standard margin rules assume you buy and hold for at least a day. Trade in and out of the same security on the same day often enough and a separate set of requirements kicks in. FINRA classifies you as a pattern day trader if you execute four or more day trades within five business days and those trades exceed 6% of your total activity in the account over the same period.⁹

Pattern day traders must keep at least $25,000 in equity in the margin account at all times, well above the standard $2,000. Drop below $25,000 and you’re restricted to closing existing positions until you bring the balance back up. Deposits made to meet the requirement can’t be withdrawn for at least two business days.¹ Your broker can also designate you a pattern day trader preemptively if it has reason to believe you’ll trade that way.

Tax Treatment of Margin Interest

The IRS treats margin interest as investment interest expense, deductible only if you itemize on Schedule A.¹⁰ For 2026 the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly,¹¹ so the deduction only helps if your total itemized deductions clear those thresholds.

Even when you itemize, the deduction is capped at your net investment income for the year: interest, ordinary dividends, and similar income from investments, minus investment expenses.¹² Capital gains and qualified dividends are excluded by default, though you can elect to include them; doing so lets you deduct more margin interest, but those gains lose their preferential rate. You figure the deduction on Form 4952.¹³ Interest you can’t deduct in the current year carries forward indefinitely.

One hard limit: interest on money borrowed to buy tax-exempt securities such as municipal bonds is never deductible.¹⁰

Opening the Account

Opening a margin account takes more paperwork than a standard brokerage account. FINRA requires your broker to collect your tax identification or Social Security number, and the firm will make reasonable efforts to obtain your occupation, marital status, and whether you’re associated with another broker-dealer.¹⁴ Expect to disclose annual income, net worth, and investment experience so the broker can judge whether margin fits your situation.

Before the account opens, the broker must give you a margin disclosure statement as a separate document spelling out the specific risks and the firm’s rights, including its ability to sell your securities without notice.⁵ You’ll also sign a margin agreement covering loan terms, interest calculation, and the firm’s liquidation authority. The agreement is a binding contract, and its terms tend to favor the broker. Read both documents closely before you sign.

Most brokers handle everything online with electronic signatures. Once approved, fund the account to at least the $2,000 FINRA minimum, or your firm’s higher threshold, and margin privileges activate.¹

1
Financial Industry Regulatory Authority. FINRA Rule 4210 – Margin Requirements
2
U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
3
Financial Industry Regulatory Authority. Margin Accounts
4
Interactive Brokers. Margin Interest Calculations
5
Financial Industry Regulatory Authority. FINRA Rule 2264 – Margin Disclosure Statement
6
Financial Industry Regulatory Authority. Know What Triggers a Margin Call
7
eCFR. Credit by Brokers and Dealers (Regulation T)
8
Financial Industry Regulatory Authority. Regulatory Notice 11-16: Treatment of Non-Margin Eligible Equity Securities
9
Financial Industry Regulatory Authority. Day Trading
10
Internal Revenue Service. Topic No. 505, Interest Expense
11
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
12
Internal Revenue Service. Publication 550, Investment Income and Expenses
13
Internal Revenue Service. About Form 4952, Investment Interest Expense Deduction
14
Financial Industry Regulatory Authority. FINRA Rule 4512 – Customer Account Information