Margin Account: How It Works, Requirements, and Costs

A margin account is a brokerage account that lets you borrow money from your broker to buy securities, using the holdings in the account as collateral. Here is how a margin account works in practice: you deposit at least $2,000 in equity, sign a margin agreement, and once approved you can purchase roughly twice what your cash alone would buy. In exchange, you pay daily interest on the loan, you have to keep your equity above a moving minimum, and your broker can sell your securities to cover shortfalls — sometimes without calling you first.

How the Leverage Math Works

The Federal Reserve’s Regulation T caps borrowing at 50% of the purchase price for most stocks, which gives you 2:1 buying power.¹ Deposit $10,000 and you can buy up to $20,000 of eligible stock. The other $10,000 is a loan secured by the securities themselves.

Leverage cuts both ways. If that $20,000 position drops to $15,000, the stock has fallen 25% but you have lost $5,000 on a $10,000 deposit — a 50% hit. Drop far enough and you can owe more than you originally put in.

What You Need to Open One

Margin is an upgrade on a standard cash brokerage account, not a starting point. The broker reviews your trading experience, income, liquid net worth, and risk tolerance before granting access, and it can deny the application.

FINRA Rule 4210 sets the minimum equity deposit at $2,000, though you do not need to deposit more than the cost of what you are buying. A $1,200 purchase on margin requires a $1,200 deposit, not $2,000.² Separately, Regulation T requires at least 50% of the purchase price as initial margin for equity securities, and your broker applies whichever rule produces the higher deposit.¹

Many brokerages set higher house minimums — $5,000 or $10,000 in equity is common — and may require a certain level of trading experience. You generally need to be at least 18, and custodial accounts for minors cannot carry margin privileges.

What You Can and Cannot Buy on Margin

Regulation T defines eligible “margin securities” as stocks listed on national exchanges, securities on the Nasdaq Stock Market, registered mutual funds and unit investment trusts, and qualifying foreign stocks.³ Anything outside those categories has to be paid for in full.

Over-the-counter stocks face strict screening. To qualify, an OTC equity must appear on the Federal Reserve Board’s approved list, which requires a minimum bid price of $5, at least six months of public trading, and at least $4 million in the issuer’s capital and surplus, among other criteria.³ Penny stocks and newly listed IPOs are the usual exclusions. A broker can also restrict margin on volatile individual stocks even when they technically qualify.

Signing the Margin Agreement

Opening the account means signing a margin agreement that includes a hypothecation clause. That clause gives the broker a security interest in the securities you purchase: your holdings serve as collateral for the money you borrow. You get leverage; the broker gets the right to seize and sell your assets if the account falls short.

FINRA Rule 2264 requires the broker to deliver a separate margin disclosure statement before you sign. It spells out risks most investors underestimate:⁴

You can lose more than you deposit. A steep decline can wipe out your equity and leave you owing money to the broker.
The broker can force-sell your securities to cover a shortfall, and you are responsible for any remaining balance.
The broker is not required to contact you before selling. Many investors assume a phone call will come first. It will not necessarily.
You do not pick which securities get sold. The broker decides what to liquidate and when.

The application itself asks for your Social Security number, employment information, annual income, liquid net worth, and investment experience. Brokers use that data to set your credit limit, so accuracy matters: misrepresenting your finances can result in account closure, and federal law imposes penalties for false statements to financial institutions.

Keeping the Account in Good Standing

After you buy on margin, the rules do not end. FINRA requires equity equal to at least 25% of the total market value of the securities in the account at all times.² Most brokerages set house requirements higher, often 30% to 40%, and can raise them at any time without advance notice.⁵

Equity is recalculated daily at closing prices. When a market decline drops you below the threshold, you receive a margin call demanding cash or additional securities. For initial Reg T requirements, you generally get two business days from the trade date to deposit funds, though firms can shorten that window.⁵

Most people misread their rights here. The broker is not required to issue a margin call before selling. The call is a courtesy. If your equity falls far enough, the broker can liquidate immediately, choose which positions to sell, and do it without notice.⁴ This is the most dangerous feature of a margin account, and it tends to hit hardest during fast-moving selloffs, exactly when positions are losing value the fastest.

What It Costs

The money you borrow creates a margin debit balance, and interest accrues on it daily. Rates vary widely. Discount brokers with competitive pricing charge around 5% to 6% on larger balances; traditional full-service firms can charge 10% to 12% on smaller debits.⁶ At one major brokerage, rates range from 7.50% on balances above $1 million down to 11.83% on balances below $25,000.⁷ Those costs erode returns over time, especially for buy-and-hold investors carrying margin for months or years.

Your securities also sit as collateral for the broker. Through rehypothecation, the broker can pledge them against its own borrowing. SEC Rule 15c3-3 caps that pledge at 140% of your debit balance and requires the broker to maintain possession or control of fully paid securities and any excess collateral above the 140% line.⁸ Your margin debt remains until you sell enough securities to cover it or deposit cash to pay it down.

Deducting Margin Interest

Interest paid on margin loans used to buy taxable investments qualifies as investment interest expense and is deductible as an itemized deduction on Schedule A.⁹ The deduction is capped at your net investment income for the year. Any excess carries forward to future years indefinitely.¹⁰

Two limits are worth watching. You cannot deduct interest on borrowed funds used to buy tax-exempt securities such as municipal bonds.⁹ And if you elect to include qualified dividends or long-term capital gains in your investment income to support a larger deduction, those amounts lose their favorable lower tax rates and get taxed as ordinary income.¹⁰ Run the numbers before filing. The deduction is reported on IRS Form 4952.

Day Trading on Margin

If you execute four or more day trades within five business days, and those trades make up more than 6% of your total activity in the account over that period, FINRA classifies you as a pattern day trader.¹¹ A day trade is any position opened and closed on the same trading day. The classification triggers a higher minimum equity requirement of $25,000, compared with the standard $2,000.²

The upside is expanded buying power. Standard margin gives you 2:1. Pattern day traders get up to 4:1 intraday, calculated as four times the maintenance margin excess at the prior day’s close.¹² Exceed that limit and you receive a day-trading margin call that restricts the account to 2:1 until you cover the shortfall. Miss the call for five business days and the account is locked to cash-only trading for 90 days.²

A broker can designate you a pattern day trader preemptively if it has a reasonable basis to believe you will trade at that frequency.¹¹ Once flagged, you cannot just drop below four trades to remove the label. Most firms require a written request and may impose a waiting period.

Short Selling on Margin

Shorting a stock requires a margin account because you are borrowing shares you do not own. The initial requirement mirrors Reg T: 50% of the short position’s market value, plus the $2,000 minimum equity.²

Maintenance requirements for shorts are steeper than for longs and depend on the stock’s price:

Stocks at $5 or above: the greater of $5 per share or 30% of current market value.
Stocks below $5: the greater of $2.50 per share or 100% of current market value.

The per-share floors mean low-priced stocks carry disproportionately high requirements. Shorting a $3 stock takes $2.50 per share in maintenance margin, over 83% of the stock’s value. Brokerages routinely add surcharges on top of these FINRA minimums for volatile or hard-to-borrow names.²

1
eCFR. 12 CFR Part 220 – Credit by Brokers and Dealers (Regulation T)
2
FINRA. FINRA Rule 4210 – Margin Requirements
3
eCFR. 12 CFR Part 220 – Credit by Brokers and Dealers (Regulation T)
4
FINRA. FINRA Rule 2264 – Margin Disclosure Statement
5
FINRA. Know What Triggers a Margin Call
6
Interactive Brokers. US Margin Loan Rates Comparison
7
Fidelity Investments. Margin Loans
8
eCFR. 17 CFR 240.15c3-3 – Customer Protection
9
Internal Revenue Service. Publication 550, Investment Income and Expenses
10
Internal Revenue Service. Form 4952, Investment Interest Expense Deduction
11
Investor.gov. Pattern Day Trader
12
FINRA. Day Trading