Margin debt is money you borrow from your brokerage firm to buy securities, using the investments already in your account as collateral. Federal rules generally let you borrow up to 50 percent of a stock’s purchase price, which roughly doubles your buying power and your exposure to loss. If the account’s value falls far enough, the broker can sell your holdings without asking you first to recover what you owe.
How the Loan Works
When you buy securities in a margin account without enough cash to cover the full cost, the broker lends you the difference. That loan shows up as a debit balance. The stocks, bonds, or funds you hold act as collateral, and the broker keeps a lien on those assets until you repay the balance in cash or by selling holdings.1Vanguard. Vanguard Brokerage Margin Account Agreement
Interest accrues daily on what you owe. Most firms use a tiered schedule, so larger balances pay lower rates. As of early 2026, annual rates at major brokerages run from roughly 5 percent on large balances up to about 12 percent on smaller ones. Interest charges are usually posted monthly and added to your debit balance if you don’t pay them from cash, so unpaid interest compounds.
The Core Rules: 50 Percent and 25 Percent
Two layers of regulation govern margin lending. The Federal Reserve’s Regulation T, at 12 CFR Part 220, controls how much credit a broker can extend for a new purchase. For most stocks, the initial margin requirement is 50 percent of current market value, meaning you put up at least half the cost yourself.2eCFR. 12 CFR Part 220 – Credit by Brokers and Dealers (Regulation T)
FINRA Rule 4210 sets the ongoing requirement. Once you own the position, you must keep equity of at least 25 percent of the total market value of the securities held on margin.3FINRA. 4210. Margin Requirements Many brokers set higher “house” thresholds, often 30 to 40 percent, for a wider cushion.4SEC.gov. Investor Bulletin: Understanding Margin Accounts
What It Takes to Open a Margin Account
FINRA requires a minimum equity deposit of $2,000 or 100 percent of the purchase price, whichever is less, before you can trade on margin. Some brokers require more than $2,000 to open the account.4SEC.gov. Investor Bulletin: Understanding Margin Accounts
Collateral is normally stocks, bonds, or mutual funds already in your account. Not every security qualifies. Non-margin-eligible securities, including many low-priced stocks, must be paid for in full and can’t back a loan.3FINRA. 4210. Margin Requirements
You’ll also sign a margin agreement. It sets the loan terms and interest structure, gives the firm a security interest in everything held in the margin account, and authorizes the broker to sell your securities to cover the debt under certain conditions.1Vanguard. Vanguard Brokerage Margin Account Agreement
Margin Calls and Forced Liquidation
Your equity is what your holdings are worth minus what you owe. If equity drops below 25 percent of the total holdings, or below your broker’s higher house requirement, the firm issues a margin call asking you to deposit more cash or marginable securities.3FINRA. 4210. Margin Requirements A sharp market decline can trigger one without warning.
The broker has the legal right to sell your securities without contacting you first. Even if the firm has given you a deadline to meet a call, it can still sell immediately if it decides that is necessary to protect its own position. There is no legally required grace period, and you are not entitled to an extension.5FINRA. 2264. Margin Disclosure Statement
The broker also picks which assets to sell. You don’t get to choose, and the firm will act to protect its own capital. That may mean selling a position you meant to hold long term or one with poor tax consequences.5FINRA. 2264. Margin Disclosure Statement
If the sale doesn’t cover the balance, you still owe the difference.5FINRA. 2264. Margin Disclosure Statement If your portfolio drops to $2,000 while you owe $3,000, liquidation leaves a $1,000 shortfall, and the broker can pursue you for it through collections or a lawsuit.
Where Margin Debt Doesn’t Apply
Traditional margin borrowing is off the table in traditional and Roth IRAs. Pledging any part of an IRA as security for a loan is treated as a distribution of the amount pledged, which triggers income tax and possibly an early-withdrawal penalty.6Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts Borrowing from an IRA is also a prohibited transaction. If one occurs at any point during the year, the entire account can lose its tax-advantaged status as of January 1 of that year.7Internal Revenue Service. Retirement Topics – Prohibited Transactions Some brokers do offer “limited margin” in IRAs to settle trades before prior-sale proceeds clear, but that isn’t borrowing against the account.
If you make four or more day trades within five business days in a margin account, you may be flagged as a pattern day trader. Pattern day traders must keep at least $25,000 in equity in the account at all times, and day trading is suspended if the balance falls below that until it’s restored.8FINRA.org. Day Trading
What the Broker Can Do With Your Shares
When you carry a margin loan, the broker is allowed to lend out or pledge a portion of your holdings to other parties, a practice called rehypothecation. Federal rules cap this: securities worth more than 140 percent of your debit balance are “excess margin securities” that must stay in the broker’s possession, not out on loan.9eCFR. 17 CFR 240.15c3-3 – Customer Protection, Reserves and Custody of Securities Everything below that threshold can be lent.
Two things follow. While your shares are on loan, you may lose voting rights on them. And if a dividend is paid during the loan, you receive a “substitute payment” instead of the actual dividend. Substitute payments are taxed as ordinary income, potentially at rates as high as 37 percent, rather than at the lower qualified-dividend rate. The same economic payment can produce a meaningfully higher tax bill.
Tax Angles
Interest on margin loans used to buy taxable investments generally qualifies as investment interest and is deductible, but only up to your net investment income for the year, meaning the amount by which your investment income exceeds your investment expenses.10Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest Any excess carries forward to future years. You claim the deduction on IRS Form 4952.11IRS.gov. Form 4952, Investment Interest Expense Deduction Interest on money borrowed to buy tax-exempt securities, such as municipal bonds, is not deductible.12Internal Revenue Service. Topic No. 505, Interest Expense
Forced sales during a margin call are taxable events like any other sale. You’ll owe capital gains tax on any profit and can claim losses on positions sold below cost. Because the broker chooses which assets to sell and when, the timing can be unfavorable, pushing you into short-term gains taxed at ordinary-income rates instead of the lower long-term rate.