Margin finance is a form of borrowing from your brokerage that lets you buy more securities than your cash balance would cover, using the securities themselves as collateral for the loan. Deposit $10,000 of your own money and federal rules let you control up to $20,000 in stock, because the minimum down payment on most equity purchases is 50%. The leverage cuts both ways. The borrowed money has to be repaid whether your investments rise or fall, and if your equity drops far enough, your broker can sell your holdings without asking permission.
How the Leverage Actually Works
When you buy stock on margin, you put up part of the purchase price and your broker lends you the rest. Your deposit is collateral. The borrowed amount shows up as a debit balance in your account and accrues interest until you pay it down. The idea is to earn more on the full position than the loan costs you.
Say you deposit $5,000 and borrow another $5,000 to buy $10,000 worth of stock. A 10% rise takes the position to $11,000. Subtract the $5,000 loan and your equity is $6,000, a 20% gain on your original $5,000 before interest. That is leverage in your favor.
The downside is just as steep. A 10% drop puts the position at $9,000. You still owe $5,000, so your equity falls to $4,000, a 20% loss. A modest market move becomes a much bigger swing for you. And unlike a cash account, where the worst case is losing what you deposited, margin borrowing can leave you owing your broker money.
Opening a Margin Account
You cannot trade on margin in a standard cash brokerage account. You have to open a dedicated margin account and sign a margin agreement, which lays out the credit terms and commits you to the requirements set by the Federal Reserve, FINRA, and the firm itself.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
Before you can place your first margin trade, you have to deposit at least $2,000 in cash or eligible securities. That minimum comes from FINRA Rule 4210, and your broker can require more.2FINRA. FINRA Rule 4210 – Margin Requirements If the stock you want to buy costs less than $2,000, you only need enough cash to cover the full purchase price.
Your broker also has to hand you a margin disclosure statement before or when you open the account. That disclosure warns you that you can lose more than you deposit, that the firm can force-sell your securities without contacting you first, and that you are responsible for any balance left after a forced sale.3FINRA. FINRA Rule 2264 – Margin Disclosure Statement
Initial Margin and Maintenance Margin
Two thresholds control your account: the initial margin (what you must put up to open the trade) and the maintenance margin (what you must keep in the account afterward). Both are expressed as a percentage of the current market value of your holdings.
Initial Margin
The Federal Reserve’s Regulation T sets the minimum initial margin at 50% for most equity purchases. You fund at least half of the purchase price with your own money and the broker lends you the rest.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts The authority for that rule sits in Section 7 of the Securities Exchange Act, which directs the Federal Reserve Board to prescribe how much credit brokers can extend for securities purchases.4Office of the Law Revision Counsel. 15 US Code 78g – Margin Requirements
Brokers can demand more than 50%, and many do for volatile stocks, thinly traded issues, or concentrated positions. These stricter house requirements give the firm extra cushion against fast price swings.
Maintenance Margin
Once the trade is open, FINRA Rule 4210 requires you to keep equity equal to at least 25% of the current market value of the securities in the account.2FINRA. FINRA Rule 4210 – Margin Requirements Equity is the market value of your holdings minus what you owe the broker. Divide equity by total market value and you have your margin percentage.
Most firms set their own maintenance thresholds between 30% and 40%, and higher for riskier holdings.1U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts Fall below whatever number your broker uses and you’ll get a margin call.
Margin Calls and Forced Sales
A margin call is your broker telling you that your equity has fallen below the required maintenance level, usually because the market value of your holdings dropped. You have to bring the account back into compliance, quickly.
You generally have three options: deposit more cash, transfer in fully paid marginable securities, or sell existing positions to pay down the debit balance. The window is short. Under Regulation T, the standard payment period is the number of business days in the settlement cycle plus two, which comes out to three business days under the T+1 settlement rules that took effect in 2024.5FINRA. 2025 Extensions of Time Filing Schedule Your broker can shorten that window under its own house rules.6FINRA. Know What Triggers a Margin Call
Forced Liquidation
This is where margin trading gets genuinely dangerous. If you don’t meet the call in time, your broker can sell securities in your account without asking permission and without warning you first. The broker also chooses which positions to sell and in what order. You have no say.7U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
Proceeds from a forced sale go straight to paying down your debit balance. If they aren’t enough to cover the loan plus accrued interest and fees, you still owe the difference. You can lose more than your original deposit.3FINRA. FINRA Rule 2264 – Margin Disclosure Statement
A forced sale is also a taxable event. Any gain or loss on the liquidated shares is treated the same as if you had voluntarily sold them, so you may owe capital gains taxes on positions you didn’t want to close. A loss from the forced sale can offset other gains, but the timing is out of your hands.
In limited situations a broker can request an extension of time from FINRA to delay liquidation, but you can’t file for one yourself, and most retail investors never see one.8FINRA. How to File an Extension of Time With FINRA Don’t plan around it.
Interest Costs on the Loan
Borrowing on margin isn’t free. Interest accrues daily on your outstanding debit balance and is typically charged to your account once a month. That monthly charge is added to the debit balance, so interest compounds and can push your account closer to a margin call even if your holdings stay flat.
The standard calculation uses a 360-day year. To get your daily interest, multiply the debit balance by the annual rate, then divide by 360. Multiply that by the days you carry the loan.
Most brokers use a tiered rate structure where larger loan balances get lower rates. As of early 2026, margin rates at major brokerages range from roughly 5% for large balances at discount brokers to above 11% for smaller balances at full-service firms.9Interactive Brokers. US Margin Loan Rates Comparison The rate is usually a spread over a benchmark like the broker’s base rate, which moves with Federal Reserve policy. When the Fed raises rates, your margin loan gets more expensive.
The cost of borrowing is a constant drag. If your position earns 8% but the loan costs 7%, your net return on the borrowed portion is 1%. A leveraged position has to clear the interest hurdle before the borrowed capital actually starts making money for you.
Tax Treatment of Margin Interest
Margin interest is generally deductible as investment interest expense, with a ceiling: you can only deduct investment interest up to the amount of your net investment income for the year.10Office of the Law Revision Counsel. 26 US Code 163 – Interest Net investment income includes things like taxable interest, non-qualified dividends, and short-term capital gains. Long-term capital gains and qualified dividends don’t count unless you elect to treat them as ordinary income, which means giving up the lower tax rate on those gains.
If your margin interest exceeds your net investment income in a given year, the excess carries forward indefinitely. You can deduct the leftover amount in any future year when you have enough investment income to absorb it.11Internal Revenue Service. Publication 550 – Investment Income and Expenses
To claim the deduction, you’ll usually need to file IRS Form 4952 with your return. There’s a narrow exception: if your investment income from interest and ordinary dividends (minus qualified dividends) exceeds your investment interest expense, you have no other deductible investment expenses, and you have no carryforward from the prior year, you can skip the form and deduct the full amount directly.11Internal Revenue Service. Publication 550 – Investment Income and Expenses
Securities You Can’t Buy on Margin
Not everything qualifies for margin lending. Securities that don’t meet the definition of a margin equity security under Regulation T are called non-margin-eligible. If you want to hold one of these in a margin account, you have to put up 100% of the purchase price yourself, and the position carries a 100% maintenance requirement, so it gives you no borrowing power.12FINRA. Treatment of Non-Margin Eligible Equity Securities
Common non-marginable categories include stocks trading under $5 per share (penny stocks), newly issued IPO shares during their first trading days, and certain over-the-counter bulletin board securities. Your broker may also flag specific stocks as non-marginable if they’re especially volatile or come from distressed issuers. Check whether a security is marginable before building a leveraged strategy around it.
Pattern Day Trader Rules
Margin accounts used for frequent short-term trading face an extra layer of regulation. If you execute four or more day trades within five business days, and those trades represent more than 6% of your total activity in the margin account during that period, FINRA classifies you as a pattern day trader.13FINRA. Day Trading
That classification comes with a much higher minimum equity requirement: $25,000, maintained in the margin account on every day you trade. If the account drops below $25,000, you cannot day trade until you restore the balance. The threshold is set by FINRA Rule 4210 and applies regardless of your broker’s house requirements, though your broker can set an even higher floor.2FINRA. FINRA Rule 4210 – Margin Requirements
In exchange for the higher capital requirement, pattern day traders get more buying power. Standard margin accounts let you borrow up to 50% of a purchase. Pattern day trader accounts typically get four times the maintenance margin excess as buying power for day trades, effectively quadrupling the leverage available for positions opened and closed the same day. That extra leverage makes it possible to lose money faster, which is exactly why the $25,000 minimum exists.