Margin stock is any security a broker or bank will accept as collateral for a loan used to buy or carry more securities. Federal rules set which securities qualify, cap the loan at 50 percent of the purchase price, and require you to keep a minimum level of equity in the account at all times. That 50-percent initial requirement has been in place since 1974 and applies to every broker-dealer in the country.1Federal Reserve. Regulation U Compliance Guide
Which Securities Count as Margin Stock
The Federal Reserve’s Regulation T defines the category. The most straightforward case is any security registered on a national securities exchange or listed on the Nasdaq Stock Market. Shares of a well-known company bought through a major exchange almost certainly qualify.2eCFR. 12 CFR 220.2 – Definitions
Beyond listed stocks, the definition reaches:
- Bonds and other debt instruments, which generally qualify regardless of where they trade.
- Shares of open-end mutual funds and unit investment trusts registered under the Investment Company Act. Many brokerages, however, require a holding period of at least 30 days before letting you pledge them.
- Certain foreign securities that meet Federal Reserve criteria.
- Convertible debt that can be exchanged into a security already qualifying as margin stock.
You may also encounter the older term “OTC margin stock.” Before 1999, this was a separate regulatory category for over-the-counter securities meeting specific Federal Reserve criteria, largely replaced when Nasdaq-listed securities received their own recognition in Regulation T.3eCFR. 12 CFR 220.11 – Requirements for the List of Marginable OTC Stocks and the List of Foreign Margin Stocks
What Doesn’t Qualify
Plenty of securities fall outside the definition and cannot be used as collateral for a margin loan:
- Thinly traded OTC stocks, including Pink Sheets and lower-tier OTC markets, which lack the liquidity and reporting margin eligibility requires.
- Standardized options and futures contracts, which are excluded from Regulation T’s definition of margin security and operate under separate exchange-set margin frameworks.
- Recently issued IPO shares, commonly treated as non-marginable for a period after the offering (typically 30 days) so a trading history can develop. This is standard brokerage practice rather than a specific FINRA rule.
- Recently purchased mutual funds, which qualify by regulation but which many brokerages will not let you pledge for at least 30 days.
You can still buy non-marginable securities inside a margin account, so long as you pay for them fully with cash or with buying power generated by other marginable positions. You just cannot use the non-marginable securities themselves as collateral.
The 50-Percent Initial Requirement
When you buy margin stock, you must put up at least 50 percent of the purchase price in cash or fully paid-for securities. The broker lends the other half, secured by the shares you just bought. To purchase $20,000 of stock on margin, you need at least $10,000 of your own equity in the account.4Federal Reserve Board. Federal Reserve Annual Report 2005 – Initial Margin Requirements Under Regulations T, U, and X
Brokers can always require more than 50 percent, and many do for volatile stocks or concentrated positions. They can never require less. A separate floor catches smaller accounts: FINRA requires a minimum equity deposit of $2,000 before you can trade on margin, or 100 percent of the purchase price if you’re buying less than $2,000 worth of securities.5FINRA. FINRA Rule 4210 – Margin Requirements Opening a margin account with $500 and borrowing another $500 is not allowed.
Maintenance Margin and Margin Calls
After the purchase, a second rule kicks in. FINRA sets an absolute floor of 25 percent of the total market value of the margin securities you hold, calculated as your equity (securities value minus what you owe).6U.S. Securities and Exchange Commission. Understanding Margin Accounts In practice most brokerages enforce a “house requirement” of 30 to 40 percent to give themselves a cushion against fast-moving declines. The specific threshold depends on the firm and sometimes on the individual security.
When your equity drops below the maintenance level, you get a margin call: a demand for additional cash or marginable securities to bring the account back into compliance.7FINRA. Know What Triggers a Margin Call This is where the practical risk lives. Your broker is not required to give you advance warning. Most firm agreements grant the right to sell your holdings immediately, without consulting you, to cover the shortfall. The broker chooses which positions to liquidate, and the tax consequences of those forced sales land on you.
Even when a formal call is issued, the timeline is tight. Regulation T provides one payment period (currently four business days from the trade date) to meet an initial margin deficiency, and maintenance calls can run shorter. Miss the call and the firm liquidates whatever it takes to restore the required equity.
What Margin Interest Costs You
The money your broker lends is not free. Interest accrues daily on the outstanding debit balance, typically calculated by multiplying the balance by the annual rate and dividing by 360. Most firms charge monthly and use a tiered rate structure in which smaller balances pay higher rates.
Because interest compounds daily, a position held on margin for months can quietly erode your returns even when the stock rises. A gain of 8 percent in a year looks different once you have paid 9 or 10 percent on the borrowed half of the position.
There is a partial tax offset. The IRS treats margin interest as investment interest expense. If you itemize, you can deduct margin interest up to the amount of your net investment income for the year, which is your interest, ordinary dividends, and other investment income minus investment expenses other than interest. Any margin interest you cannot deduct because it exceeds net investment income carries forward to future years.8Internal Revenue Service. Publication 550 (2025) – Investment Income and Expenses The calculation goes on IRS Form 4952.9Internal Revenue Service. About Form 4952 – Investment Interest Expense Deduction
Loans From Banks and Foreign Lenders
Regulation T covers borrowing from a broker-dealer, but two companion rules extend the same limit elsewhere. Regulation U governs credit from banks and other non-broker lenders when the loan is secured by margin stock and used to buy or carry securities. The maximum loan value is the same 50 percent of current market value that applies to broker-dealer lending.10eCFR. 12 CFR 221.7 – Supplement: Maximum Loan Value of Margin Stock and Other Collateral Non-bank lenders that regularly extend such credit above certain thresholds must register with the Federal Reserve.11eCFR. 12 CFR Part 221 – Credit by Banks and Persons Other Than Brokers or Dealers (Regulation U)
Regulation X places obligations directly on borrowers. If you obtain credit from a foreign lender to purchase margin stock, the loan must conform to the same margin requirements that would apply if the lender were a domestic broker or bank.12eCFR. 12 CFR Part 224 – Borrowers of Securities Credit (Regulation X) It was added after some borrowers argued the margin rules bound only lenders. That argument no longer works.
The Pattern Day Trader Threshold
Active traders on margin should know one more line. If you make four or more day trades within five business days and those trades represent more than 6 percent of your total trading activity in that period, FINRA classifies you as a pattern day trader. That designation requires a minimum equity of $25,000 in the margin account, maintained at all times.13FINRA. Day Trading
If your account dips below $25,000, day trading stops until you restore the balance. Funds deposited to meet the requirement cannot be withdrawn for at least two business days. Exceeding your day-trading buying power and failing to meet the resulting call within five business days restricts the account to cash-only trading for 90 days.5FINRA. FINRA Rule 4210 – Margin Requirements Many firms set their own thresholds higher. Check your broker’s house rules before you trip the designation, because the restrictions are mechanical once triggered.