A margin account lets you borrow money from your brokerage to buy stocks and other investments

A margin account is a type of investment account where your brokerage firm lends you money to buy securities — stocks, bonds, exchange-traded funds, and similar investments. You put up some of your own cash as a down payment (called your margin), and the brokerage covers the rest. In exchange, you pay interest on the borrowed amount, just as you would on any loan.

This is different from a regular cash account, where you can only buy investments with money you already have. A margin account gives you the ability to purchase more than your cash alone would allow. The catch is that if your investments lose value, you owe the full borrowed amount back regardless — and the brokerage can force you to sell your holdings to recover their money.

Margin accounts are offered by most stock brokerages and are common among people who trade frequently or want to amplify their investment positions. They are not the same as a line of credit, though both involve borrowing. A line of credit is money you can use for any purpose. A margin account is specifically for buying investments, and the investments themselves serve as collateral for the loan.

Key Takeaways

  • A margin account allows you to borrow from your brokerage to buy investments, using your own cash as a down payment.
  • You pay interest on the borrowed amount, and the interest rate varies by brokerage and the size of your loan.
  • If your investments drop in value, you may face a margin call — a demand to deposit more cash or sell holdings to cover the brokerage's risk.
  • Margin accounts are riskier than cash accounts because losses are magnified when you are borrowing, and the brokerage can force sales without your permission.
  • You must meet a minimum deposit requirement (often $2,000) and maintain a minimum account balance to keep a margin account open.

How the borrowing works in a margin account

When you open a margin account, the brokerage sets a margin requirement — the percentage of the purchase price you must cover with your own money. The most common requirement is 50%, meaning you put up half and the brokerage lends you the other half. Some brokerages allow lower percentages for experienced traders, and some securities have higher requirements.

Let's say you have $5,000 in your margin account and want to buy $10,000 worth of stock. You put in your $5,000, and the brokerage lends you $5,000. You now own the stock, but you owe the brokerage $5,000 plus interest. The interest rate is usually a percentage per year, charged monthly on the outstanding balance. Rates vary between brokerages and typically range from 5% to 12% annually, though this changes with market conditions.

The stock itself serves as collateral. The brokerage holds the shares in your account and can sell them if you fail to repay the loan or if the account falls below the minimum balance requirement. This is where margin accounts differ most from unsecured lines of credit — the brokerage has a direct claim on the investments you bought with borrowed money.

What a margin call is and when it happens

A margin call occurs when the value of your investments drops enough that your equity (the portion you own outright) falls below the brokerage's maintenance requirement. Most brokerages require you to maintain at least 25% to 30% equity in your account at all times. If you fall below that, the brokerage will demand that you deposit more cash or sell some holdings when ready.

Here's a concrete example: You bought $10,000 of stock with $5,000 of your own money and $5,000 borrowed. Your equity is 50%. If the stock drops to $6,000, your equity is now $1,000 (the $6,000 value minus the $5,000 you still owe), which is about 17%. Most brokerages would issue a margin call at this point. You would have a few days — the exact timeline varies by brokerage — to deposit $1,000 or more, or the brokerage will sell your shares without asking your permission.

Margin calls can happen quickly in volatile markets. If you do not have cash available to meet the call, you will be forced to sell at whatever price the market is offering at that moment. This can lock in losses and is one of the biggest risks of margin accounts.

The costs and interest you pay on borrowed money

The primary cost of a margin account is the interest on borrowed funds. Unlike a fixed-rate loan, margin interest rates can change. Your brokerage sets a base rate and may offer discounts based on your account size — larger accounts sometimes may have access to for lower rates. You are charged interest monthly on the average daily balance of your margin loan.

If you borrow $5,000 at 8% annual interest, you would pay roughly $33 per month (though the exact amount depends on how many days are in the month and how long you hold the loan). Over a year, that is $400 in interest alone. If you hold the margin loan for multiple years, the interest compounds and becomes a significant expense.

Some brokerages also charge account maintenance fees or require a minimum deposit to open a margin account — often $2,000 to $5,000. A few charge inactivity fees if you do not trade frequently. Read your brokerage's fee schedule carefully before opening a margin account, as these costs add up.

Why margin accounts are riskier than regular investment accounts

Margin accounts magnify both gains and losses. If you invest $5,000 of your own money and the investment gains 20%, you make $1,000. But if you borrow $5,000 and invest $10,000 total, a 20% gain means $2,000 profit — double the return. This is why some traders use margin: the potential upside is larger.

The downside is equally magnified. A 20% loss on $10,000 is $2,000, wiping out your entire $5,000 down payment and leaving you owing the brokerage $2,000 more. In extreme cases, you can lose more than you invested. If the market crashes and your shares become worthless, you still owe the full borrowed amount.

Margin calls add another layer of risk. You may be forced to sell at the worst possible time — when prices are low and you are most likely to lock in losses. You have no control over which securities the brokerage sells; they will liquidate whatever is needed to meet the call. This can disrupt your long-term investment strategy.

Who should and should not use a margin account

Margin accounts are designed for experienced investors who understand the risks and have a clear strategy for using borrowed money. They work best for people who trade frequently, have substantial cash reserves to cover margin calls, and can tolerate significant short-term losses. Professional traders and active investors often use margin to increase their trading power.

Margin accounts are generally not suitable for long-term buy-and-hold investors, people new to investing, or anyone without an emergency cash fund. If you cannot afford to lose your initial investment plus cover a margin call within days, a margin account will expose you to forced sales and compounding losses. The interest costs also eat into returns on long-term positions, making margin less attractive for buy-and-hold strategies.

If you are unsure whether a margin account makes sense for your situation, start with a regular cash account. You can always open a margin account later once you have more experience and a clearer understanding of your risk tolerance.

How to open a margin account and what you need to know first

Opening a margin account is straightforward: most brokerages offer them as an option when you set up an account or allow you to upgrade an existing cash account. You will need to sign a margin agreement that explains the terms, including the interest rate, maintenance requirements, and the brokerage's right to liquidate your holdings if you fall below minimums.

Before you open one, confirm the margin requirement (usually 50%), the maintenance requirement (usually 25% to 30%), and the current interest rate. Ask whether the rate changes based on account size or market conditions. Find out how many days you have to meet a margin call and whether the brokerage charges any account fees.

You will also need to meet the minimum deposit requirement, which varies by brokerage but is typically $2,000 to $5,000. Some brokerages require more for certain types of trading. Once your account is open, you can borrow up to your margin limit, but you do not have to — you can use a margin account like a regular cash account if you choose.

Frequently Asked Questions

Can I lose more money than I invested in a margin account?

Yes. If you borrow $5,000 and invest $10,000 total, and the investment becomes worthless, you still owe the $5,000 plus interest. In theory, you could owe more than your initial investment, though brokerages typically force sales before losses reach that point.

What happens if I cannot meet a margin call?

Your brokerage will sell your holdings without your permission to raise the cash needed to meet the call. They will sell whatever is necessary to bring your account back into compliance, which may not be the securities you wanted to sell.

Is the interest on margin loans tax deductible?

Margin interest may be deductible as an investment expense if you itemize deductions on your tax return, but rules vary and depend on your income level and how the borrowed money was used. Consult a tax professional about your specific situation.

Can I use margin to buy any investment?

No. Stocks and most exchange-traded funds are marginable, but some securities like penny stocks, mutual funds, and options have restrictions or cannot be bought on margin at all. Your brokerage will tell you which securities are marginable.

How is margin interest different from credit card interest?

Margin interest is typically lower than credit card interest and is charged only on the borrowed amount. Credit card interest applies to your entire balance. However, margin interest rates can change, while credit card rates are usually fixed once set.