A margin account lets you borrow money from your brokerage to buy more investments than you could pay for in cash

When you open a regular investment account, you can only buy as much as you have money for. A margin account works differently: your brokerage lends you money so you can buy more stocks, bonds, or other investments than your cash balance would normally allow. You pay interest on the borrowed amount, similar to a loan.

The investments you buy sit as collateral — meaning the brokerage can sell them if you don't repay the loan or if the value of your account drops below a certain level. This is why margin accounts carry more risk than regular accounts. You can lose more than you invested, because you're responsible for repaying the borrowed money even if your investments decline sharply.

Margin accounts are offered by most brokerages — firms like Fidelity, Charles Schwab, E-Trade, and others. They're common among people who trade frequently or who want to amplify their investment positions, but they're not required for basic investing.

Key Takeaways

  • A margin account allows you to borrow from your brokerage to buy investments, using your existing investments as collateral.
  • You pay interest on the borrowed amount, and the interest rate varies by brokerage and the size of your loan.
  • If your account value falls below the brokerage's minimum requirement, you must deposit more cash or sell investments to bring it back up — this is called a margin call.
  • Margin accounts can amplify your gains, but they also amplify your losses, and you can owe more than your original investment.
  • Opening a margin account requires approval from your brokerage and usually a minimum deposit, often between $2,000 and $25,000 depending on the firm.

How borrowing on margin actually works

When you want to buy an investment on margin, you put up part of the purchase price in cash and borrow the rest from your brokerage. The percentage you must pay yourself is called the initial margin requirement, and it's set by federal regulation at 50% for stocks — meaning you must put up at least half the purchase price yourself. Your brokerage may require more.

Let's say you have $5,000 in your margin account and you want to buy $10,000 worth of stock. You pay $5,000 from your account and borrow $5,000 from the brokerage. The stock sits in your account as collateral. You now owe the brokerage $5,000 plus interest.

The interest rate your brokerage charges varies. It's usually between 6% and 12% per year, depending on the brokerage, the size of your loan, and current market conditions. The larger your loan, the lower the rate is often. Interest accrues daily and is usually charged to your account monthly.

What a margin call is and when it happens

Your brokerage requires that the value of your account stay above a certain level relative to what you owe. This is called the maintenance margin requirement, and it's typically 25% for stocks — though brokerages often set it higher, sometimes at 30% or 35%.

If the value of your investments drops, the equity in your account shrinks. When your account value falls below the maintenance requirement, your brokerage issues a margin call — a demand that you deposit more cash or sell investments to bring your account back above the minimum.

Here's a concrete example: You borrowed $5,000 to buy $10,000 of stock, so you have $5,000 equity. If your stock drops to $6,500 in value, your equity is now $1,500 (the $6,500 value minus the $5,000 you owe). At a 25% maintenance requirement, you need to maintain at least $1,625 in equity. You're now below that, so you get a margin call. You must deposit at least $125 in cash, or sell some of the stock to raise cash.

If you don't meet a margin call within the timeframe your brokerage sets — usually a few business days — the brokerage can sell your investments without asking you. They'll sell enough to bring your account back into compliance, and you'll be responsible for any losses.

The difference between margin accounts and regular accounts

In a regular cash account, you can only buy what you have money for. If you have $5,000, you can buy $5,000 worth of investments. You own them outright, and there's no loan or interest involved.

In a margin account, you can buy more than your cash balance allows by borrowing. This amplifies both gains and losses. If your $5,000 investment grows to $7,000, you've made $2,000 — a 40% return. But if you used margin to buy $10,000 of stock with $5,000 of your own money and $5,000 borrowed, and that stock grows to $12,000, your equity grows from $5,000 to $7,000 — still a 40% return on your own money, but you're paying interest on the borrowed $5,000.

Conversely, if that $10,000 investment drops to $8,000, your equity drops to $3,000 (the $8,000 value minus the $5,000 you owe). You've lost $2,000 of your own money — a 40% loss — even though the investment only dropped 20%. And you still owe the interest on the borrowed amount.

Opening a margin account and what you need to know first

To open a margin account, you'll need to contact your brokerage and request one. Most brokerages require you to sign a margin agreement, which is a legal document explaining the terms, risks, and interest rates. You'll need to read this carefully — it spells out exactly when the brokerage can issue a margin call and what happens if you don't meet it.

Most brokerages require a minimum deposit to open a margin account, typically between $2,000 and $25,000. Some firms have no minimum, but they may charge higher interest rates on smaller loans. Check your specific brokerage's requirements.

Before opening a margin account, understand that you're taking on debt. Margin works well when investments are rising and you're confident in your strategy. It works poorly when you're uncertain, when you can't afford to cover a margin call, or when you're new to investing. Many people who use margin lose money because they underestimate how quickly losses can mount or because they panic and sell during downturns.

Interest rates and fees on margin accounts

The cost of borrowing on margin is the interest rate your brokerage charges. This rate is not fixed — it changes based on market conditions and your brokerage's policies. Some brokerages publish their margin rates publicly on their websites; others require you to call or log in to see yours.

Interest is calculated daily on the balance you owe and is usually charged monthly. If you borrow $5,000 at 8% annual interest, you'll pay roughly $33 per month (though the exact amount depends on how many days are in the month and the precise calculation method your brokerage uses).

Some brokerages offer lower rates if you maintain a large account balance or if you borrow a large amount. Others charge higher rates for smaller loans. A few brokerages also charge a monthly maintenance fee on margin accounts, though this is less common.

Risks specific to margin accounts

The biggest risk is that you can lose more than you invested. If you put $5,000 down and borrow $5,000, you have $10,000 at risk. If that investment drops 60%, it's worth $4,000. You still owe $5,000, so you're now $1,000 in the hole — you've lost your entire $5,000 plus an additional $1,000 of money you don't have.

A second risk is forced selling. If you can't meet a margin call, your brokerage sells your investments without your permission. This locks in losses and may trigger tax consequences if the investments were profitable when sold.

A third risk is that margin calls can happen suddenly during market downturns, when you may not have cash available to deposit. If you can't meet the call, you have no choice but to sell, often at the worst possible time.

Margin is also not suitable if you're borrowing to cover living expenses or other debts. It's a tool for investing, not for general borrowing.

Frequently Asked Questions

Can I use margin to buy any investment?

No. Federal rules allow margin for stocks and some bonds, but not for all investments. Mutual funds, options, and cryptocurrencies have different rules or may not be marginable at all. Your brokerage will tell you which investments you can buy on margin.

What happens if the stock market crashes and I can't pay a margin call?

Your brokerage will sell your investments to raise the cash needed to bring your account back into compliance. You'll be responsible for any losses, and you may owe money even after the sale if the proceeds don't cover what you owe.

Is margin the same as a line of credit?

They're similar in that both let you borrow money, but they work differently. A margin account uses your investments as collateral and is tied to your brokerage account. A line of credit is a separate loan from a bank or lender that you can draw from for any purpose. Margin is specifically for buying investments.

Can I pay back my margin loan whenever I want?

Yes. You can repay a margin loan at any time by depositing cash into your account or by selling investments. There's usually no penalty for early repayment, though you'll owe interest up to the date you repay.

Do I have to use margin if I open a margin account?

No. You can open a margin account and never borrow. You can use it like a regular cash account if you choose. However, you'll still be responsible for any margin fees your brokerage charges, and you'll need to understand the terms in case you do decide to borrow later.