Margin

What Is Margin?

In investing, margin is a loan from a brokerage firm that lets an investor buy more securities than their cash balance would allow. The investor's account and the securities in it act as collateral for the loan. Buying on margin means using this borrowed money, and an account that permits it is called a margin account. A cash account does not offer borrowing. The word also has unrelated meanings, such as profit margin, but in trading it refers to borrowing.

How Margin Works

Margin accounts have two key requirements. The initial margin is the share of a purchase that the investor must pay with their own money. In the United States, Federal Reserve rules set a minimum for most stock purchases. The maintenance margin is the minimum equity the investor must keep in the account after the purchase, and it is set by the brokerage and industry rules.

The borrowed amount accrues interest, which is charged periodically until the loan is repaid. If the account's equity falls below the maintenance requirement, the broker issues a margin call, demanding that the investor deposit cash or securities. If the investor does not respond promptly, the broker may sell holdings without prior consent to restore the required level.

An Example

Consider a hypothetical investor with 10,000 dollars in cash who wants to buy stock worth 20,000 dollars. Borrowing the other 10,000 dollars from the broker means the investor controls twice as much stock. This leverage works in both directions. If the stock rises 10 percent to 22,000 dollars, the investor repays the 10,000 dollar loan plus interest and keeps the rest. The gain on the investor's own money is about 20 percent before interest, which is larger than an unborrowed purchase would have produced.

If the stock instead falls 10 percent to 18,000 dollars, the investor's equity drops to 8,000 dollars, a 20 percent loss on their own money. Losses can also grow large enough to require additional deposits.

Why Margin Matters

Margin magnifies both gains and losses. Interest costs reduce returns, and forced selling during a market decline can lock in losses at unfavorable prices. Understanding margin requirements helps investors evaluate the risks of borrowing to invest.