Trading with leverage magnifies both gains and losses. You could lose more than your initial deposit. Leveraged products are not suitable for all investors.
Your capital is at risk. Investments can go down as well as up and you may get back less than you put in.
This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
Margin trading lets you borrow money from your broker to buy more securities than your cash balance allows. It amplifies both gains and losses, making it a powerful but risky tool.
How margin works
You deposit $5,000 in a margin account. With 50% initial margin (Regulation T requirement), you can buy up to $10,000 worth of securities — your $5,000 plus $5,000 borrowed from the broker.
If your $10,000 investment rises 10% to $11,000, you repay the $5,000 loan and keep $6,000 — a 20% return on your original $5,000.
If your $10,000 investment falls 10% to $9,000, you repay the $5,000 loan and are left with $4,000 — a 20% loss on your original $5,000.
Margin doubles the percentage move in both directions.
Margin requirements
Initial margin (Regulation T). You must deposit at least 50% of the purchase price. To buy $10,000 of stock, you need at least $5,000 in cash or fully paid securities.
Maintenance margin. After you buy, your equity must stay above a minimum — typically 25% for stocks (FINRA Rule 4210). Some brokers set higher requirements (30-35%). If your equity drops below the maintenance level, you get a margin call.
Pattern Day Trader (PDT) rule. If you execute 4 or more day trades within 5 business days in a margin account, you are classified as a Pattern Day Trader and must maintain a minimum of $25,000 in equity. This is a FINRA rule.
Margin calls
If your account equity falls below the maintenance requirement, the broker issues a margin call. You must deposit cash or sell securities to bring equity back above the requirement, typically within 2-5 business days.
If you do not meet the margin call, the broker can sell your securities without notice. They choose which positions to liquidate — you do not. This can trigger taxable capital gains and lock in losses.
What margin costs
You pay interest on the amount you borrow. Rates vary dramatically:
| Broker | Margin Rate ($10K) | Annual cost on $10K |
|---|---|---|
| Interactive Brokers | 5.83% | $583 |
| Robinhood Gold | 5.75% (+$60/yr) | $635 |
| Webull | 6.74% | $674 |
| Fidelity | 9.75% | $975 |
| Charles Schwab | 10.75% | $1,075 |
The difference between the cheapest and most expensive broker on a $50,000 margin balance is over $2,500 per year. See the margin rates comparison.
Risks of margin trading
Amplified losses. Margin multiplies losses the same way it multiplies gains. A 20% drop in a fully margined position wipes out 40% of your equity.
Forced liquidation. The broker can sell your securities at any time and at any price without consulting you if a margin call is not met.
Interest accumulates daily. Even if your investments are flat, the margin interest compounds against you. A $10,000 margin balance at 10% costs $1,000 per year just to hold.
Not for beginners. The combination of leverage, interest, and forced liquidation risk makes margin unsuitable for new investors.
When margin makes sense
Margin is appropriate for:
- Active traders who know their numbers. If you have a strategy with a proven edge and need leverage to scale it.
- Short-term borrowing. Using margin for a few days rather than months or years.
- Portfolio margin. For accounts over $100,000, risk-based margin requirements can be more favourable than Regulation T.
It is not appropriate for long-term buy-and-hold investors who can achieve their goals without borrowing.
Common questions
Can I trade on margin without paying interest? No. Interest accrues daily on the borrowed amount. You pay interest even if your investments lose money.
What happens if my broker goes bankrupt while I have a margin balance? Stocks held in a margin account that have been loaned out by the broker may be more difficult to recover in a SIPC liquidation. SIPC coverage still applies to your net equity.
Is margin the same as options leverage? No. Options provide leverage through the contract structure. Margin provides leverage through borrowing. The risks and mechanics are different.
Where to start
If you are new to investing, use a cash account. Upgrade to margin only after you understand the risks and have consistent profits in a cash account. If you trade on margin, use Interactive Brokers for the lowest rates. Read the margin rates comparison.