Break it down: Margin and margin call

Margin balances have reached a new record high as investors continue to chase bigger gains and borrow against their portfolio investments to buy more stock. Margin debt reached the highest level in 12 years as investors borrowed a record $880.3 billion against their investment portfolios through March 2025, according to the Financial Industry Regulatory Authority (FINRA).

But what exactly is margin, and what does it mean to borrow against your investment? We’re here to explain the lingo to you.

What is margin?

Margin is the money borrowed from a brokerage firm to purchase an investment. The existing securities in your account are used as collateral for the loan, but unlike a typical loan which has a set limit, this value can fluctuate as the value of your account changes. Banks and brokerage firms charge interest on the collateralized loan.

Typically, margin allows an investor to leverage buying power up to two times what it would be without margin. For example, if you deposit $5,000 into your margin account, you can purchase up to $10,000 worth of securities.

Risks and benefits of buying on margin

Margin investing comes with potentially greater reward, but it also can be very risky. Margin investing allows you to buy more securities than you might normally be able to afford. It can also be advantageous at times when the investor anticipates earning a higher rate of return on the investment than what they are paying in interest on the loan. However, buying on margin also exacerbates any losses.

Generally speaking, buying on margin is typically not for beginners because it requires a certain amount of risk tolerance, and the investments need to be closely followed. Seeing a stock lose and gain value over time can be quite stressful for some people, especially when the investment is dependent on a loan.

There is also a high potential for loss, particularly during a stock market crash, and you can lose more funds than you initially deposited into your margin account. Your bank or brokerage can increase its maintenance margin requirements at any time, and it can sell your assets without contacting you if you face a margin call.

How do I “buy on margin”?

Buying on margin occurs when an investor buys securities by borrowing the balance from a bank or broker. In order to buy on margin, you must have a margin account rather than a standard brokerage account. There is typically an initial minimum investment required to open a margin account. This initial deposit is known as the minimum margin. Throughout your time investing, you must always cover a percentage of the purchase price of a security with cash or collateral. The percentage requirement is known as initial margin and the current initial margin requirement by the Federal Reserve Board’s Regulation T is 50%. Meaning, investors can borrow no more than half of the purchase price, with the remaining balance paid in cash or collateral.

Going back to our example: After depositing $5,000 into your margin account, you have purchasing power of up to $10,000 worth of securities. If you buy $2,000 worth of stock, you still have $8,000 worth of buying power remaining. In this event, you haven’t tapped into your margin yet because you only start borrowing money after you buy securities worth more than $5,000.

Now let’s take this example one step further. You decide to purchase 100 shares of Company ABC at $100 per share, using $5,000 in cash and the remaining $5,000 in margin for a total purchase price of $10,000. One year later, the share price appreciates to $200. You sell all 100 shares for $20,000. When you sell the stock in a margin account, the proceeds first go to your bank or broker against the repayment of the loan until it is fully paid. So you immediately pay $5,000 back to your bank or broker and receive a take-home value of $15,000, tripling your initial $5,000 investment.

But not every scenario results in a performance gain. Consider that instead of doubling after a year, shares in Company ABC lose half their value and are now only worth $50 per share. You decide to sell at a loss and receive $5,000. Since this is the amount you borrowed from your bank or broker, you repay the loan and lose 100% of your investment. Had you not used margin for your initial investment, you still would have lost money, but that would have only been 50% of your investment.

What is a margin call?

Every margin account requires you to maintain a minimum account balance, known as maintenance margin. If you do not maintain that balance, your bank or broker will force you to deposit more funds into the account or sell stock to pay down your loan and bring your account balance back to the required level. When this happens, it is known as a margin call.

A margin call usually indicates that one or more of your positions has lost value. When a margin call occurs, you must choose whether to add more cash to the account or sell some of the securities in your account.

If you do not meet a margin call, your bank or broker can close out any open positions you have in order to bring the account back to the minimum required balance. Your bank or broker can do this without your permission, and they can choose which investments to liquidate. You are not entitled to an extension of time on a margin call.

View Disclosures