How do margin requirements and balances work?

Buying on margin can be a high-risk investment strategy because you can lose more than you invested if the market turns against you, but it does allow investors to purchase stock beyond their available cash or to deposit other assets in lieu of cash to use as collateral to buy on margin.

But what exactly does it mean to buy on margin? And what do you need to know before taking on this approach?

Let’s break it down below.

What is margin trading?

Margin is the money you borrow from a brokerage firm to purchase an investment.

Essentially, buying on margin means the broker is giving you a loan or advancing you a line of credit, which you agree to pay back later with interest. When you do this, the brokerage uses the securities in your brokerage account as collateral. If you’re able to repay the loan plus interest, you can keep your existing assets. If you fail to repay the loan, the brokerage may liquidate the securities in your account to cover your loan.

The ability to borrow against your existing assets without having to liquidate them may help magnify potential returns. However, it can also amplify potential losses. This type of investment strategy can be highly risky, so understanding how margin works and the risks, as well as carefully monitoring, is crucial when trading on margin.

Understanding margin balances

An account’s margin balance can be either a debit or credit balance. A debit balance shows the total amount of money owed inclusive of any unapplied interested charges by the account holder (borrower) to the broker (lender). This is the more common occurrence in equity markets, as most investors engage in buying stocks.

A credit balance shows the funds that were credited to the account due to a transaction. This may be the result of a cash deposit into the account or because the account holder has sold some of their holdings.

What are margin interest rates?

The interest rate on margin trading is set by the broker/dealer and comes with an annual rate based on the amount borrowed. This adds to the overall cost of margin trades and can potentially limit your profits.

Margin accounts vs. cash investing accounts

To trade on margin, you need to apply for a margin. If you’re interested in buying stocks, a margin account will allow you to buy more shares than you would otherwise be able to buy if you just used your own money. This means you have more buying power. How much more will depend on the margin requirement set by your broker.

This is different from the standard cash account, which is the default option for most investors. In a standard cash account, your buying power is equal to the amount of money you put into your account.

What are margin requirements?

Margin requirements are meant to protect the broker (lender) by ensuring the borrower (you) maintains enough equity (cash/securities) to cover potential losses if you are trading on margin. Margin requirements are expressed as a percentage of the total value of the trade that must be funded by the account holder.

Different types of securities have different lending values. Brokerages will have two types of margin requirements to offset the risk they’re taking by allowing investors to use margin:

The Federal Reserve Board regulates the initial requirements under Regulation T, which sets an industry-wide initial margin requirement of 50% for equity securities which meets their “margin security” definition.  FINRA governs the minimum maintenance requirements under Rule 4210.  They also set the minimum equity required to use margin, which is currently set at $2,000.  Your broker, however, may set higher maintenance requirements known as “house requirements”.

What does this mean in practice? If the initial margin requirement is 50% and you want to buy $20,000 of a stock, you need at least $10,000 in your account, and the broker will lend you the remaining $10,000.

If the broker has a house maintenance requirement of 30% on your margin account, and the value of the equity in the account falls below 30% of the total market value of the securities, you will receive a margin call requiring you to deposit additional collateral or reduce your loan amount.

What happens if you don’t meet margin requirements?

If an investor’s equity falls below the maintenance margin requirement, they will receive a margin call, requiring them to deposit additional assets or liquidate their positions to restore the required equity. Failure to do this can lead to the broker selling the securities to recover the loaned funds.

Margin trading can carry a great deal of risk for investors. If you miscalculate or your margin trade is affected by an unexpected shift in the market, you risk losing all of the securities in your account. You may find yourself in debt as well if the sale of the assets in your account aren't enough to cover your loan.

The bottom line

Trading on margin may be a powerful tool for investors looking to increase their buying power, but it also comes with great risks. Understanding margin requirements – including initial and maintenance margins – is essential to managing leverage effectively. Whether you’re considering opening a margin account or want to ensure you’re meeting the required equity thresholds, staying informed will help you make smarter investment decisions.

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