A margin account lets you borrow from your broker to buy more stock than your cash alone allows. The leverage cuts both ways: a 30% rise becomes a 50%+ gain on your equity, and a 30% drop can wipe you out.
How It Works
You deposit cash. The broker matches it (typically up to 50% of the purchase price for an initial buy). The borrowed amount earns interest, paid by you, daily.
If your stock falls and the equity in your account drops below the maintenance margin (often 25%), you get a margin call — deposit more cash or the broker sells your positions, often at the worst possible time.
The Math
If you put up $10,000 and borrow $10,000 to buy $20,000 of stock:
- Stock rises 20% → portfolio is $24,000. Repay $10,000 → you have $14,000. Return = 40% on your cash (minus margin interest).
- Stock falls 20% → portfolio is $16,000. Repay $10,000 → you have $6,000. Loss = 40%.
- Stock falls 50% → portfolio is $10,000. Repay $10,000 → you have $0. Loss = 100%.
Our Stock Profit Calculator helps model the unleveraged side; layer the leverage manually.
The Costs
Margin interest is currently 8–12% APR depending on broker and balance. That is a high hurdle: the stock must earn more than the margin rate for borrowing to be net-positive.
Regulatory Limits
- Reg T initial margin: 50% for most stocks.
- Maintenance margin: 25% federal minimum; brokers often require 30–35%.
- Pattern Day Trader rules kick in if you make 4+ day trades in 5 business days with a margin account under $25,000.
When It Makes Sense
- Short-term liquidity (a few days, against an obvious price catalyst) at low cost.
- Tax-loss harvesting bridges while waiting on settled funds.
- Almost never for long-term holdings.
Bottom Line
The math is brutal: borrowing at 10% to chase a 7% long-term average is negative-expected-value. Most investors are best off never opening a margin account.
Run the numbers yourself
Plug your own inputs into our free calculators — no signup.