How does a margin account work?
Last updated August 2026
Short answer
The mechanics are simple and the risk is not symmetric. Amplified gains are pleasant; amplified losses can end the position at the worst possible price.
How the borrowing works
You deposit cash or securities, and the broker extends credit against their value.
Federal rules generally cap the initial loan at 50% of the purchase price of marginable securities, and brokers apply their own stricter limits on volatile names.
Interest accrues daily on the borrowed balance at a rate the broker sets and can change at any time.
Why losses amplify
With $10,000 of your own money and $10,000 borrowed, a 20% fall in the position is a $4,000 loss against your $10,000 of equity, which is 40%.
The loan does not shrink when the market does, so the entire decline lands on your share.
Interest continues throughout, which means a position that recovers to break even has still cost you money.
Maintenance and margin calls
After purchase, you must keep equity above a maintenance requirement, commonly 25% under exchange rules and often higher at the broker's discretion.
Falling below it triggers a margin call: add cash, add securities, or have positions sold.
Brokers can liquidate without prior notice, choose which holdings to sell, and do it at the prevailing price, which in a falling market is the worst one available.
Try it in Walnut
Walnut connects to your brokerage and reads what you hold, including a margin account, so leverage is visible rather than buried in an account summary.
Other things the agreement permits
Securities in a margin account can generally be lent out by the broker, which is how share lending programmes operate.
Maintenance requirements can be raised at any time, including on a specific security the broker has become uncomfortable with.
Voting rights on lent shares may pass to the borrower, which matters mainly in contested corporate votes.
Legitimate uses
Short-term liquidity, where selling would realise a large taxable gain and the need is temporary.
Settlement convenience, since a margin account avoids waiting for funds to settle between trades.
Options and short selling eligibility, which brokers generally require a margin account for regardless of whether you carry a balance.
Portfolio margin and other variants
Some brokers offer portfolio margin to larger accounts, calculating requirements from overall risk rather than position by position.
It permits more leverage, which means the same risks arrive faster and at a scale that can exceed the account.
Cash accounts, by contrast, permit no borrowing at all, which is the correct setting for most long-term investors.
Sources
Margin rules, maintenance requirements and what brokers may do without notice are published by FINRA at Margin Accounts and by the SEC at investor.gov. Investment interest deductibility is covered in IRS Publication 550. Walnut is informational and is not an investment adviser. This guide is educational and not personalized investment advice.
FAQ
How does a margin account work?
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Your broker lends you money against the securities in your account, which act as collateral. You pay interest on the balance, and the borrowed money buys more securities than your cash alone could. Gains and losses are both amplified.
How much can I borrow?
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Federal rules generally allow borrowing up to 50% of the purchase price of marginable securities, and brokers frequently impose stricter limits on volatile holdings. Maintenance requirements then govern how much equity you must keep as prices move.
What is a margin call?
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A demand to add cash or securities when your equity falls below the maintenance requirement. If you do not meet it, the broker can sell holdings in your account to restore the ratio, and it can do so without contacting you first.
Can the broker really sell without asking?
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Yes. The margin agreement you sign permits it, and in fast markets brokers act quickly. They also choose which securities to sell, and you have no say in the timing or the price.
What does margin cost?
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Interest, charged daily on the borrowed balance at a rate the broker sets and can change without notice. Rates typically fall as the borrowed amount rises, and they are frequently higher than most people assume.
Is margin interest tax deductible?
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Investment interest expense may be deductible against net investment income if you itemise, with any excess carried forward. It is a narrower benefit than it sounds and depends entirely on your wider tax position.
Do I have to borrow if I have a margin account?
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No. Many people hold margin accounts and never carry a balance, using the designation only for faster settlement or options eligibility. The risk arrives with the borrowing, not with the account type.
Can retirement accounts use margin?
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Generally not in the borrowing sense. IRAs may offer limited margin for settlement purposes, but true leverage is prohibited, which removes the most dangerous version of this from most people's largest accounts.
What is portfolio margin?
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A method some brokers offer larger accounts that sets requirements from overall portfolio risk rather than position by position. It permits more leverage, which means the same risks arrive faster and can exceed the account's value.
Should most investors use margin at all?
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Most do not need to. Borrowing to invest raises the range of outcomes in both directions and adds an interest cost that runs whether the position works or not. Holding a margin-designated account without carrying a balance avoids all of that.