Margin Account

A margin account differs from a standard cash account in one fundamental respect: the brokerage firm extends credit to the account holder to finance securities purchases. The investor supplies a portion of the purchase price — the initial margin — and the broker lends the remainder, charging interest on the borrowed amount. The purchased securities serve as collateral for the loan.

In the United States, margin lending for securities purchases is governed by Federal Reserve Board Regulation T ('Reg T'), which currently requires investors to deposit at least 50 percent of the purchase price of marginable securities at the time of purchase. This means a qualifying investor can control $20,000 worth of stock by depositing $10,000 of their own funds. After the initial purchase, FINRA Rule 4210 imposes ongoing 'maintenance margin' requirements: the equity in the account (market value of securities minus the loan balance) must remain above a minimum threshold — generally 25 percent of the current market value of the margined securities, though most major brokers impose higher 'house' maintenance requirements.

Margin accounts enable investors to amplify their purchasing power and potential returns. However, leverage amplifies losses just as much as gains. If a $20,000 position funded with $10,000 of equity declines to $15,000, the investor's equity has fallen from $10,000 to $5,000 — a 50 percent loss on the investor's own capital from a 25 percent decline in the security's price.

Margin accounts are also required for short selling: because short sellers borrow and sell securities they do not own, the proceeds and any additional required collateral are held in a margin account. Options trading at certain strategy levels may also require margin account status.

Interest on the margin loan accrues daily, though it is typically debited to the account monthly. Margin interest rates vary by broker and by the size of the loan balance, and are disclosed in the broker's margin agreement. Investors considering using margin should carefully read the margin agreement — required under FINRA rules — and understand the mechanics of margin calls, which occur when account equity falls below maintenance requirements.