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.

Reg T Requirements: Federal Reserve Board Regulation T sets the initial margin requirement at 50 percent of the purchase price for most marginable equity securities. This means an investor can borrow no more than 50 cents for every dollar of stock purchased at inception. Reg T also governs the time frame within which initial margin must be deposited — generally before settlement of the purchase. Certain securities, including most options and many OTC stocks, are not marginable under Reg T and must be purchased entirely with cash in most circumstances. Brokers may impose more restrictive initial margin requirements than Reg T's minimum, and frequently do for highly volatile or thinly traded securities.

Maintenance Margin: After the initial purchase, the account must satisfy ongoing maintenance margin requirements rather than the initial Reg T threshold. FINRA Rule 4210 sets the regulatory floor at 25 percent of the current market value of long equity positions, but most major retail brokers set house maintenance requirements of 30 to 40 percent. If account equity as a percentage of market value drops below the house maintenance level — whether due to price declines, interest accrual, or a combination — the broker issues a margin call requiring the investor to restore equity to the required level. Monitoring account equity relative to the maintenance threshold on a continuous basis is a key discipline for any investor using leverage.