What Is a Margin Account?
A margin account is a brokerage account that lets you borrow from the broker to hold more than your cash covers. The loan is secured by the positions themselves, which is why a broker can sell them without asking once account equity drops under a set percentage.
How it works
A margin account is a loan facility attached to a brokerage account. You put up cash, the broker lends against it, and you hold a larger position than your own money would buy.
What makes it different from an ordinary loan is the collateral. The security for the loan is the position itself. If the position falls, the collateral falls with it — the thing backing the debt and the thing losing value are the same thing.
Nothing about the price changes because you borrowed to buy it. The chart above is the same chart whether you paid cash or used four times your money. That sounds obvious and it is the single most misunderstood thing about margin: leverage is applied to the outcome, not to the probability.
Two numbers govern the account. The initial requirement is what fraction of the purchase your own money must cover. Under Regulation T that is 50%, so $10,000 of cash buys $20,000 of stock.
The maintenance requirement is the second number — the fraction your equity must stay above once the position is on. Financial Industry Regulatory Authority (FINRA) sets the floor at 25%, and brokers routinely set their own higher on volatile names. A house requirement of 40% on a thin stock is common and it is not negotiable.
The maintenance arithmetic
Equity is what you would have left if everything sold right now: position value minus what you borrowed. The call comes when equity divided by position value falls under the maintenance fraction.
Run that for Regulation T margin. Per dollar of your own money you hold two dollars of stock and owe one. Equity stays above 25% until the position falls to two-thirds of what you paid. That is a 33.3% fall, and the level is drawn on the chart below at 66.63 against an entry of 99.95.
Now run it at 4:1, which is the intraday buying power a pattern day trader gets. Per dollar you hold four and owe three. Equity over value is 3 ÷ (4 × 0.75) = 1.0 — the maintenance line sits exactly at your entry price. A fully extended day-trading account has no cushion at all before the first tick against it. That is not a warning dressed up as arithmetic; it is what the formula returns.
A worked example
Take $10,000 and buy $20,000 of stock at 99.95. You owe $10,000. The position falls 20% to 79.96, so it is worth $16,000 and you still owe $10,000. Equity is $6,000, which is 37.5% of value — above 25%, no call, and you have lost 40% of your money on a 20% move.
Push the fall to 33.3% and value is $13,340 against the same $10,000 debt. Equity is $3,340, which is 25% of value. That is the call.
What arrives is a demand with a deadline, usually two to five business days, and two ways to meet it: deposit cash, or close enough of the position that the ratio comes back above the line. Do neither and the broker closes it for you, picking what to sell and when.
There are two kinds of call and they behave differently. A house call comes from your broker’s own requirement and can often be met by talking to them. A Regulation T call is regulatory and cannot be waived by anyone at the firm.
The loan also charges interest daily. On a position held for months that is a real drag, and it is charged whether the position is working or not.
When it fails
A stop-loss does not cap a margin loss. A stop is an instruction to trade at the market once a price prints. If the market opens through it, you are filled where it opened — and the shortfall is money you borrowed, so a large enough gap can leave the account owing more than it holds.
And most of the time nothing dramatic happens. Leverage simply makes an ordinary sideways stretch more expensive, because every cost — the spread, the interest, the round trip — is multiplied while the range is not.
The other failure is arithmetical rather than dramatic. A cash account cannot go below zero: the worst case is that the position becomes worthless. A margin account can, because the debt is fixed while the collateral is not. Owing the broker after a position closes is a real outcome, not a theoretical one, and it is the reason the deposit is not the maximum loss.
The failure that catches people is timing, not direction. The maintenance calculation runs on the broker’s clock. Being right about the company three weeks after being sold out of it is the same outcome as being wrong.
The original data
Of the 24,971 videos measured for this site, exactly one covers margin accounts directly — and its median is 125,237 views, the highest of any market-mechanics topic in the set. That gap between how much the subject is searched for and how little of it exists is why this page is long.
The numbers on this page are computed, not repeated. The 33.3% figure comes from solving the maintenance equation, and the levels drawn on the charts are that solution applied to the site’s shared price history. The 4:1 result — a maintenance line sitting at the entry — falls out of the same formula and is the reason the risk per trade question matters more here than anywhere else.
Related
Margin is the account; leverage is what you do with it, and the sizing maths is identical. Short selling is a margin position whether you asked for one or not. The pattern day trader rule is what governs the 4:1 case, and settlement explains why a cash account behaves so differently.
I have never used more than 2:1 on anything I hold overnight, and the reason is not discipline — it is that I did the arithmetic once and did not like where the number landed. A third of the way down sounds like a lot until you look at what a bad month actually does.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.