Buying Stocks on Margin Explained: Borrowing to Invest, and the Risks

November 6, 2026 Invest Clarity Path Team

When you buy shares, you usually pay the full price with your own money. Buying on margin is different. It means borrowing money from your broker to buy more shares than your cash alone would allow. This guide explains how margin works and why the SEC’s investor education office says margin accounts are not appropriate for everyone.

The short answer

Buying stocks on margin means borrowing money from your broker to buy shares, using the shares in your account as security for the loan. You pay interest on the money you borrow. If the shares fall in value, your losses are bigger than they would be without borrowing, and you can lose more than the money you put in.

The biggest risk, first

Margin increases your buying power, but it also increases your losses. Investor.gov puts it plainly: “Margin increases your purchasing power, but also exposes you to the potential for larger losses.” And: “Margin accounts can be very risky and they are not appropriate for everyone.”

The first risk is that you can lose more money than you put in. In a cash account, the worst outcome is that your shares fall to zero and you lose what you paid. On margin, you still owe the money you borrowed, plus interest, even after your shares have lost most of their value. You can end up owing your broker money on top of losing your own money.

The second risk is that you can be forced to sell at the worst time, and you have little control over it. If the shares fall, your broker can demand more money or sell your shares to get the loan repaid. If the broker sells after the price has fallen sharply, you lose the chance to get your money back if the market recovers later. Your broker can sell your shares without asking you first, and you cannot choose which shares it sells. You also get no extra time to meet a margin call.

What buying on margin means

A cash account is the normal kind of brokerage account. In a cash account, you must pay the full amount for the shares you buy. You cannot borrow money from your broker to pay for them.

A margin account is different. In a margin account, your broker lends you cash to buy shares, using the account as security for the loan. The shares you buy are called margin securities. They serve as collateral, which means the broker has a claim on them until the loan is repaid.

To open a margin account, you sign a margin agreement. That agreement sets out the rules: how interest is charged, how you must repay the loan, and what the broker can do if the value of your account falls. Read it carefully before you sign, because it gives the broker strong rights.

One warning from Investor.gov is worth knowing before you open any account. Some brokerage account applications make margin accounts the default account type. Check that you are opening the account type you want before you sign your application.

How much you can borrow

Under Regulation T of the Federal Reserve Board, you may borrow up to 50 percent of the purchase price of the shares. This is known as the initial margin. Some firms require you to put in more than 50 percent.

Before you trade on margin, FINRA requires you to deposit a minimum of $2,000 or 100 percent of the purchase price of the shares, whichever is less. This is known as the minimum margin. Some firms require more than $2,000.

After you buy, you must keep a minimum amount of your own money in the account. This is the maintenance requirement. FINRA rules require it to be at least 25 percent of the total market value of the shares bought on margin. Many firms set higher requirements, typically between 30 and 40 percent.

A worked example

Here is a simple example, with made up round numbers and no interest included, showing how margin makes both gains and losses bigger. Imagine you have $5,000 of your own money. You borrow $5,000 from your broker, so you buy $10,000 of stock.

First, the shares rise by 20 percent. Your $10,000 of stock is now worth $12,000. You still owe the broker $5,000, so your own money in the account is $12,000 minus $5,000, which is $7,000. You started with $5,000 and now have $7,000, a gain of $2,000, or 40 percent. Without borrowing, a 20 percent rise would have given you only a 20 percent gain. Margin doubled the gain.

Now the other way. The shares fall by 20 percent. Your $10,000 of stock is now worth $8,000. You still owe the broker $5,000, so your own money in the account is $8,000 minus $5,000, which is $3,000. You started with $5,000 and now have $3,000, a loss of $2,000, or 40 percent. Without borrowing, a 20 percent fall would have cost you only 20 percent. Margin doubled the loss.

And the loss can go further. If the shares fell by 60 percent, your $10,000 of stock would be worth $4,000. You would still owe the broker $5,000, so you would owe $1,000 more than the shares are worth, plus interest. That is what it means to lose more than you put in. Investor.gov gives the same lesson with small numbers: a stock bought for $50 that falls to $15 costs a cash buyer 70 percent, but a margin buyer loses more than 100 percent and still owes the broker $10 plus interest.

What a margin call is

Your equity is the value of your shares minus what you owe your broker. If the shares fall, your equity falls too. When your equity drops below the firm’s maintenance requirement, the firm may ask you to add cash or shares to the account. That request is called a margin call.

Investor.gov gives this example. You buy $16,000 of shares, borrowing $8,000 from your firm and paying $8,000 in cash. If the market value of the shares drops to $12,000, your equity falls to $4,000 ($12,000 minus $8,000). If your firm has a 25 percent maintenance requirement, you must have $3,000 in equity (25 percent of $12,000), so you have enough. But if your firm has a 40 percent requirement, you would need $4,800 in equity (40 percent of $12,000). Your $4,000 is $800 short, so the firm may issue a margin call, asking you to add $800.

If you cannot meet the margin call, your firm will sell your shares to raise your equity back above the requirement. And your broker may not be required to make a margin call at all, or to tell you that your account has fallen below the requirement. Under most margin agreements, the broker can sell your shares at any time without asking you first.

The interest cost

Margin is a loan, and like all loans it charges interest. Investor.gov says: “Like all loans, margin loans charge interest. This interest directly reduces your return on investments, increasing the amount your investment needs to earn to break even.” Interest rates can vary a lot between firms. That means your shares have to rise just to cover the interest before you make any gain at all.

The margin agreement should explain how interest is calculated, and a firm must generally give you at least 30 days written notice of changes in how it is computed.

Questions to ask before you borrow to invest

Investor.gov suggests asking yourself these questions before buying shares in a margin account. Do you know that margin accounts involve much more risk than cash accounts? Are you aware you may lose more than the amount you first invested? Can you afford to lose more money than you have invested? Have you read and understood the margin agreement? Do you know what interest you will be charged, and are you aware that your broker can sell your shares without notice when your account does not have enough equity?

If the answer to any of these is no, learn more before you sign anything. Margin is a loan that makes both gains and losses bigger, and the losses can be bigger than the money you started with.

Quick answers

What does buying stocks on margin mean?

It means borrowing money from your broker to buy shares, using the shares in your account as security for the loan. You pay interest on the money you borrow.

Can you lose more than you invest on margin?

Yes. If the shares fall far enough, they can be worth less than the loan you still owe, so you lose your own money and still owe your broker money, plus interest.

What is a margin call?

It is a demand from your broker to add cash or shares to your account because your equity has fallen below the firm’s maintenance requirement. If you cannot meet it, the broker can sell your shares.

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