MARGIN ACCOUNTS & BUYING ON MARGIN
Plain English
A margin account lets you borrow money from your broker to buy more stock than you could with cash alone. It amplifies both gains and losses. The broker charges interest on the loan. If your position drops too far, you get a margin call and must deposit more cash immediately.
Going deeper
Margin accounts allow investors to borrow up to 50% of a position's purchase price (Regulation T). If you have $10,000, you can control up to $20,000 in stock. The borrowed amount accrues interest (typically 5-10% annually). Maintenance margin requires you to keep a minimum equity percentage (usually 25-30%) in your account at all times. If your account equity falls below this threshold, a margin call requires you to deposit more funds or have positions liquidated. Margin magnifies both gains and losses. Pattern Day Trader (PDT) rules apply if you execute 4+ day trades in 5 days with under $25,000 in the account.
Examples
Leverage Amplification
You have $10K cash. Using 2:1 margin, you buy $20K of stock. The stock rises 10% → stock worth $22K. You repay the $10K loan. Profit: $2,000 (20% return on your $10K) vs. just 10% without margin. But if stock drops 10% → stock worth $18K. After repaying loan: $8K. You lost 20% on your cash.
Margin Call
You buy $50K of stock using $25K of your own money and $25K borrowed. Stock drops 30% to $35K. Equity is now $10K (35K - 25K loan). With a 25% maintenance requirement, you need $35K × 25% = $8,750. You're close to the limit. Another 5% drop and you get a margin call.