Trading on Margin

Margin is borrowing from your broker to buy more than your cash allows, amplifying both gains and losses.

A real-world scenario

An investor uses margin to double a $50,000 account into $100,000 of stock. The market drops 25%, the account falls to $75,000 against a $50,000 loan — equity of $25,000 on a $75,000 position, well below the maintenance margin. The broker demands more cash. Unable to meet the call, the investor watches positions sold at the lows. What would have been a tolerable 25% paper loss on their own money became a forced sale that locked in a 50% loss of equity. Margin turns drawdowns into permanent damage.

Why it matters

It lets small accounts take bigger positions.

Common confusion

A drop can trigger a margin call forcing sales at the worst time; losses exceed deposits.

Worked example

How investors use it

Treat margin as a risk multiplier, not free money. Borrow only when you can survive the worst case, and remember interest accrues daily even if the market goes nowhere.

Key takeaway

Margin amplifies both gains and losses, and the loss side is what ends accounts. A margin call forces you to sell at the worst time or deposit more cash, and the broker can liquidate without consent. The interest also accrues daily, quietly bleeding the position even when the market goes nowhere. Treat margin as a risk multiplier, size so the worst case is survivable, and never borrow money you would be forced to sell in a downturn. The worst case is the only case that matters.

Definitions reviewed by the Investing Glossary editorial team.