Margin Debt

What is margin debt?

Margin debt is the amount an investor borrows from a broker through a margin account to buy securities. The investor’s own funds in the account are the equity (or margin), while the borrowed portion is the margin debt. Securities purchased on margin serve as collateral for the loan.

How it works

• Regulation T (Federal Reserve) sets the initial margin minimum at 50% for most stock purchases: an investor can borrow up to half the purchase price. Brokers may impose stricter limits.
• Example: An investor buys 1,000 shares at $100 (total $100,000). With 50% initial margin she invests $50,000 of her own cash and borrows $50,000. The shares act as collateral.

Historical note: Extremely loose margin lending (e.g., borrowing 90% of purchase) contributed to the 1929 stock market crash, which is why margin rules are more restrictive today.

Risks and rewards

• Leverage magnifies both gains and losses.
• Positive scenario: If the stock rises to $150, the 1,000 shares are worth $150,000. After repaying the $50,000 loan, the investor’s equity is $100,000 — a 100% return on her $50,000 cash investment (vs. 50% if she had used $100,000 cash).
• Negative scenario: If the stock falls to $60, the position is worth $60,000. After subtracting the $50,000 loan, equity is $10,000. If equity falls below the maintenance requirement, the broker can issue a margin call or liquidate holdings.

Pros
* Allows purchase of larger positions with less cash.
* Can amplify percentage returns.

Cons
* Creates debt that must be repaid.
* Exposure to margin calls and forced liquidation if equity falls.
* Potentially large losses that exceed the investor’s cash invested.

Margin calls and timing

• A margin call occurs when account equity drops below the maintenance margin requirement. Brokers (and exchanges/FINRA) commonly require a maintenance margin of about 25%, though many brokers set higher levels (e.g., 30–40%).
• If a margin call is issued, brokerages typically give customers about 2–5 days to meet it by depositing cash or marginable securities. If the call isn’t met, the broker can sell holdings — often without prior notice — to restore compliance.

Account minimums and day trading rules

• To open a margin account, firms generally require a minimum deposit. FINRA/SEC rules effectively require at least $2,000 for most margin accounts; if the total purchase price is under $2,000, you must deposit 100% of that purchase.
• Pattern day trader rule: If you execute four or more day trades within five business days (and those trades are more than 6% of your activity), you may be designated a pattern day trader and must maintain minimum equity of $25,000 in the account.

Bottom line

Buying on margin can boost returns but also increases risk, including the chance of rapid losses and forced liquidation. Margin strategies are best reserved for experienced investors who understand leverage, maintain adequate cash reserves, and can tolerate potential losses.

Sources

• U.S. Securities and Exchange Commission — Margin: Borrowing Money to Pay for Stocks; Investor Bulletin: Understanding Margin Accounts; Margin Rules for Day Trading
• Financial Industry Regulatory Authority (FINRA) — Brokerage Accounts: Margin Accounts; Know What Triggers a Margin Call
• Federal Reserve History — Stock Market Crash of 1929