Margin trading lets you invest with borrowed money, increasing your buying power beyond what you could afford with cash alone. That sounds appealing — but it also introduces a level of risk that many investors underestimate.
Before using margin, it’s important to understand not just how it works, but how quickly things can go wrong.
What is margin trading?
Margin trading is when you borrow money from your broker to buy stocks or other investments.
Instead of paying the full cost of a trade, you put up a portion of the money and your broker covers the rest. Your existing investments act as collateral for the loan.
That changes the equation in two important ways:
You can take larger positions than your cash balance allows.
Your gains and losses are both amplified.
The borrowed funds aren’t free — you’ll pay interest as long as you carry a margin balance, and you’re responsible for repaying it regardless of how your investments perform.
How does margin trading work?
Margin trading works similarly to regular investing — except you’re using borrowed money.
Here’s the simple version:
You deposit cash into a margin account.
Your broker lets you borrow against that balance.
You buy securities using both your money and borrowed funds.
You repay the loan (plus interest) when you sell or add cash.
Margin trading looks simple. In practice, it’s a system that’s constantly adjusting based on market movements.
When you open a margin account, your broker gives you access to a line of credit tied to your portfolio. You can use that credit to place trades alongside your own cash.
In the US, most investors start with 50% initial margin, meaning you can borrow up to half the value of a stock purchase.(1) So if you want to buy $10,000 worth of stock, you might put up $5,000 and borrow the other $5,000.
But the more important number isn’t the initial margin — it’s the maintenance margin. This is the minimum account value you must maintain at all times.
If your investments drop and your account falls below that threshold, your broker can step in and force changes to your account. That’s where risk comes into play.
Example: How margin amplifies gains (and losses)
Let’s say you invest $5,000 of your own money and borrow another $5,000 to buy $10,000 worth of stock.
If the stock rises 20%:
Your position grows to $12,000.
After repaying the $5,000 loan, you’re left with $7,000.
That’s a $2,000 gain on your original $5,000.
Now flip it.
If the stock falls 20%:
Your position drops to $8,000.
You still owe $5,000 (plus interest).
You’re left with $3,000.
That’s a $2,000 loss — nearly double what you would have lost without margin. This dynamic — amplified upside and downside — is the defining feature of margin trading.
*FINRA requires a minimum of $2,000 to open a margin account.(2)
With a cash account, your risk is limited to what you invest. With margin, your risk can exceed it.
What is a margin call?
A margin call is one of the most important — and misunderstood — parts of margin trading.
If the value of your account drops below your broker’s required minimum, you’ll be asked to bring it back up. That usually means depositing cash or selling investments.
But here’s the key detail: you may not have much time to act.
If markets move quickly, your broker can liquidate positions on your behalf to cover the shortfall. That can lock in losses at exactly the wrong moment.
This is what makes margin different from a typical loan — you don’t control the timing.
How much can you borrow?
How much you can borrow depends on the margin requirement of the investment — or the percentage you’re required to pay yourself. In the US, most stocks have a 50% initial margin requirement, but some assets may require more or less depending on risk.
To see how this works, let’s use a simple example.
If you want to buy $1,000 worth of stock:
Margin requirement
You pay
You borrow
50%
$500
$500
35%
$350
$650
20%
$200
$800
At a 50% margin requirement, you fund half the trade and borrow the rest. At 20%, you’re putting up less of your own money — which means you’re borrowing more and using higher leverage.
The lower the requirement, the more leverage you’re using — and the more sensitive your account becomes to price swings.
Another way to think about it:
Lower margin requirement → more borrowing power
More borrowing power → higher potential returns
Higher potential returns → higher risk
That’s because smaller price moves have a bigger impact on your account when more of your position is funded with borrowed money.
What does margin trading cost?
Margin trading doesn’t have a flat fee — the cost comes from borrowing.
As long as you’re using margin, you’ll pay interest on the borrowed amount, usually calculated daily and charged monthly.
Rates vary widely depending on:
The broker you use
The size of your loan
Whether you have a premium account
Larger balances often qualify for lower rates, but even small differences in interest can add up over time.
If you hold positions for longer periods, margin costs can quietly eat into your returns — even if your investments are performing well
What investors actually use margin for
Margin isn’t just about “buying more stock.” It’s typically used in specific situations:
Short-term trading. Traders use margin to amplify small price movements over short periods.
Buying dips. Some investors use margin to increase exposure during market pullbacks.
Short selling. Margin is required to borrow shares and bet against a stock.
Options strategies. Certain strategies require margin accounts to execute.
These uses can be effective — but they all depend on timing and risk management.
What can you trade on margin?
Margin accounts can be used for a wide range of investments:
Some brokers also offer limited crypto margin trading, but this is far riskier and not widely available in the US.
Pros and cons of margin trading
Pros
Increased buying power
Potential for higher returns
Access to advanced trading strategies
Cons
Losses are amplified
Interest costs reduce profits
Risk of margin calls and forced liquidation
Is margin trading worth it?
Margin trading isn’t inherently good or bad — it just changes the stakes.
It tends to make more sense for:
Active traders managing positions daily
Investors using short-term strategies
People comfortable with higher risk
It tends to make less sense for:
Long-term, buy-and-hold investors
Beginners
Anyone who isn’t closely monitoring their account
If you’re investing for the long run, margin often adds complexity and risk without a clear benefit. But for experienced traders, it can be a useful — and powerful — tool.
Margin availability is only part of the picture. Rates, platform tools, maintenance requirements and whether you need a premium subscription can all materially affect the true cost of trading on margin.
eToro securities trading offered by eToro USA Securities, Inc. (‘the BD”), member of FINRA and SIPC. Investing involves risk, and content is provided for educational purposes only, does not imply a recommendation, and is not a guarantee of future performance. Finder is not an affiliate and may be compensated if you access certain products or services offered by the BD.
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Bottom line
Margin trading can increase your returns — but it also increases your risk in ways that aren’t always obvious at first. It’s not just about borrowing money. It’s about how leverage changes the behavior of your entire portfolio.
If you’re going to use margin, make sure you understand how it works in real market conditions — not just when things are going up. Compare the best trading platforms to see which brokers offer margin trading, low rates and the tools you need.
Frequently asked questions
Trading on margin means borrowing money from your broker to buy investments, increasing your buying power.
Margin trading is significantly riskier than regular investing because you can lose more than your initial investment.
Yes. You must repay margin loans with interest, regardless of whether your investment gains or loses value.
If you can't meet a margin call, your broker may automatically sell your investments to cover the shortfall.
Matt Miczulski is an investments editor and market analyst at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on Yahoo Finance, CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University.
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