Margin account
Also known as: margin brokerage account
A margin account is a brokerage account that lets an investor borrow money from the broker-dealer to buy securities, using the securities themselves as collateral. It amplifies both gains and losses compared to paying in full.
A margin account is a brokerage account in which the customer can borrow part of the purchase price of securities from the broker-dealer. The securities in the account serve as collateral for the loan, and the customer pays interest on the borrowed balance. This contrasts with a cash account, where every purchase must be paid for in full.
Initial borrowing is governed by Regulation T, the Federal Reserve rule that currently requires customers to deposit at least half of a stock purchase, with the firm lending the rest. After the purchase, FINRA's minimum maintenance rules take over: equity in the account must stay above a floor (25% of market value for long positions). If falling prices push equity below that level, the firm issues a maintenance call demanding more cash or securities — and can liquidate positions if the customer doesn't respond.
Margin is a leverage tool. Borrowing doubles your buying power, so a 10% move in the stock produces roughly a 20% move in your equity — in either direction. Opening one also requires extra paperwork, including a margin agreement with a hypothecation provision pledging the securities as collateral, plus a risk disclosure document.
Margin accounts are tested heavily on the securities exams. The Series 9 devotes an entire section to margin rules, while the Series 65 and Series 66 focus on how cash and margin accounts differ, the required customer agreements, and minimum maintenance requirements.
Key takeaways
- A margin account lets the customer borrow from the broker-dealer to buy securities, with the securities pledged as collateral.
- Regulation T sets the initial deposit requirement, and FINRA maintenance rules set the ongoing equity minimum.
- Falling equity triggers a maintenance call, and the firm can sell out positions if it isn't met.
- Leverage magnifies both gains and losses relative to a fully paid cash position.
- Opening a margin account requires a signed margin (hypothecation) agreement and risk disclosure.