A margin account lets an investor borrow from a broker against eligible securities, increasing exposure and collateral risk.
A margin account is a brokerage account that allows an investor to borrow from the broker against eligible securities in the account. The account creates leverage, so gains and losses are measured against a smaller amount of investor equity than a fully paid cash purchase.
The securities in the account act as collateral. If collateral value falls or requirements rise, the broker can restrict trading, require additional equity, or sell securities under the margin agreement. This page is educational and does not recommend using margin.
| Feature | Cash account | Margin account |
|---|---|---|
| Funding | Trades are paid with settled cash or fully paid securities | Trades can use investor equity plus broker credit |
| Leverage | Generally no broker loan for securities purchases | Leverage can increase exposure beyond cash deposited |
| Interest cost | No margin interest on a broker loan | Margin interest accrues on borrowed balances |
| Liquidation risk | Selling may still occur for settlement or account issues | Broker can liquidate collateral to meet margin requirements |
| Short selling | Usually not available | Commonly requires a margin account and borrow arrangements |
The investor deposits cash or eligible securities. The broker calculates equity, loan value, buying power, and required margin based on the account, holdings, and current rules. When the investor buys securities using margin, the broker finances part of the purchase and holds the account assets as collateral.
The important account equation is practical rather than universal:
| Item | Meaning |
|---|---|
| Market value | Current value of securities in the account |
| Debit balance | Amount borrowed from the broker, before any accrued interest not yet posted |
| Account equity | Market value minus the debit balance |
| Required margin | Equity or collateral required by rules and broker policy |
| Excess equity | Equity above the applicable requirement |
An investor deposits $8,000 and buys $12,000 of eligible stock using a $4,000 margin loan. If the stock later falls to $10,000, the loan is still $4,000 before interest, so account equity is $6,000.
The position may still be above the broker’s requirement, or it may require action depending on the security, account, concentration, and current margin rules. The broker’s calculation controls the margin status, not the investor’s original trade plan.