A margin loan is broker credit secured by securities in a margin account and used to finance investment exposure.
A margin loan is money borrowed from a broker and secured by assets in a margin account. The loan is usually used to buy securities or carry investment positions, and the broker can protect the loan by requiring more collateral or selling account assets.
A margin loan is not a fixed installment loan. The balance, collateral value, interest cost, and required equity can change with market prices and broker rules.
| Step | What happens | Risk to watch |
|---|---|---|
| Account approval | Investor opens or converts to a margin account | Approval does not mean margin is suitable for every trade |
| Securities purchase | Investor buys with equity plus broker credit | Exposure is larger than investor cash |
| Loan accrual | Broker records a debit balance and charges interest | Interest can compound or accrue daily depending on broker policy |
| Collateral monitoring | Broker compares equity with requirements | Falling prices can reduce the cushion quickly |
| Margin action | Broker may demand funds or sell assets | Liquidation may occur during unfavorable market conditions |
An investor buys $20,000 of stock using $12,000 of cash and an $8,000 margin loan. If the stock rises, the investor benefits from exposure to the full $20,000 position, after repaying the loan and paying costs. If the stock falls to $15,000, the investor still owes the $8,000 loan before interest, so equity is $7,000.
The broker will compare that equity with current requirements. If the account is below requirement or near a house-risk limit, the broker may require more equity or reduce the position.
| Feature | Margin loan | Traditional loan |
|---|---|---|
| Collateral | Securities and cash in the brokerage account | Often property, business assets, or borrower credit |
| Loan amount | Changes with collateral value and broker rules | Usually fixed at origination unless revolving |
| Repayment schedule | Often no fixed amortization schedule while margin is permitted | Commonly scheduled payments |
| Lender control | Broker can sell collateral under the margin agreement | Lender remedies depend on loan terms |
| Main use | Investment or trading exposure | Consumer, business, property, or other financing |