Reviewed by Gotrade Internal Analyst
Buying on margin allows investors to purchase securities using borrowed money from a brokerage. Understanding buying on margin is essential before exploring leveraged strategies, as it increases both potential returns and potential losses.
At its core, margin trading basics revolve around using your existing assets as collateral to access additional capital. While this can amplify gains, it also magnifies risk.
Here is how margin works and what investors should consider.
What Is Buying on Margin?
Buying on margin means borrowing funds from a broker to purchase stocks or other securities.
Instead of paying the full purchase price, the investor contributes a portion of the capital, and the broker lends the rest.
For example:
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You want to buy $10,000 worth of stock.
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You invest $5,000 of your own money.
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The broker lends you $5,000.
Your total exposure is $10,000, but only half is your capital. The borrowed portion must be repaid with interest.
Margin accounts are different from standard cash accounts because they allow borrowing against eligible securities.
How Margin Accounts Work
To buy on margin, you must open a margin account with a brokerage. There are typically two key requirements:
Initial margin requirement
This is the minimum percentage of the purchase price you must provide. In many markets, the initial requirement is around 50% for stocks, though rules vary by jurisdiction.
Maintenance margin requirement
After the position is opened, you must maintain a minimum equity level in the account. If the value of your securities declines and your equity falls below the maintenance requirement, you may receive a margin call.
A margin call requires you to:
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Deposit additional funds
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Add more collateral
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Or allow the broker to liquidate positions
Margin accounts operate continuously. If prices fall sharply, forced selling may occur.
Margin Interest and Costs
Borrowing money is not free. When buying on margin, you pay interest on the borrowed amount.
Margin interest rates vary based on:
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Broker policies
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Market interest rates
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Account size
Interest accrues daily and is charged monthly. Other potential costs include:
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Commission fees
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Maintenance fees
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Forced liquidation fees during margin calls
These costs reduce overall returns. For example:
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If your investment gains 8%
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But margin interest costs 6%
Your net gain may be significantly reduced. Margin trading should factor in both price movement and financing cost.
Risks of Margin Trading
Margin trading increases exposure and risk.
Key risks include:
Amplified losses
If the stock declines, losses are magnified relative to your invested capital.
Example:
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You invest $5,000 and borrow $5,000.
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The stock drops 20%.
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Total value becomes $8,000.
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After repaying the $5,000 loan, you are left with $3,000.
Your actual loss is $2,000, or 40% of your original capital.
Margin calls
If losses reduce account equity below required levels, brokers can demand immediate additional funds.
Failure to meet margin calls may result in automatic liquidation.
Volatility risk
In volatile markets, rapid price swings can trigger forced selling at unfavorable prices.
Emotional pressure
Leverage increases psychological stress, which may lead to poor decision-making. Margin trading basics must be fully understood before using borrowed funds.
When Margin Can Amplify Losses
Margin amplifies both gains and losses. It becomes especially risky when:
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Markets decline rapidly
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Stocks experience unexpected earnings shocks
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Interest rates rise, increasing borrowing costs
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Leverage levels are high relative to account equity
Consider another example:
You invest $10,000 using $5,000 of your own capital and $5,000 borrowed.
If the stock falls 50 percent:
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Total value becomes $5,000
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You still owe $5,000
Your equity is effectively wiped out, excluding interest costs.
In extreme cases, losses can exceed your original investment if forced liquidation occurs during sharp declines.
When building a portfolio, use Gotrade App and consider starting with unleveraged strategies before evaluating advanced tools like margin.
Leverage can enhance returns but requires disciplined risk control.
Conclusion
Buying on margin allows investors to borrow funds to increase market exposure. While it can amplify gains, it also magnifies losses and introduces additional costs.
Margin accounts require careful monitoring due to interest expenses and maintenance requirements.
For most investors, understanding margin trading basics is essential before considering leverage. Used cautiously and strategically, margin can enhance exposure. Used carelessly, it can significantly increase risk.
FAQ
What does buying on margin mean?
Buying on margin means borrowing money from a broker to purchase securities, using your existing assets as collateral.
What is a margin call?
A margin call occurs when your account equity falls below the required minimum, requiring you to add funds or risk liquidation.
Can you lose more than your initial investment with margin?
Yes. Because you are using borrowed funds, losses can exceed your original capital in extreme scenarios.
References
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Investopedia, Buying on Margin: How It's Done, Risk, Reward, 2026.
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FINRA, Guidance on Margin, 2026.
