Basics of Buying on Margin: What's Margin Trading?

Traders get more bang for their trading buck—or at least, that's the idea. With margin trading, you're only required to deposit a percentage of the notional value of a given investment product, which can increase how much you can purchase with the funds in your account. Margin provides leverage that could enhance returns. Through margin, traders put up less than the full cost of a trade, potentially enabling them to make larger trades than they could if they were required to put up the entire notional value of the position. 

Margin trading requires a "margin account," and this typically requires submitting an application and posting collateral with your broker, and you must pay margin interest on money borrowed. Margin interest rates vary among brokerages. In many cases, securities in your account can act as collateral for the margin loan. (A Charles Schwab account that's approved for margin trading must have at least $2,000 in cash equity or eligible securities and a minimum of 30% of its total value as equity at all times.)

Under Reg T, a Federal Reserve Board rule, a trader can borrow up to 50% of the purchase price of securities that can be purchased on margin, also known as initial margin. Some securities have a higher margin requirement, thereby lowering the percentage that can be borrowed against the security.

Exchanges and self-regulatory organizations, such as Financial Industry Regulatory Authority, or FINRA, have their own margin trading rules, and brokerages can establish their own margin requirements as long as they're at least as restrictive as Reg T, according to the U.S. Securities and Exchange Commission (SEC). FINRA requires a minimum deposit with a brokerage firm of $2,000, or 100% of the purchase price, whichever is less. This is known as the minimum margin.

Let's say a trader wants to buy 1,000 shares of a marginable stock that's currently trading at $50 per share. If the trader bought it with only the cash in their account, they'd need $50,000. But if they bought the shares through a margin trading account, they'd only need to have $25,000 in their account to purchase them—the other $25,000 would be funded by margin, which is borrowed money from the broker.

If the stock's share price rises from $50 to $55 and the trader sold it to realize a gain of $5 per share, or $5,000, they'd have a 20% return because they only had to use $25 per share of their own cash. The other $25 per share was paid with funds borrowed from the broker, boosting the return.

But margin cuts both ways. If the stock's share price dropped and the trader sold it for $45 per share, they would realize a loss of 20%—double what the loss would be if they paid for the stock entirely in cash. And don't forget, the whole time you're holding a margin loan balance, you're incurring interest on that amount.

Because margin magnifies both profits and losses, it's possible to lose more than the initial investment used to purchase the stock. This magnifying effect can lead to a margin call when losses exceed a limit set either by a broker or the broker's regulating body. This "maintenance margin" limit, which may be increased by the broker without prior notice, often ranges from 30% to 40% instead of the initial 50% required at the time of purchase.

The SEC spells out a pretty clear message. On its website, it says that margin accounts "can be very risky and they are not suitable for everyone." Before opening a margin account, the SEC suggested investors should fully understand that "you can lose more money than you have invested," and they may be forced to sell some or all their securities when falling stock prices reduce the value of the securities.

In volatile markets, the SEC explains that "investors who put up an initial margin payment for a stock may, from time to time, be required to provide additional cash if the price of the stock falls." Some investors "have been shocked" to learn their brokerage has the right to sell their securities bought on margin—without any notification and potentially at a substantial loss to the investor, according to the SEC.

Similar to a bank loan, there is an interest charge associated with borrowing funds through margin. For more information about margin interest charges, contact your broker for specifics.

Margin requirements—also called performance bonds—for futures and forex trading are substantially lower than stocks, typically ranging from 3% to 15% of the total contract value. Performance bonds are financial guarantees required of both buyers and sellers of futures to ensure they fulfill contract obligations.

Unlike margin on stocks or portfolio margin, margin on futures and forex trading is not a loan. To open a futures position, you must provide a deposit (sometimes called a good faith deposit). The amount of the deposit is the "initial margin" required to open the position. The required margin after opening the position is known as the "maintenance margin" requirement or level. If the account's balance falls below the maintenance level, the account value would be in a margin call, and you'd be required to add additional funds immediately. Failure to restore the account to the maintenance margin requirement and meet the margin call can result in the liquidation of the futures positions.

Futures initial margins are set by the exchanges (firms may hold higher house requirements) and vary depending on the underlying asset (market volatility is also a factor). For example, May 2025 CME Group WTI Crude Oil futures required an initial margin of $11,701.80, or roughly 20% of the total contract value. The contract was trading around $56 per barrel in April 2025, meaning one futures contract covering 1,000 barrels of oil had a notional value of about $56,000. 

Margin requirements in the retail foreign exchange (forex) market can be even lower—2% to 3% of the total value. "Generally, forex rules allow for the most leverage, followed by futures, then equities," said Nick Theodorakos, managing director of margin risk at Schwab. "Depending on the product, forex and futures leverage can be at 20-to-1 or even 50-to-1 compared to equities' overnight margin of 4-to-1." It's important to note that while futures and forex products offer greater leverage, they also carry a higher risk of loss, potentially greater than the initial investment and with smaller price moves.

When used with caution and discipline, leverage can be a valuable tool in a trader's toolbox, but the warning bears repeating: Margin trading is a double-edged sword. It can magnify losses as well as gains. If you plan to use margin as a trading strategy, make sure you understand the risks and be sure to monitor your accounts carefully.