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Buying on margin: how margin loans, interest and leverage work

How buying stock on margin works under Reg T and FINRA rules, what interest costs, and how leverage magnifies gains and losses, with fully worked examples.

Intermediate 8 min read By Finabase Research Updated Oct 30, 2026

On this page

The vocabulary of a margin purchase
The rules that set the limits
Worked example: leverage on the way up and down
How equity shrinks as the price falls
What margin interest really costs
Pitfalls
Margin compared with other ways to get leverage
How Finabase helps
Frequently asked questions
Summary

Buying on margin means buying securities partly with money borrowed from your broker. You put up some of the price, the broker lends the rest, and the shares you bought secure the loan. If the investment rises, you keep the whole gain on a position larger than your own money could buy. If it falls, you absorb the whole loss, still owe the loan in full, and pay interest the entire time.

That symmetry is the heart of margin. It is not a way to make an investment better; it is a way to make its outcome bigger. Used carelessly, it is also one of the fastest ways for an ordinary investor to lose more money than they put in.

This page explains how a US margin purchase works as of 2026: the 50% Regulation T limit on the loan, the 25% FINRA maintenance floor and the higher house requirements firms add, how margin interest is charged, and, through worked examples, exactly how leverage amplifies both gains and losses. It is an educational outline, not a recommendation to borrow.

The vocabulary of a margin purchase

Four quantities describe every margin position. Keep them straight and the rest is arithmetic.

Market value: what the securities are worth now (shares × price).
Debit balance (the loan): what you owe the broker. It does not change when the price moves; it grows with interest and shrinks when you deposit cash or sell.
Equity: market value minus debit balance, the part of the position that is yours.
Equity percentage: equity ÷ market value. Margin rules are expressed in this ratio.

Margin account identities

Equity            = Market value − Debit balance
Equity %          = Equity ÷ Market value
Leverage          = Market value ÷ Equity
Return on equity  ≈ Leverage × Price return − Interest ÷ Starting equity

The rules that set the limits

Initial margin: Regulation T's 50%

The Federal Reserve's Regulation T caps how much a broker may lend for a purchase. For "margin equity securities," the supplement at 12 CFR 220.12 sets the required margin at 50% of current market value. In FINRA's words, firms can lend a customer up to 50 percent of the total purchase price. So $5,000 of your own money can buy at most $10,000 of a marginable stock.

Regulation T also gives you a deadline. If a purchase needs a deposit to meet the 50% requirement, the money must arrive within the payment period, defined as the standard settlement cycle plus two business days, which works out to three business days after the trade date under today's T+1 settlement. Many firms simply require the funds before you can place the trade.

The $2,000 minimum

FINRA Rule 4210 requires at least $2,000 of equity before you can trade on margin (you never have to deposit more than the cost of what you buy). With less, you can still trade in the account, but only with available cash.

Maintenance margin: FINRA's 25% and house requirements

Once you hold the position, a second rule takes over. FINRA requires equity of at least 25% of the current market value of long margin securities. Since June 4, 2026 FINRA also states that this 25% requirement applies throughout the trading day, not only at the close.

Brokers may set a stricter house requirement, and most do: 30% is common, and concentrated positions, volatile stocks or leveraged ETFs can carry 50% or even 100%. Some low-priced or thinly traded securities are not marginable at all. Your firm's requirement, not FINRA's minimum, is the one that decides when you get a margin call.

Worked example: leverage on the way up and down

200 shares at $50 with a $5,000 loan (illustrative)

Setup. You deposit $5,000 and buy 200 shares at $50 = $10,000. The broker lends $5,000. Equity is $5,000, equity percentage 50%, leverage 2:1. For comparison, a cash buyer with the same $5,000 buys 100 shares.

Interest. Assume an illustrative 10% annual margin rate. Holding the loan for six months costs about $5,000 × 10% × 0.5 = $250.

Price rises 20% to $60 after six months. Market value 200 × $60 = $12,000. Debit $5,000. Equity $7,000. Gain before interest: $7,000 − $5,000 = $2,000, or +40% on your $5,000. After $250 interest: $1,750, or +35%. Cash buyer: 100 × $10 = $1,000, or +20%.

Price falls 20% to $40 after six months. Market value 200 × $40 = $8,000. Debit $5,000. Equity $3,000. Loss before interest: $2,000, or −40%. After interest: $2,250, or −45%. Cash buyer: −$1,000, or −20%.

Break-even. To cover $250 of interest, the 200 shares must gain $250, so the price must reach $50 + $250 ÷ 200 = $51.25, a 2.5% rise, before the margin trade makes anything at all.

Return on the same $5,000 after a 20% move, cash versus 2:1 margin, after six months of illustrative interest at 10%.

Notice the asymmetry once interest is included: leverage turned a 20% gain into 35%, but a 20% loss into 45%. Interest always works against you, whichever way the price goes.

How equity shrinks as the price falls

Because the loan is fixed, equity absorbs every dollar of price change, and the equity percentage falls faster than the price. For the position above, equity percentage at any price P is:

Equity percentage for this example

Equity % = (200 × P − 5,000) ÷ (200 × P) = 1 − 25 ÷ P

At $50 that is 50%. At $40 it is 37.5%. At $33.33 it reaches 25%, the FINRA maintenance floor, which is where a margin call begins. At $25 the shares are worth exactly the loan and your equity is zero. Below $25 the account owes the broker more than the shares are worth.

Equity as a share of market value for 200 shares bought at $50 with a $5,000 loan. Illustrative.

The general formula for the price that triggers a call, loan ÷ (shares × (1 − maintenance)), and what happens next are covered in Margin calls: when they trigger, how to calculate them, what to do. With a 30% house requirement the same position is called at about $35.71; with 40%, at about $41.67, only a 16.7% drop.

What margin interest really costs

Margin interest is usually a variable rate set by the firm, tiered so that larger balances pay less, and accrued daily on the debit balance. It is typically charged to the account monthly, which increases the loan if you do not pay it in cash. Rates differ widely between firms, so the same trade can have very different break-even points depending on where it is held.

A rough way to see the drag: with 2:1 leverage, a 10% annual rate on the borrowed half costs about 5% a year on your own equity. The underlying investment has to beat that hurdle before leverage adds anything. Over long holding periods, interest can quietly consume much of the extra return margin was supposed to deliver.

Pitfalls

Forced selling at the worst time. A margin call arrives when prices are already down. If you cannot deposit cash, the firm may sell at the low, locking in a loss you might otherwise have waited out.
Losing more than you put in. A large overnight gap can move a stock straight through the zero-equity price, leaving a debit the broker will collect from you.
House requirements can change without notice. A firm can raise the maintenance level on a stock that suddenly becomes volatile, triggering a call with no price move at all.
Concentration. Margin on a single stock is far riskier than margin on a diversified portfolio, because one bad headline can move the whole position.
Underestimating interest. Small daily charges add up and compound into the loan.
Confusing buying power with a target. Being allowed to borrow 50% does not mean borrowing 50% is prudent. Many leveraged investors stay far below the limit to keep a buffer. The risk-per-trade arithmetic in Position sizing: how many shares to buy for a set risk applies to the whole leveraged position, not just your equity.

Margin compared with other ways to get leverage

Approach	How leverage arises	Can lose more than invested?	Ongoing cost
Margin loan on stock	Broker lends up to 50% at purchase	Yes	Margin interest
Cash account	None	No	None
Buying call options	Small premium controls 100 shares	No (premium is the max loss)	Time decay
Leveraged ETF	Fund uses derivatives, resets daily	No	Expense ratio, daily-reset drag
Short selling	Borrowed shares sold; margin required	Yes, without limit	Borrow fees, margin interest

How Finabase helps

Finabase does not lend money or calculate your broker's margin, so your firm's statement is the authority on your equity and requirements. Finabase can help with the research and monitoring around a margin position. A symbol page shows the live quote, chart and key statistics, which helps judge how volatile a stock has been. Once you know your call price from the formula above, an alert can notify you by push or email when the stock crosses it. A portfolio records your buys and sells and shows cost basis plus unrealized and realized gains at live prices; note that it tracks the positions, not the loan, so subtract your debit balance yourself to see equity.

Frequently asked questions

How much can I borrow on margin?

Under Regulation T, up to 50% of the purchase price of a marginable stock, so your own money can buy at most twice as much. Firms can lend less, and some securities cannot be bought on margin at all.

What is the difference between initial and maintenance margin?

Initial margin is the share of the price you must pay when you buy (50% under Reg T). Maintenance margin is the minimum equity you must keep afterwards: at least 25% under FINRA rules, often more at the firm.

Is margin interest tax deductible?

It can be. IRS Publication 550 treats interest on money borrowed to buy investment property as investment interest, deductible by taxpayers who itemize but limited to net investment income, with any excess carried forward (figured on Form 4952). Interest used to produce tax-exempt income is not deductible. This is general information, not tax advice.

Can I lose more than I invested buying on margin?

Yes. If the price falls below the point where the shares are worth less than the loan, for instance $25 in the example above, you still owe the full debit balance.

Does buying on margin make me a pattern day trader?

Not by itself. The legacy rule applied only to four or more day trades in five business days; since June 4, 2026 FINRA has replaced it with intraday margin, though firms may keep the old rule until October 20, 2027.

Summary

Buying on margin funds part of a purchase with a broker loan secured by the shares. Regulation T caps the loan at 50% of a stock's value, FINRA requires equity to stay above 25% (firms often demand more), and interest accrues every day the loan is open. The result is leverage: at 2:1, a 20% move becomes about 40% on your money, and after interest the loss side is worse than the gain side. Knowing the price at which your equity hits the maintenance level, and at which it reaches zero, is the minimum homework before borrowing a dollar.