What is a Margin Account? Definition, Formula, and Example
A margin account is a brokerage account that allows traders to borrow money from the broker to buy securities, using the account's existing assets as collateral for the loan.
What is a Margin Account?
A margin account is a brokerage account that permits a trader to borrow funds from the broker to purchase securities. The securities and cash held in the account serve as collateral for the loan. This leverage amplifies both gains and losses. The broker charges interest on the borrowed balance, known as the debit balance, at a rate determined by the broker, typically based on the broker call rate plus a spread. A margin account is distinct from a cash account, where all purchases must be fully funded by the account's cash balance.
How a Margin Account is Calculated / Identified
The core mechanics of a margin account revolve around three key figures: equity, margin requirement, and maintenance margin.
Equity is the account's net value, calculated as:
Equity = Total Market Value of Securities - Debit Balance
The initial margin requirement is the minimum percentage of the purchase price that must be paid with the trader's own cash. Under Regulation T, the Federal Reserve Board sets this at 50% for most stocks. The broker can require more.
The maintenance margin is the minimum equity percentage that must be maintained in the account at all times. FINRA requires a minimum of 25% for most stocks, but many brokers set a house requirement of 30% to 40%.
A margin call occurs when the account's equity falls below the maintenance margin requirement. The formula for the price at which a margin call occurs for a long position is:
Margin Call Price = Initial Purchase Price × ((1 - Initial Margin) / (1 - Maintenance Margin))
Worked Example
Assume a trader opens a margin account and buys $20,000 worth of AAPL stock using $10,000 of their own cash and a $10,000 margin loan. The initial margin is 50%.
The broker's maintenance margin requirement is 30%. The price at which the trader will receive a margin call is:
Margin Call Price = $20,000 × ((1 - 0.50) / (1 - 0.30)) = $20,000 × (0.50 / 0.70) = $14,285.71
If the market value of the AAPL position falls to $14,285.71, the account equity is $4,285.71 ($14,285.71 - $10,000 loan). This equity is exactly 30% of the position's value. Any further decline triggers a margin call, requiring the trader to deposit cash or sell securities to restore equity to the maintenance level.
When Traders Use a Margin Account
Traders use margin accounts to increase position size beyond their cash balance, amplifying returns on winning trades. They also use margin for short selling, which requires a margin account because the trader borrows shares to sell. Options traders use margin accounts to satisfy the collateral requirements for naked option writing and spread strategies. Active traders use margin to deploy capital more efficiently, avoiding the need to liquidate existing positions to fund new ones.
Limitations / Common Misconceptions
A margin account does not guarantee a loan for any amount. The broker can change margin requirements or reduce the credit limit at any time. The leverage cuts both ways: a 50% decline in a fully leveraged position wipes out 100% of the trader's equity. Interest charges accrue daily and erode returns, making margin costly for long-term holds. A common misconception is that a margin call is a request; it is a demand. The broker can liquidate positions without the trader's consent to bring the account into compliance. Margin accounts do not protect against gap-down risk; a stock can open below the maintenance margin price, resulting in a debit balance that the trader must repay.