Margin trading is when investors borrow money to buy stock. It’s a risky trading strategy that requires you to deposit cash in a brokerage account as collateral for a loan, and pay interest on the borrowed funds.
Margin trading—also known as buying on margin—allows you to use leverage to boost your purchasing power and make larger investments than you could with your own resources. But when you buy stock with borrowed money, you run the risk of racking up higher losses.
When you open a new brokerage account, you may be offered the opportunity to choose a margin account. This type of brokerage account lets you deposit cash and then borrow a larger amount of money to buy investments.
Margin trading is a type of secured lending. When you take out a loan from your broker to buy on margin, the loan is secured with the investments you buy—similarly to how you secure a home equity line of credit ( HELOC) with the home itself.
Regulations limit investors to borrowing up to 50% of an investment’s purchase price.
The Federal Reserve’s Regulation T allows investors to borrow up to 50% of the initial purchase price of securities. The minimum maintenance requirement is 25%, but it can be as high as 40%, depending on the broker.
Interest on margin trading is typically added to the margin balance monthly.
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