Margin Investing
Borrowing funds from a broker to purchase securities, using existing portfolio holdings as collateral.
What is Margin Investing?
Margin investing refers to the practice of borrowing funds from a broker-dealer to purchase securities, using existing portfolio holdings as collateral. The Financial Industry Regulatory Authority (FINRA) requires investors to maintain a minimum equity percentage in their margin accounts—known as the maintenance margin, typically 25%—and if the account value falls below this threshold, the broker issues a margin call requiring the investor to deposit additional funds or liquidate positions. While margin amplifies potential gains when prices rise, it equally magnifies losses when prices fall, and also incurs interest charges on the borrowed amount throughout the holding period.
Example
An investor with $10,000 uses a 2:1 margin to purchase $20,000 of stock, borrowing $10,000 from the broker at 8% annual interest. If the stock rises 20% to $24,000, the investor nets $4,000 on their $10,000 cash outlay (40% return before interest). But if the stock falls 20% to $16,000, the investor loses $4,000—a 40% loss on their initial equity.