Margin trading is borrowing money from your brokerage — using eligible securities in your account as collateral — to buy more investments than you could with cash alone. It can amplify your returns, but it also magnifies your losses.
That last part is crucial: when you trade on margin, you can lose more than you originally invested. Before opening a margin account, you should understand exactly how these accounts work, what triggers a margin call, and whether the added risk fits your financial situation.
What is margin, and what is a margin account?
Margin is credit extended by your brokerage. When you open a margin account, you agree to borrow funds against the securities you already hold. Those holdings act as collateral for the loan.
A margin account differs from a standard cash account because it lets you trade with more than your deposited cash. This extra buying power can help you take larger positions, but the borrowed money comes with interest charges — and obligations you must meet if your account value drops.
How does a margin account work, and what are the risks?
When you buy securities in a margin account, you pay part of the purchase price with your own funds and borrow the rest from your brokerage. The securities you purchase — plus any other eligible holdings — serve as collateral.
Suppose you want to buy $10,000 worth of a stock. With a 50% initial margin requirement, you would deposit $5,000 of your own cash and borrow the remaining $5,000. If the stock rises to $12,000, your equity grows to $7,000 (the new value minus your $5,000 loan) — a 40% gain on your original cash, rather than the 20% gain you would see without leverage.
The same math works against you when prices fall. If that $10,000 position drops to $8,000, your equity shrinks to $3,000 — a 40% loss on your initial $5,000. Prices can fall far enough that your equity turns negative, meaning you owe more than your holdings are worth.
What does "buying on margin" mean?
Buying on margin means using borrowed funds from your brokerage to purchase securities. You put up a portion of the cost — called the initial margin — and your brokerage lends you the rest.
Because you control a larger position than your cash alone would allow, both gains and losses are amplified. If the investment performs well, you keep the profits after repaying the loan and interest. If it performs poorly, you still owe the borrowed amount plus interest, regardless of what your holdings are worth.
What is a margin loan, and how does interest work?
A margin loan is the amount you borrow from your brokerage when you buy on margin. Interest accrues on the outstanding balance for as long as you hold the loan, typically calculated daily and charged monthly.
Interest costs eat into your returns. If you borrow $5,000 at an annual rate of 8% and hold the loan for 6 months, you would owe roughly $200 in interest — money that comes directly out of any gains or adds to your losses. The longer you carry a margin balance, the more interest accumulates.
What are margin rates, and what influences them?
Margin rates are rates that determine the margin requirements on individual securities. For example, if the margin rate on a security is 50% and the security costs $10,000, the margin requirement is $5,000 ($10,000 x 50%). In Canada, the Canadian Investment Regulatory Organization (CIRO), sets minimum margin rates, and for many equities trading at $2.00 or above the standard requirement is 50% of market value. Certain securities that meet CIRO’s eligibility criteria qualify for a reduced rate under the list of securities eligible for reduced margin (LSERM). Your brokerage may set margin rates that are higher than CIRO minimums.
Lower-priced securities often require a higher percentage — sometimes 60%, 80%, or even 100% for very low-priced shares — because they tend to be more volatile.
What is a margin call, and how is it triggered?
A margin call happens when your account’s available margin falls below the margin requirement — the minimum equity your brokerage requires you to hold at all times. In Canada, the Canadian Investment Regulatory Organization (CIRO), sets minimum margin requirements, and for many equities trading at $2.00 or above the standard requirement is 50% of market value — meaning a margin call can be triggered once your equity falls below that level. Individual brokerages may impose stricter requirements, and certain qualifying securities can have lower thresholds.
If declining prices push your equity below this threshold, your brokerage will issue a margin call. You must then restore your account by depositing additional cash, transferring in eligible securities, or selling holdings to pay down the loan. If you cannot meet the call quickly, your brokerage may sell securities on your behalf — often without advance notice — to bring the account back into compliance.
How can you avoid a margin call?
Maintain a buffer: keep your equity well above the minimum requirement so routine fluctuations do not trigger a call.
Monitor your account regularly: check your margin balance and equity daily, especially in volatile markets.
Limit your leverage: borrowing less than the maximum allowed gives you more room to absorb losses.
Diversify your holdings: concentrated positions can swing sharply, increasing margin-call risk.
Have cash or securities ready: knowing you can deposit funds quickly reduces stress if a call does occur.
How do margin rates and margin requirements vary?
Margin requirements differ based on the type and price of the security. For many equities trading at $2.00 or above, a common margin requirement is around 50% of market value.
Options, futures, and other complex products typically have their own margin rules set by regulators and exchanges. Requirements can also change during periods of high volatility, so the margin you needed yesterday might not be enough tomorrow.
Margin account vs. cash account: what's the difference?
In a cash account, you buy securities with the money you have deposited — no borrowing, no leverage. You cannot spend more than your balance, and you cannot lose more than you invest.
A margin account introduces borrowing. You can control larger positions, potentially boosting returns, but you also accept the risk of amplified losses and the possibility of owing money even after selling your holdings.
Feature | Cash account | Margin account |
|---|---|---|
| Buying power | Limited to deposited cash | Cash plus available loan value |
| Leverage | None | Yes |
| Interest charges | None | Yes, on borrowed balance |
| Margin calls | Not applicable | Possible if equity falls |
| Maximum loss | Amount invested | Can exceed amount invested |
When does it make sense to use margin instead of a cash account?
Margin can be useful when you have a clear investment thesis, understand the risks, and have the financial cushion to absorb potential losses. Some investors use margin for short-term opportunities or to avoid selling existing holdings to raise cash.
Margin is generally unsuitable if you cannot afford to lose more than your initial investment, have a low tolerance for volatility, or lack the time to monitor your account closely. It is also worth considering whether the potential gains outweigh the interest costs and emotional stress of amplified swings.
Can I lose more than I invest with a margin account?
Yes. Because you borrow money, a steep decline in your holdings can leave you owing more than your original deposit.
Do I pay interest even if my investments go up?
Yes. Interest accrues on any borrowed balance, regardless of how your investments perform.
How quickly must I meet a margin call?
Your brokerage is not required to give you any notice period and may sell positions immediately to cover a shortfall. Some brokerages provide a short window — typically 1 to a few business days — but this is not guaranteed.
Is margin suitable for beginners?
Most new investors benefit from starting with a cash account. Margin adds complexity and risk that can overwhelm someone still learning the basics of investing.
