What is Margin?
Introduction
For most investors, opening a brokerage account starts with selecting between a cash account and a margin account. The two accounts differ primarily in their use of leverage, with a cash account being zero leveraged and a margin account providing various degrees of leverage. Cash accounts are the more traditional, low-risk option, for clients looking to limit their downside exposure to the cash deposited for investment. Margin accounts, however, enhance an investor’s purchasing power by extending credit for security trading. In short, 1-dollar in a cash account buys 1-dollar of securities, but in a margin account, the same 1-dollar may be worth 1.5-dollars, contingent upon the degree of leverage provided by the broker.
Margin is the collateral an investor must deposit with a counterparty (usually a broker) to hedge against investor credit risk. A margin loan is an extension of credit against the marginable securities and cash in the account. The value of margin is the difference between the value of the investment and the value of the loan. For the purposes of the following exposition, long-only equity margin accounts (investors can only bet on the price of assets increasing) will be considered unless otherwise specified.
Cash Account: Advantage & Disadvantage (Norris, Anderson, and Courage, n.d.)
Advantage | Disadvantage |
Simple—no complex trading like shorting | Limited trading options |
Long-term focused | Limited returns |
Interest earning—cash sitting in the account generally earns interest | Trade settlement—cash accounts require at least a T+1 settlement period, during which time, no more trades may be made |
Limited loss | — |
Margin Account: Advantage & Disadvantage (Norris, Anderson, and Courage, n.d.)
Advantage | Disadvantage |
Increase purchasing power of deposited cash | Much higher risk with the potential for larger losses |
Opportunity to enhance returns | Much greater complexity |
Greater variety of investment options | Minimum account balances |
No settlement period | Margin calls, which may result in forced selling |
Easy way to access leverage | Less suited for long-term investors |
Security lending | High costs |
How Margin Accounts Work
Margin accounts are either rules-based or risk-based.
Rules-Based
Rules-based margin accounts are regulated by a governing entity that establishes the degrees of margining allowable for an account. The rules are formulaic, disregarding considerations of portfolio diversification and net risk exposures. Instead, margin is a set percentage applied to the market value of a security. Rules based margining is the principal means of account regulation in the United States (Interactive Brokers, n.d.).
In the US, the Federal Reserve establishes regulations for RegT accounts (US brokerage), allowing investors to borrow 50% against of the value of stocks held and 50% from the broker. Margin is then subdivided into initial and maintenance (see Initial vs Maintenance Margin section for details). Over the course of a trading day, US RegT accounts must have a net equity position of at least 25% to avoid violating maintenance margin requirements.
Risk-Based
In risk-based margin accounts, a broker provides margin based on the portfolio in aggregate, meaning considering collective risk. Risk simulation is performed via quantitative pricing models and scenario analysis. In general, the use of risk-based margining affords the investor greater leverage than RegT rules-based margining, meaning a client’s maintenance margin requirement may be below 25%. Internationally, the more popular version of margining is risk-based.
Initial vs Maintenance Margin
Initial margin is the margin afforded at the time of an asset’s purchase while maintenance margin represents the equity a client must maintain in their account post investment. Typically, the initial margin is higher than the maintenance margin to allow for volatility in the price of the margined asset. Thus, above some pre-agreed upon threshold, the price of the asset may fall without incurring a margin call.
Yet, once the threshold is crossed, meaning the value of the asset falls below the maintenance margin limit, the investor will receive a margin call. A margin call is a request from the client’s broker advising the client to increase the equity level within the account in one of three ways (CFI Team, n.d.):
- Deposit additional funds to meet the account’s maintenance margin requirement
- Deposit unmargined securities to meet the account’s maintenance margin requirement
- Sell margined securities to meet the account’s maintenance margin requirement
A failure to improve the equity position within the mandated period will result in the of the forced sell of client holdings up to, and sometimes in excess of, the maintenance margin.
The below table illustrates the different requirements for Charles Schwab margin accounts. Margin rules are broadly set and enforced by regulatory bodies, but individual brokers may impose additional restrictions that augment and exceed those of governing agencies.
General Margin Requirements (Charles Schwab, n.d.)
Rules-Based | Risk-Based |
Margin equity = Stock + (+/– Cash balance) | Maintenance excess (buying power) = Net liquidation value – Margin requirements |
Maintenance margin = 50% initial for marginable securities | No difference between initial and maintenance margins |
25% RegT requirements; marginable long equities = 25% requirement; short equities = 30% requirement | Treatment of volatility is applied to margin requirement |
Long options are not marginable and have a 100% requirement | Allows for correlation and margin offsets between similar investments, i.e., long XOM offset by a short in CVX |
Schwab uses 30% minimum house maintenance requirement on short and marginable long equities | Long options are marginable and can be used as collateral for other marginable positions |
Options requirements computed in real-time using FINRA rules and fixed percentages | Generally broad-based indexes: –15% and 15%; equities: +15% and –15%; allows up to 6.6 to 1 leverage |
Futures & Derivative Margining
Futures, unlike equities, are nearly exclusively traded through margin accounts. Furthermore, the margin requirements in futures contracts are centered upon risk-based analysis. On average, the initial margin on futures contracts ranges from 3% to 20%.
In a short sale, the investor is borrowing the asset and selling it in the market. The short seller expects the future price of the asset to fall, allowing them to repurchase the security at a lower price, pocketing the difference between the sale and buy, and returning it to the lender. When margining a short trade, RegT requires an investor maintain 150% of the value of the short as initial margin. For example, the margin on a USD 10K position would be USD 15K. Like long positions, short accounts require maintenance margins, but the level is high relative to long positions. The NYSE and Nasdaq require a maintenance margin of 100% of the current market value of a short sale, plus 25% of the total market value of the securities in the margin account (Langager, Potters, and Perez, n.d.).
Margin Costs
Borrowing money from a broker is a simple process, but it can be expensive, and as such, the effect of borrowing should be understood before investing.
USD IBKR Margin Rates as of 27 June 2025
Tier | IBKR Pro |
0 ≤ $100,000 | 5.830% (BM + 1.5%) |
$100,000 ≤ $1,000,000 | 5.330% (BM + 1%) |
$1,000,000 ≤ $50,000,000 | 5.080% (BM + 0.75%) |
$50,000,000 ≤ $250,000,000 | 4.830% (BM + 0.5%) |
> $250,000,000 | 4.830% (BM + 0.5%) |
Basic Calculations
The initial margin rate is simply the percentage loan provided by the broker or bank against the value of the marginable securities. For example, if the initial margin is 50%, this means an account holding USD 10K of assets may be margined to a buying power of USD 20K (i.e., USD 10K assets + USD 10K margin loan).
The maintenance margin can be calculated based on the loan value:
To determine the price of an asset at which maintenance margin will be called:
Where,
The calculation of the cost of margin can vary due to differences in reported rates, day count convention, and unique brokerage methodologies. However, the general formula is based on an annualized interest rate (Scott and Perez, n.d.):
Where, 
The total return on margin expresses the net return on the margined position:
Conclusion
Margin is a tool that, when used prudently and tactically, may enhance returns and facilitate portfolio management. However, a misapplication of margin can quickly result in significant portfolio malperformance. Even when used judiciously, margin can become a liability in volatile or fat tailed (a market with more frequent extreme price swings) markets. Thus, for the majority of long-term investors, cash accounts lower overall portfolio risk and are the recommended account type.
Works Cited
CFI Team. n.d. “Margin Call.” Corporate Finance Institute (blog). Accessed June 27, 2025. https://corporatefinanceinstitute.com/resources/wealth-management/margin-call/.
Charles Schwab. n.d. “Portfolio Margin vs. Regulation T Margin.” Schwab Brokerage. Accessed June 26, 2025. https://www.schwab.com/learn/story/portfolio-margin-vs-regulation-t-margin.
Interactive Brokers. n.d. “Margin Education Center.” Interactive Brokers LLC. Accessed June 26, 2025. https://www.interactivebrokers.com/en/trading/margin-education.php.
Kagan, Julia, Gordon Scott, and Kristen Rohrs Schmitt. n.d. “Maintenance Margin: Definition and Comparison to Margin Accounts.” Investopedia. Accessed June 26, 2025. https://www.investopedia.com/terms/m/maintenancemargin.asp.
Langager, Chad, Charles Potters, and Yarilet Perez. n.d. “What Are the Minimum Margin Requirements for an Equities Short Sale Account?” Investopedia. Accessed June 26, 2025. https://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp.
Norris, Emily, Somer Anderson, and Ariel Courage. n.d. “Cash Account vs. Margin Account: What’s the Difference?” Investopedia. Accessed June 26, 2025. https://www.investopedia.com/ask/answers/100314/whats-difference-between-cash-account-and-margin-account.asp.
Scott, Gordon, and Yarilet Perez. n.d. “How Are the Interest Charges Calculated on Margin Accounts?” Investopedia. Accessed June 27, 2025. https://www.investopedia.com/ask/answers/126.asp.
Scott, Gordon, and Daniel Rathburn. n.d. “The Difference Between Initial Margin vs. Maintenance Margin.” Investopedia. Accessed June 26, 2025. https://www.investopedia.com/ask/answers/033015/what-difference-between-initial-margin-and-maintenance-margin.asp.
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