Margin Loan¶
OVERVIEW¶
A margin loan is a line of credit extended by a brokerage to an investor, collateralized by the securities held in the brokerage account. Traders borrow capital against their existing portfolio to purchase additional assets or withdraw cash without liquidating positions. The broker charges interest on the outstanding balance, calculated daily and accrued to the account.
Note
If the value of the collateral drops below the maintenance requirement, the broker issues a margin call requiring the trader to deposit additional cash or sell assets to restore account equity.
HOW MARGIN LOANS ARE CALCULATED¶
Borrowing capacity is governed by Regulation T and individual broker maintenance rules. Two thresholds apply to every margin account.
| Requirement | Standard Reg T Value | Description |
|---|---|---|
| Initial Margin | 50% | Minimum equity required to open a position |
| Maintenance Margin | 25% | Minimum equity required to hold an open position |
Available Margin Formula
Margin Call Trigger Price
Tip
For a $50,000 loan at a 25% maintenance margin, the margin call triggers when the portfolio value falls to $66,666.67 ($50,000 ÷ 0.75). Monitor position value continuously against this threshold.
WORKED EXAMPLE¶
| Variable | Value |
|---|---|
| Starting Cash Balance | $50,000 |
| Stock | AAPL at $200/share |
| Shares Purchased | 500 |
| Total Position Size | $100,000 |
| Amount Borrowed | $50,000 |
| Initial Margin Used | 50% (Reg T) |
Scenario A — AAPL drops to $150
| Metric | Value |
|---|---|
| Position Value | $75,000 |
| Account Equity | $25,000 |
| Maintenance Requirement (25%) | $18,750 |
| Margin Call Triggered | No |
Scenario B — AAPL drops to $120
| Metric | Value |
|---|---|
| Position Value | $60,000 |
| Account Equity | $10,000 |
| Maintenance Requirement (25%) | $15,000 |
| Shortfall | $5,000 |
| Margin Call Triggered | Yes |
Note
A margin call at $120 per share requires the trader to deposit $5,000 in cash or liquidate sufficient positions immediately. The broker may act without explicit trader consent.
WHEN TRADERS USE MARGIN LOANS¶
- Leverage — Amplify returns on high-conviction positions without increasing cash allocation
- Short Selling — Borrow shares to sell short using margin capacity
- Liquidity Access — Raise cash without triggering taxable events by selling appreciated holdings
- Portfolio Margin Accounts — Advanced accounts use risk-based models, reducing maintenance requirements to 10–15% on highly liquid equities
Tip
Margin interest is deducted from realized profits. The strategy's return must exceed the cost of the loan for margin to be net positive.
LIMITATIONS AND COMMON MISCONCEPTIONS¶
| Misconception | Reality |
|---|---|
| Initial 50% margin protects long-term | A margin call arrives well before equity drops to the initial requirement level |
| Losses are capped like gains | A 50% margin loan doubles exposure — a 25% drop in the underlying wipes out 50% of account equity |
| Traders control all liquidation events | Brokers can liquidate positions without consent to satisfy a margin call, generating taxable capital gains |
Note
Margin loans magnify losses at the exact rate they magnify gains. Risk management must account for the full leveraged exposure, not the cash-only position size.