What is Buying on Margin? (Risks Explained Simply)

Want to double your returns? Wall Street allows you to borrow money to buy more stock. This is called Leverage. It works great on the way up, but it acts like a guillotine on the way down. Here is the math behind the Margin Call and why brokers can sell your stocks without asking you.

BMT Investing Team BMT Investing Team · 📅 Jan 2026 · ⏱️ 6 min read · INVESTING › BASICS
Reg T
50%
Min Down PaymentRule
Interest
8% – 13%
Annual RateCost
Risk
>100%
Can lose more than cashWarn

1. The Rules of the Game (Reg T)

You cannot borrow unlimited money. The Federal Reserve (Regulation T) and FINRA set strict limits.

Initial Margin (50%)
To buy on margin, you generally must deposit at least 50% of the purchase price. (e.g., To buy $10,000 of stock, you need $5,000 cash).
Maintenance Margin (25% – 30%)
This is the “Kill Switch.” After you buy, your equity (your slice of the pie) must never fall below 25% (most brokers require 30-35%). If it does, they sell your assets immediately.

2. Leverage: The Double-Edged Sword

Let’s see how a 10% move in the market impacts your wallet when using 2x Leverage.

Scenario Cash Account ($10k) Margin Account ($20k)*
Stock Rises 10% +$1,000 Profit
(10% Return)		 +$2,000 Profit
(20% Return)
Stock Flat (0%) $0 -$800 Loss
(Interest Expense)
Stock Falls 10% -$1,000 Loss
(-10% Return)		 -$2,000 Loss
(-20% Return)

*Comparison assumes you started with $10k cash and borrowed another $10k.

3. Visualizing the “Margin Call”

How much can the stock drop before you are wiped out? This chart shows your Equity Buffer. When the bar hits the red line, you are liquidated.

Stock Price Drop Your Equity Distance to Death (Margin Call)
0% Drop
(Start)		 50%
Safe Zone
-20% Drop
(Correction)		 37.5%
Warning!
-30% Drop
(Crash)		 28%
CRITICAL
Turbocharge Your Safety
Pro Tip: Never max out your 2x leverage. Professional traders rarely go above 1.2x to 1.5x leverage. Keeping cash in reserve prevents the broker from selling your Tesla shares at the absolute bottom.

4. Strategy: The Hidden Cost (Interest)

Margin is a loan. Loans have interest. As of 2026, margin rates are typically 8% to 13%.

  • The Hurdle: If you borrow at 10%, your stock MUST rise more than 10% just to break even.
  • The Decay: Holding margin debt for a year is expensive. It is best used for short-term trades (days/weeks), not long-term investing.

5. Warning: The “No Phone Call” Rule

Movies show brokers calling you to ask for money. Reality is colder.

⛔ They Don’t Have to Ask

Under the margin agreement you signed (but didn’t read):

  • 1. The broker can sell any stock they want to cover the call.
  • 2. They do not have to notify you first.
  • 3. You cannot choose which stocks get sold.
  • 4. You are responsible for any deficit if the sale doesn’t cover the loan.

6. Frequently Asked Questions

Can I lose more than I invested?
Yes. If the stock gaps down overnight (e.g., -50% open), your equity can go negative. You will owe the broker money.
What is Pattern Day Trading (PDT)?
If you have a margin account under $25,000, you are limited to 3 day trades in a 5-day period. Violating this freezes your account.
Is margin good for dividends?
Generally, no. Margin interest rates (10%+) usually exceed dividend yields (3-4%). You lose money by holding.