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Account & Regulation

Margin Account

A brokerage account that allows borrowing against existing securities to buy more. Amplifies gains and losses, enables short selling, and incurs interest on the borrowed balance.

What is a margin account?

A margin account is a type of brokerage account that lets you borrow money from the broker, using the securities you already own as collateral. The borrowed money (called margin) can be used to buy additional shares, sell short, or withdraw cash against the portfolio.

Key features

  • Leverage: typical retail margin is 2:1 on overnight positions and 4:1 intraday for pattern day traders, meaning a $10,000 account can hold up to $20,000 in stock overnight
  • Interest charged: the broker charges interest on the borrowed balance, usually adjusted to a benchmark rate plus a spread
  • Short selling enabled: selling a stock you don't own requires margin because the broker lends you shares to sell
  • Immediate settlement of proceeds: no good faith violation risk on rapid round-trips
  • Maintenance margin: the account must keep a minimum equity ratio. If positions drop far enough, the broker issues a margin call
  • Forced liquidation: brokers can sell positions to cover a margin call, often without further notice

Risks

  • Amplified losses: leverage cuts both ways. A 50% drop in a fully margined position can wipe out the account
  • Interest drag: borrowing costs compound against holding periods longer than a few days
  • Pattern day trader rule: four or more day trades in five business days with less than $25,000 flags the account under the PDT Rule
  • Tax complications: shorting creates specific tax treatment; interest paid may be deductible against investment income
Margin is a tool, not free money. Use it sparingly and always size positions based on what you're willing to lose, not what the broker will let you buy.

Related Terms

Brokerage Account

A standard taxable investment account that holds stocks, ETFs, mutual funds, bonds, and other securities. No contribution limits or withdrawal restrictions, but gains, dividends, and interest are taxed each year.

Cash Account

A brokerage account where all trades must be paid for in full with settled cash. No margin, no shorting, and rapid round-trips can trigger settlement violations.

Margin

Borrowed money from your broker to trade larger positions. Amplifies both gains and losses.

Margin Call

A demand from your broker to deposit more money or sell positions because your account value has dropped below the required maintenance level.

PDT Rule

FINRA's former Pattern Day Trader rule required a $25,000 minimum for active day trading. Overhauled April 2026: the $25K floor is gone, replaced by a $2,000 margin minimum and real-time intraday margin.

UGMA / UTMA

Custodial brokerage accounts that let an adult hold investments for a minor. Assets legally belong to the child and transfer to them at the age of majority.