Buying on Margin and Margin Calls

Your money + a loan, buying together

buying on margin means borrowing from your broker to buy stock. Put in $10,000 of your own and borrow $10,000, and you can buy $20,000 of stock: that's 2x leverage. The loan must be repaid, with interest.

Gains and losses both magnified

The loan doesn't change with the share price, so every gain and loss falls on your equity: at 2x leverage, a 10% rise earns you about 20%, and a 20% drop costs you about 40%.

Margin call line: fall to here and you must add money

equity percentage = equity ÷ position value. If it falls below the broker's maintenance margin (say 30%), you get a margin call; if you don't add money, your shares may be sold for you.

Interest accrues every day

Margin interest is an annual rate charged daily. Borrow $10,000 at 8% a year and holding for a year costs about $800. Even if the price doesn't move, interest slowly eats your equity.

Key takeaways

• Buying on margin = your own money + a loan, used together to buy stock. At 2x leverage, a 10% price move moves your own money by about 20%.
• The loan and its interest don't shrink when the price falls, so your equity absorbs every loss.
• Equity percentage = equity ÷ market value of the position. Fall below the maintenance level and you get a margin call; if you don't top up, your shares may be force-sold.
• The higher the leverage, the closer the margin-call price sits to your entry, and the less room you have to be wrong.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click "Example: 2x · down 20%": how much equity is left? What percentage of your own money did you lose?
2. Keep the price at −20% and set "Leverage" back to 1.0x: how much do you lose? What happens to the "margin call line"?
3. Click "2x · down 30%": what's the equity percentage, and why did it trigger a margin call? How much do you need to add at least?
4. Set "Price change" back to 0% and "Days held" to 360: the price didn't move at all, so why did your equity shrink?

Quiz and explanations

1. You have $10,000 of your own and use 2x leverage (borrowing $10,000) to buy a $50 stock. The price drops to $40. Ignoring interest, what's your equity?

Answer: $6,000.400 shares × $40 = $16,000, minus the $10,000 loan, leaves $6,000 of equity. The price fell 20%, but your own money lost 40%.

2. Same trade, with a 30% maintenance margin. At what price does a margin call trigger?

Answer: About $35.71.Let the price be P: (400P − 10,000) ÷ 400P = 30%, which solves to P = 10,000 ÷ (400 × 0.7) ≈ $35.71.

3. After buying on margin, the price doesn't move at all. What happens to your equity?

Answer: It slowly shrinks, because interest on the loan accrues daily.Borrowed money accrues interest daily at an annual rate. Even if the price doesn't move, the interest slowly eats into your equity.

Terms in this lesson

• equity percentage (Equity Percentage): Net equity as a share of position value in a margin account; dropping below the broker's maintenance level triggers a margin call.
• maintenance margin (Maintenance Margin): The minimum margin your account must keep; fall below it and you'll be asked to top up.
• buying on margin (Buying on Margin): Borrowing from your broker to buy stock: your own money plus the loan makes a bigger position, magnifying gains and losses, and you pay interest.
• margin call (Margin Call): When your account drops below maintenance margin, you must add funds or your positions will be closed.