What Is Margin?

Margin trading means borrowing money from your brokerage to buy investments, using your existing portfolio as collateral. A margin account allows you to buy more shares than you could afford with cash alone. If you have $10,000 and use 2:1 margin, you can purchase $20,000 worth of stock -- $10,000 of your money and $10,000 borrowed from the broker.

The Federal Reserve's Regulation T requires investors to put up at least 50% of the purchase price as an initial margin requirement. Brokers also set maintenance margin requirements (typically 25-30%) -- the minimum equity you must maintain. If your portfolio value falls below the maintenance requirement, you receive a margin call demanding that you deposit more funds or sell positions.

Margin is a double-edged sword. It amplifies both gains and losses. If you use 2:1 margin and your stock goes up 20%, your return on equity is 40% (minus interest). But if the stock drops 20%, your loss is 40% of your equity -- plus you still owe interest on the borrowed money. Margin interest rates typically range from 5-10% annually.