™Stock Market University · Trading, Charts & Behavior
Margin Explained
Bring clarity to your process.
Learn how borrowed purchasing power magnifies exposure, financing cost and the possibility of forced liquidation.
The idea to understand
Separate account equity from borrowed exposure and model interest, maintenance requirements and forced-liquidation risk.
The explanation
The essentials, explained.
Follow the idea, then work through an example. Pause at the self-check whenever you are ready.
Borrowing against the account
Margin allows eligible customers to borrow from a broker using account assets as collateral. Buying power can increase, but ownership risk and repayment obligations remain.
Leverage works both ways
A gain on the full position can be large relative to your equity, and so can a loss. Interest expense further raises the break-even point.
Maintenance requirements
If equity falls below applicable requirements, a broker may demand funds or sell positions. Firms can impose requirements above regulatory minimums and change them.
Know the agreement
Review the broker’s rates, calculation method, house rules and liquidation rights. Margin is not simply extra cash and can create losses beyond the initial amount committed.
Optional context & practice
Why this matters
Borrowed exposure can amplify loss and create funding deadlines. Broker liquidation and changing house requirements can override a planned holding period.
Useful vocabulary
Margin: Borrowed purchasing power or collateral required to support certain positions. Margin call: A demand to add funds or securities, or reduce positions, when account equity falls below requirements. Buying power: The amount available in an account to purchase securities, including permitted margin where applicable.
House rules and liquidation rights are part of the position
Broker equity requirements can exceed regulatory floors and increase as risk changes. A broker may liquidate without a prior margin call or waiting for a client's chosen exit. The debt remains owed even when collateral loses value. Model equity loss, financing cost and the possibility of a forced sale together; a static stop-price calculation does not capture the full leveraged account.
Try it with a hypothetical example
Read a broker margin agreement. Identify interest, initial and maintenance requirements, liquidation rights and when additional collateral can be demanded.
A question to think through
$5,000 equity plus a $5,000 loan buys $10,000 stock. After a 30% price decline, what equity remains before interest?
Compare your reasoning
$2,000: $7,000 assets less the $5,000 loan. The $3,000 loss is 60% of starting equity; actual margin requirements may already force action.
A moment to reflect · optional
Why does a 20% asset decline create a 40% equity loss in the example?
Think through your answer, then compare it with the explanation.
Reveal the explanation
The $2,000 loss is measured against the investor’s $5,000 equity, while the borrowed $5,000 remains owed.
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Sources & editorial notes
Reviewed 2026-10-13 · My Market Book editorial team. Examples are hypothetical unless identified as historical. General education, not a personal investment recommendation. Next scheduled review: 2027-04-11, or earlier after a material change. Conceptual and evergreen.