Margin Accounts, Leverage, and Regulation T

A margin account allows you to borrow money from your broker to purchase securities. The Federal Reserve's Regulation T limits how much you can borrow initially, while FINRA and individual brokers set ongoing maintenance requirements. Understanding these rules prevents unexpected margin calls and forced liquidations.

Regulation T: Initial Margin Requirements

Regulation T, established by the Federal Reserve Board, requires that you deposit at least 50% of the purchase price when buying securities on margin. This means your maximum initial leverage is 2:1.

If you want to buy $20,000 worth of stock, Regulation T requires you to deposit at least $10,000. The remaining $10,000 comes from your broker as a margin loan. You pay interest on this borrowed amount.

The 50% requirement applies at the time of purchase. After the initial transaction, maintenance margin rules govern your ongoing requirements.

Settlement and Regulation T

The 50% deposit must occur within two business days of the trade (T+2). If you fail to meet this requirement, your broker may liquidate the position and restrict your account from margin trading for 90 days under Regulation T's "frozen account" provision.

FINRA Maintenance Margin Requirements

FINRA Rule 4210 sets the minimum maintenance margin at 25% of the current market value of securities held long. Most brokers impose higher requirements, typically 30-40%, to provide a buffer before FINRA minimums are breached.

When your equity falls below the maintenance requirement, you receive a margin call. You must deposit additional funds or securities, or your broker will liquidate positions to bring the account back into compliance.

Calculating Margin Call Price

For a long position, you can calculate the price at which a margin call will occur:

Margin Call Price = Initial Purchase Price × (1 - Initial Margin %) / (1 - Maintenance Margin %)

If you buy stock at $100 with 50% margin and face a 25% maintenance requirement:

Margin Call Price = $100 × (1 - 0.50) / (1 - 0.25) = $100 × 0.50 / 0.75 = $66.67

If the stock falls from $100 to $66.67, you will receive a margin call.

With a 30% maintenance requirement (typical at most brokers):

Margin Call Price = $100 × 0.50 / 0.70 = $71.43

The higher maintenance requirement triggers a margin call at a higher price, providing less room for the position to decline.

Worked Example: Margin Account Mechanics

David opens a margin account with $30,000 cash. He wants to buy shares of ABC Corp trading at $80.

Maximum Initial Purchase

Under Regulation T's 50% requirement, David can buy up to $60,000 worth of stock:

• His $30,000 equity
• Plus $30,000 borrowed from the broker

At $80 per share, David buys 750 shares for $60,000.

Account Status After Purchase

• Market value: $60,000 (750 shares × $80)
• Margin loan: $30,000
• Equity: $30,000
• Margin equity %: 50%

Scenario A: Stock Rises to $95

• Market value: $71,250 (750 × $95)
• Margin loan: $30,000 (unchanged)
• Equity: $41,250 ($71,250 - $30,000)
• Margin equity %: 57.9%

David gained $11,250 on his $30,000 investment, a 37.5% return. The stock rose 18.75%, but leverage amplified his gain.

Scenario B: Stock Falls to $70

• Market value: $52,500 (750 × $70)
• Margin loan: $30,000
• Equity: $22,500
• Margin equity %: 42.9%

David's equity fell from $30,000 to $22,500, a 25% loss. The stock only fell 12.5%, but leverage amplified his loss.

Scenario C: Stock Falls to $60, Triggering Margin Call

• Market value: $45,000 (750 × $60)
• Margin loan: $30,000
• Equity: $15,000
• Margin equity %: 33.3%

If David's broker requires 35% maintenance margin, he receives a margin call.

Required equity at 35%: $45,000 × 35% = $15,750 Current equity: $15,000 Margin call amount: $750

David must deposit $750 cash or $750 worth of marginable securities. Alternatively, he could sell shares to reduce the margin loan. If David fails to meet the call, his broker may sell shares without notice.

Interest Costs on Margin Loans

Margin loans accrue interest daily, typically calculated on your average daily debit balance. If David maintains a $30,000 margin loan at 9% annual interest:

Annual interest cost: $30,000 × 9% = $2,700 Monthly interest cost: $225 Daily interest cost: approximately $7.40

This interest compounds. If David holds the leveraged position for one year without the stock moving, he starts $2,700 behind. The stock must rise 4.5% ($2,700 / $60,000) just to break even after interest.

Pattern Day Trader Rules

FINRA rules require that accounts designated as pattern day trader (PDT) accounts maintain minimum equity of $25,000. PDT classification applies if you execute four or more day trades within five business days, and day trades exceed 6% of total trades during that period.

PDT accounts receive 4:1 intraday buying power instead of 2:1. This allows a trader with $25,000 equity to control up to $100,000 in positions during the day, provided all positions are closed by market close.

Overnight positions remain subject to the standard 2:1 Regulation T limit.

Special Margin Requirements

Certain securities carry higher margin requirements:

• Concentrated positions: If one stock exceeds 60-70% of your account, brokers may require 50-70% maintenance margin on that position
• Volatile stocks: Brokers may increase maintenance requirements to 50-100% on highly volatile securities
• Low-priced stocks: Securities under $3 are often not marginable at all
• Options: Have separate margin requirements under Regulation T, detailed in options-specific rules

Risks of Margin Trading

Margin amplifies both gains and losses. A 50% decline in a fully margined position eliminates your equity entirely, and you still owe the broker the margin loan balance.

Brokers can change margin requirements at any time without notice. During market disruptions, maintenance requirements may increase, triggering margin calls even if prices haven't moved.

Brokers are not required to issue a margin call before liquidating. The margin agreement you sign typically gives the broker the right to sell securities without notification if your account falls below maintenance requirements.

Liquidation during volatile markets often occurs at unfavorable prices. Forced selling during rapid declines can lock in losses that might have recovered if you had time to deposit additional funds.

Next Steps

1. Calculate the margin call price for any leveraged position you are considering before entering the trade
2. Monitor your account's margin equity percentage daily if you hold leveraged positions
3. Keep cash or marginable securities available to meet potential margin calls without forced liquidation
4. Factor margin interest costs into your expected return calculations for any positions held on margin
5. Verify your broker's specific maintenance margin requirements, which may exceed FINRA's 25% minimum