What is a Margin Loan? Definition, Formula, and Example
A margin loan is a line of credit extended by a brokerage to an investor, collateralized by the securities held in the brokerage account, allowing the investor to buy assets or withdraw cash without liquidating positions.
What is a Margin Loan?
A margin loan is a line of credit extended by a brokerage to an investor, collateralized by the securities held in the brokerage account. It allows traders to borrow capital against their existing portfolio to purchase additional assets or withdraw cash without liquidating positions. Brokerages charge interest on the borrowed balance, calculated daily and accrued to the account. If the value of the collateral drops below a maintenance requirement, the broker issues a margin call requiring the trader to deposit more cash or sell assets to restore the account equity.
How Margin Loans Are Calculated
The borrowing capacity of a margin account is determined by Regulation T and individual broker maintenance rules. The initial margin requirement dictates how much equity the trader must put up to open a position. The maintenance margin is the minimum account equity required to hold the position.
The core formula for margin availability is:
Available Margin = (Account Equity × Maintenance Requirement) − Current Borrowed Balance
For a standard Reg T account, the initial margin requirement is 50% for equities. If a trader deposits $100,000, they can purchase up to $200,000 of stock, borrowing $100,000. The maintenance margin for long equities is generally 25%. The margin call trigger is calculated as:
Margin Call Price = Borrowed Amount / (1 − Maintenance Margin %)
If a trader borrows $50,000 to buy $100,000 of stock, the maintenance margin is 25%. The margin call triggers when the stock portfolio value falls to $66,666.67 ($50,000 / 0.75). Interest accrues daily on the outstanding loan balance based on the broker's tiered base rate plus a spread.
Worked Example
Assume a trader has a $50,000 cash balance in their IBKR margin account and wants to buy AAPL trading at $200. Under Reg T's 50% initial margin rule, the trader can buy 500 shares for a total position size of $100,000, borrowing $50,000 from the broker.
If AAPL drops to $150 per share, the total position value falls to $75,000. The account equity is now $25,000 ($75,000 position value − $50,000 loan). The maintenance margin requirement is 25% of the position value, which is $18,750. Because the $25,000 equity exceeds $18,750, the account avoids a margin call. However, if AAPL drops to $120 per share, the position value falls to $60,000. The account equity drops to $10,000. The 25% maintenance requirement on a $60,000 position is $15,000. The account is short $5,000, triggering an immediate margin call.
When Traders Use Margin Loans
Traders use margin loans for leverage to amplify returns, for short selling, or to access liquidity without triggering taxable events by selling appreciated stock. Portfolio margin accounts, available to advanced traders, use risk-based models to calculate requirements, often allowing 15% to 10% maintenance margins for highly liquid equities. Margin interest is deducted from realized profits, making it a strict cost of capital that the strategy must exceed.
Limitations and Common Misconceptions
Margin loans magnify losses at the exact rate they magnify gains. A 50% margin loan doubles the portfolio's exposure, meaning a 25% drop in the underlying asset wipes out 50% of the account equity. Traders frequently misunderstand maintenance margin, assuming the initial 50% requirement protects them long-term; a margin call arrives much faster than the initial requirement implies. Margin loans also create immediate tax complexity if the broker liquidates positions to satisfy a margin call, generating capital gains without the trader's explicit consent.