You deposit $6,600. Your brokerage ticket shows $13,200 of buying power. Your savings have not doubled. The extra $6,600 is money the broker is offering to lend.
Use all of it to buy stock, and a 10% fall can cost you 20% of your own money, before interest. You can also lose the choice to wait for a recovery: the broker may sell your shares.
The loan changes more than how much you can buy. It changes who gets to decide when you sell.
A loan inside your stock account
A margin account lets you borrow from your broker, using your holdings to back the loan. The amount you borrow is your margin loan. Having permission to borrow does not mean you have used it.
Harbor Coffee, our fictional coffee business, ended year 3 at $66 a share. Suppose you buy at that price, leaving out dividends, taxes and trading costs and treating interest separately:
- With cash: Your $6,600 buys 100 shares.
- With a loan: You put in $6,600, the broker lends $6,600, and the combined $13,200 buys 200 shares.
Your account equity is the holdings' current value minus what you owe the broker. It starts at $13,200 − $6,600 = $6,600. It changes with the share price; it is not a record of your original deposit. Harbor's own debt and shareholders' equity sit on the company's balance sheet.
Investor leverage compares the value of your position with your equity. Here it is $13,200 ÷ $6,600 = 2 times. You own twice as much stock with the same amount of your own money.
The stock moves; the debt stays
Suppose the price moves 10% from your $66 purchase:
- Up to $72.60: The cash purchase gains $660. The 200-share position is worth $14,520. Subtract the $6,600 loan and your equity is $7,920: a $1,320 gain, or 20% of your original cash.
- Down to $59.40: The cash purchase loses $660. The 200-share position is worth $11,880. Subtract the same loan and your equity is $5,280: a $1,320 loss, or 20% of your original cash.
Your equity takes the entire price change. The loan stays fixed as your cushion shrinks.
The leverage does not stay at 2 times. After the fall, it is $11,880 ÷ $5,280 = 2.25 times. Falling prices make the shares you still own more leveraged.
Borrowing also creates a bill when nothing happens. Say the rate is 8% a year and the loan stays at $6,600 for six months. Simple interest is $6,600 × 8% × 6/12 = $264.
With a flat stock price, you are down 4% on your starting $6,600 after interest. If you set aside $200 a month, that bill exceeds one monthly contribution.
Two requirements, two different jobs
For a conventional US margin account buying eligible listed stocks, two equity requirements apply:
- Initial margin is the equity needed to buy. The federal minimum is generally 50% of the purchase price: $6,600 from you for a $13,200 purchase.
- Maintenance margin is the equity needed to keep holding. FINRA's baseline is 25% of the holdings' current market value.
These are lending limits, not suggested safety buffers. Not every stock is eligible to borrow against.
The broker's own equity threshold is its house margin requirement. It can be higher, and it can rise without advance written notice. Your account can fall short even when the stock price stands still.
The equity ratio measures how much of the position is yours after debt:
Holdings value is what the shares are worth now; loan balance is what you still owe. At purchase, ($13,200 − $6,600) ÷ $13,200 = 50%. The maintenance test compares that ratio with the broker's threshold.
Follow a margin call
Say the broker uses 25% maintenance. At $44 a share, your 200 shares are worth $8,800. Subtract the $6,600 loan and equity is $2,200, exactly 25% of $8,800. Below $44, you fall short of the requirement. Your equity need not hit zero for the broker to act.
Suppose Harbor jumps past that boundary to $40. Holdings are worth $8,000 and equity is $1,400. Required equity is 25% × $8,000 = $2,000, leaving a $600 shortfall.
A margin call is a demand from the broker to restore the required equity. Adding outside cash and selling shares can both close the gap, but they work differently.
A $600 cash deposit used to repay part of the loan cuts the debt to $6,000. Equity becomes $2,000 against the same $8,000 of shares: 25% again.
At $40, selling 60 shares brings in $2,400. Using that money to repay debt leaves $5,600 of shares and a $4,200 loan. Equity stays $1,400, now 25% of a smaller position. A $600 cash shortfall takes a $2,400 sale to fix.
The deposit adds equity. The sale leaves equity unchanged and shrinks the position it must support.
You may not get a warning
FINRA's margin disclosure makes the broker's powers clear: it can sell without contacting you, choose which assets to sell and act before a deadline it gave you. It can also sell more than the minimum needed, including the whole position.
A maintenance threshold does not guarantee a sale price. If all 200 shares instead sell at $30, they bring in $6,000 against the $6,600 loan. Your deposit is gone and you still owe $600. Your plan to hold for years does not bind the lender.
Whether the $6,600 loan fits your finances depends on its actual interest rate, the house requirement and cash you could supply from outside the account. Without the last two, the ticket's $13,200 of buying power cannot tell you what you can afford.
Leaving the loan unused is a valid choice; this whole track is optional. The funding-plan test at the end asks whether a borrowing plan can survive a cash deadline.
Next, short selling reverses the loan: you borrow shares to sell, then owe shares back.
In short
- Borrowing increases your stock exposure without increasing your own equity.
- Price losses shrink your equity while the loan and interest remain payable.
- Initial margin sets the equity needed to buy; maintenance margin sets the equity needed to keep holding.
- Adding cash builds equity. Selling shares to repay debt shrinks the position that equity must support.
- A broker can raise its requirement or sell without warning, and a forced sale can still leave you owing money.