Can you lose money on a margin account?
The bottom line
Margin balance allows investors to borrow money, then repay it to the brokerage with interest. A negative margin balance or margin debit balance represents the amount subject to interest charges. This amount is always either a negative number or $0, depending on how much an investor has outstanding.
While margin loans can be useful and convenient, they are by no means risk free. Margin borrowing comes with all the hazards that accompany any type of debt — including interest payments and reduced flexibility for future income. The primary dangers of trading on margin are leverage risk and margin call risk.
With a margin account, it's possible to end up owing money on an individual stock purchase. Your losses are still limited, and your broker may force you out of a trade in order to ensure you can cover your loan (with a margin call).
If an investor isn't able to meet the margin call, a broker may close out any open positions to replenish the account to the minimum required value. They may be able to do this without the investor's approval.
If an account loses too much money due to underperforming investments, the broker will issue a margin call, demanding that you deposit more funds or sell off some or all of the holdings in your account to pay down the margin loan.
If you do open a margin account, there is also no obligation to purchase on margin (using borrowed capital). You can use it just as you would a cash account and simply not purchase any more stock than you have money for.
Understand How Margin Works
For example, let's say the stock you bought for $50 falls to $15. If you fully paid for the stock, you would lose 70 percent of your money. However, if you bought on margin, you would lose more than 100 percent of your money.
Since this equals the amount owed to the broker, the investor loses 100% of their investment. If the investor had not used margin for their initial investment, the investor would still have lost money, but they would only have lost 50% of their investment—$2,500 instead of $5,000.
Bigger losses: Just as buying investments on margin can boost your overall returns when the market is going up, it can also amplify your losses if those investments lose value. Let's take our previous example: Say that instead of earning a 40% return, your $20,000 investment actually drops by 50% to $10,000.
Can I lose more than my margin?
When investing on margin, the investor is at risk of losing more money than what they deposited into the margin account. This may occur when the value of the securities held declines, requiring the investor to either provide additional funds or incur a forced sale of the securities.
Can you lose more money than you put in stocks? The only way you lose more money than you initially invested is if you used borrowed money to make the purchase.
There are many convenient ways to withdraw your money. The most common is using an electronic funds transfer (EFT) to your bank. Interest charges are automatically posted to your account monthly. You determine the payback schedule and payment amount.
There are three ways to receive a margin call: You trade for more than the buying power in your account. The value of your margin account decreases. Your broker raises the house maintenance margin requirements.
The amount you can borrow on margin is typically limited to 50% of the value of marginable securities in your account. Once you borrow on margin, you are required to maintain a certain amount of equity. in your account, depending on the securities you hold.
Margin calls must be settled immediately, but no later than the displayed due date, which is normally two business days. If steps aren't taken to satisfy the margin call, your broker will sell enough of your securities to bring your account back into compliance.
Margin debt is the sum of money that investors borrow from the brokerage through the margin account. Investors can use the margin debt to buy securities or short sell stocks. The initial set margin debt that the investor can borrow is 50% of the total account balance.
A margin exposes investors to additional risks and is not advisable for beginner investors, and margins can be a useful tool for experienced investors, though if you're new to investing, it might be more prudent to play it safe.
If you have a negative listed cash balance in your margin account, that means you are currently borrowing money. Your margin account will automatically borrow money whenever you make a trade that is not covered by the available cash of the currency of the trade in your account.
You can reduce or pay off your debit balance (which includes margin interest accrued) by depositing cash into your account or by liquidating securities. The proceeds from the liquidation will be applied to your debit balance. I sold a stock short, and now I'm being charged whenever the company pays a dividend.
Does margin account affect credit score?
If you open a margin account, the lender may run a hard inquiry — this will temporarily decrease your credit score.
| Pros | Cons |
|---|---|
| Offers more flexibility in terms of loan repayment. | In case of losses, other securities might be subject to forced liquidation. The credit increases the investor's purchasing power. |
| The credit increases the investor's purchasing power. | The cost of investment is high |
You can repay your loan at any time by depositing money or by selling securities. Margin loan rates are typically low. These types of loans also have low fees also.
You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities or assets in your account(s).
You can deduct margin interest from your taxes by itemizing your deductions and subtracting margin interest costs from your net investment income.
