An interactive guide to understanding margin trading. Learn how leverage can amplify gains and magnify losses, and explore the critical risk management techniques needed to navigate this advanced strategy.
Margin allows you to control a larger position than your cash alone permits. But leverage cuts both ways. Use the slider below to see how a stock's performance impacts your return on equity at different leverage levels.
Based on a $10,000 position
$0
0% Return on Equity
Your Capital: $10,000
Margin Loan: $0
Margin trading is governed by a hierarchy of rules. Understanding the difference between the initial requirement, the regulatory minimum, and your broker's "House Rule" is critical. Your broker's rule is the one that actually triggers a margin call.
| Regulator | Rule Name | Minimum Equity | Key Function |
|---|---|---|---|
|
Federal Reserve
|
Regulation T
|
50%
|
Governs the initial extension of credit for
new purchases. You must fund at least 50% of a new position
with your own equity.
|
|
FINRA
|
Rule 4210
|
25%
|
Sets the absolute regulatory minimum equity
level you must maintain in your account at all times.
|
|
Your Broker
|
"House" Rule
|
30–40%+
|
The broker's stricter internal rule. This is the
actual trigger point for a margin call and
can be changed without notice.
|
A margin call occurs when your account equity drops below the broker's house requirement. This simulator shows how a falling stock price erodes your equity and can trigger a forced liquidation.
50%
Equity Percentage
Market Value: $20,000
Your Equity: $10,000
Margin Loan: $10,000
Your equity has fallen below the 35% house requirement. You must deposit funds or your broker may forcibly liquidate your positions to cover the loan.
Successful margin trading is not about market prediction; it's about disciplined risk management. These core techniques help safeguard your capital in volatile conditions.
Never use your full buying power. Borrowing less creates an equity buffer that can absorb downturns without triggering margin calls.
Set aside extra cash to meet margin calls without panic selling. It’s your financial airbag in volatile markets.
Predetermine your risk. A stop-loss order enforces discipline and automatically exits losing positions.
Spread leverage risk across sectors. Don’t let one bad trade wipe out your entire account.
Don’t rely on assumptions. Understand your margin agreement, house minimums, interest rates, and call triggers.
Leverage is active risk. Watch your equity, set alerts, and act fast. Don’t trade and forget.