Last Modified: June 3, 2026
Table of Contents
SERIES 7 PREP | FINANCIAL REGULATION COURSES
Buying on margin is the practice of purchasing securities using a combination of the investor's own funds and money borrowed from a broker-dealer, creating a leveraged position in which the investor controls a securities position larger than could be acquired with their own capital alone — a strategy that amplifies both potential gains and potential losses relative to the investor's equity in the account, and one that is governed by a layered regulatory framework beginning with the Securities Exchange Act of 1934, which granted the Federal Reserve Board authority to regulate the extension of credit for securities purchases, continuing through the Federal Reserve's Regulation T, which establishes the fifty percent initial margin requirement for equity securities, and extending through FINRA Rule 4210, which sets the twenty-five percent minimum maintenance margin requirement that determines when a margin call is triggered.
Margin trading occupies a position of unusual regulatory prominence because the collapse of stock prices in the 1929 market crash was attributed in significant part to the extreme leverage that investors had taken through margin accounts — with initial margin requirements as low as ten percent in some cases creating a situation in which modest price declines wiped out investor equity entirely and forced liquidations that accelerated the market's decline — a lesson that Congress codified in the Securities Exchange Act and that the Federal Reserve Board has administered ever since.
For securities industry professionals, buying on margin is one of the most heavily tested topics on the Series 7 examination — requiring candidates to perform margin calculations, apply Regulation T and FINRA Rule 4210, determine when margin calls arise, calculate equity and debit balances, understand the special margin requirements for pattern day traders, and explain the risks of leveraged investing to clients.
This entry examines the structure and mechanics of the margin account in complete technical detail, covers the regulatory framework from Section 7 of the Exchange Act through Regulation T and FINRA Rule 4210, works through the fundamental margin calculations tested on the Series 7 examination, explains the margin call and forced liquidation process, addresses the special margin rules for pattern day traders, analyses the interest charge on the margin debit balance, and identifies the risks that every broker-dealer must disclose and every client must understand before opening a margin account.
Buying on margin means purchasing securities by depositing a portion of the purchase price in cash — the margin — and borrowing the remainder from the broker-dealer, with the securities purchased serving as collateral for the loan.
The borrowed funds create a debit balance in the margin account — the amount owed to the broker-dealer — while the investor's cash contribution plus any unrealised appreciation in the securities constitutes the equity in the account. The margin account is therefore simultaneously a brokerage account and a credit account, with the broker-dealer acting as both securities intermediary and lender.
The fundamental economic appeal of margin is leverage — the ability to earn returns on a larger position than the investor's capital would otherwise support. An investor with ten thousand dollars in capital who buys ten thousand dollars of stock earns a ten percent return on their investment if the stock rises ten percent — a one thousand dollar gain.
The same investor using margin to buy twenty thousand dollars of stock earns ten percent on twenty thousand dollars — a two thousand dollar gain on their ten thousand dollar equity — representing a twenty percent return on their equity investment. Leverage doubles the return in this scenario. The same leverage also doubles the loss if the stock declines, and continues to amplify losses even as the investor's equity approaches zero — the defining risk of margin trading.
The authority to regulate margin credit derives from Section 7 of the Securities Exchange Act of 1934, which delegated to the Federal Reserve Board — now the Board of Governors of the Federal Reserve System — the power to prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained for the purchase or carrying of securities. Congress granted the Federal Reserve this authority specifically to prevent excessive leverage from contributing to market instability of the kind that had magnified the 1929 crash, when margin requirements as low as ten percent allowed investors to leverage their capital ten-to-one, creating a cascade of forced liquidations when prices began to fall.
The Federal Reserve exercises this authority through Regulation T — Credit by Brokers and Dealers — codified at 12 Code of Federal Regulations Part 220. Regulation T establishes the initial margin requirement for equity securities purchased in margin accounts and defines the eligible account types within which margin lending may occur.
FINRA exercises complementary authority through FINRA Rule 4210, Margin Requirements, which supplements Regulation T by establishing maintenance margin requirements — the ongoing minimum equity level that must be maintained in a margin account after the initial purchase — and by imposing initial margin requirements for securities and transactions that Regulation T does not specifically address, including certain corporate bonds and complex derivatives positions.
A margin account is a brokerage account in which the broker-dealer has agreed to extend credit to the customer for the purchase of securities, with the customer's securities holdings serving as collateral. Not all securities are eligible to be purchased on margin — Regulation T defines margin securities as those eligible for margin credit, which includes stocks listed on national securities exchanges, certain over-the-counter stocks meeting Federal Reserve criteria, and other instruments specified in the Regulation T supplement. Non-margin securities — including initial public offerings, most penny stocks trading below five dollars, and securities that the broker-dealer determines are too volatile or illiquid to serve as acceptable collateral — must be purchased entirely with cash in a cash account.
Before opening a margin account, the broker-dealer must provide the customer with a margin disclosure statement describing the nature and risks of margin trading, consistent with the SEC's investor protection objectives and FINRA's investor education requirements. The margin agreement must be signed by the customer and establishes the terms under which the broker-dealer extends credit, including the interest rate that will be charged on the debit balance and the circumstances under which the broker-dealer may liquidate positions without prior notice to the customer.
FINRA Rule 4210 establishes a minimum equity requirement of two thousand dollars — the minimum amount of equity that must be present in a margin account at all times. A customer opening a margin account to make an initial securities purchase must deposit at least two thousand dollars before any margin credit is extended. If the cost of the initial securities purchase is less than two thousand dollars, the customer must deposit the full purchase price in cash — margin credit does not arise unless the transaction exceeds the minimum equity level.
Regulation T's primary operative provision for equity securities is the initial margin requirement — the percentage of the purchase price that the customer must deposit in cash or eligible securities when establishing a new margin position. Under Regulation T, the initial margin requirement for equity securities is fifty percent — the customer must deposit at least fifty percent of the total purchase price of any marginable equity security purchased in the margin account, and the broker-dealer may lend the customer up to fifty percent of the purchase price.
This fifty percent requirement means that a customer who wishes to purchase twenty thousand dollars of a marginable stock must deposit at least ten thousand dollars of their own funds, with the broker-dealer lending the remaining ten thousand dollars against the purchased securities as collateral. The customer now holds a twenty thousand dollar position funded by ten thousand dollars of equity and ten thousand dollars of borrowed capital — a two-to-one leverage ratio.
Regulation T permits the broker-dealer to impose higher initial margin requirements than the fifty percent federal minimum — and many broker-dealers do impose higher house requirements for certain securities they consider higher risk. However, broker-dealers cannot permit customers to post less than the federal fifty percent minimum for equity securities, regardless of how creditworthy the customer may be.
For exempt securities — including United States Treasury securities, federal agency obligations, and municipal bonds — Regulation T does not impose a specific percentage initial margin requirement. Instead, broker-dealers set the initial margin in good faith, typically a much lower percentage reflecting the lower volatility and credit risk of these instruments relative to equity securities.
The calculation of initial margin requirements, account equity, and debit balance are fundamental Series 7 examination skills requiring precision and practice. The following structure covers the essential calculations.
An investor wishes to purchase one thousand shares of a stock at twenty dollars per share for a total purchase cost of twenty thousand dollars. The investor deposits ten thousand dollars in cash to meet the fifty percent Regulation T initial margin requirement. The broker-dealer lends the remaining ten thousand dollars.
After the transaction, the account structure is: securities market value equals twenty thousand dollars; debit balance — the loan from the broker-dealer — equals ten thousand dollars; and equity equals securities market value minus debit balance, which is twenty thousand minus ten thousand, equalling ten thousand dollars. The equity percentage equals equity divided by securities market value, which is ten thousand divided by twenty thousand, equalling fifty percent.
The debit balance does not change as the securities price changes — the loan amount remains constant. Only the equity changes as the market value of the securities changes. If the stock price rises to twenty-five dollars per share, the securities value becomes twenty-five thousand dollars. The debit balance remains ten thousand dollars. The equity becomes twenty-five thousand minus ten thousand, equalling fifteen thousand dollars — a fifty percent increase in equity from a twenty-five percent increase in securities value, illustrating the amplification effect of leverage.
If the stock price falls to fifteen dollars per share, the securities value becomes fifteen thousand dollars. The debit balance remains ten thousand dollars. The equity becomes fifteen thousand minus ten thousand, equalling five thousand dollars — a fifty percent decrease in equity from a twenty-five percent decline in securities value, illustrating the symmetric amplification of losses.
After the initial purchase is made under Regulation T, the ongoing regulation of the margin account shifts to FINRA Rule 4210's maintenance margin requirements. The maintenance margin is the minimum percentage of equity that must be maintained at all times in the account relative to the current market value of the securities held long. Under FINRA Rule 4210, the minimum maintenance margin for equity securities held long in a margin account is twenty-five percent of the current market value of those securities.
Many broker-dealers impose house maintenance requirements higher than the FINRA minimum — typically thirty to forty percent — providing an additional buffer above the regulatory minimum before forced liquidation must occur. The house requirement is disclosed in the margin agreement the customer signs when opening the account.
A margin call is a demand from the broker-dealer that the customer deposit additional cash or securities — or liquidate sufficient positions — to restore the account equity to at or above the maintenance margin requirement. A margin call arises when the securities in the account decline in value to the point where the equity falls below the maintenance margin percentage.
Using the example above — a twenty thousand dollar stock position with a ten thousand dollar debit balance and a ten thousand dollar equity — consider what happens as the stock price declines. If the broker's maintenance margin requirement is twenty-five percent, the margin call trigger point is calculated as follows: the debit balance divided by one minus the maintenance requirement, which is ten thousand dollars divided by one minus zero point two five, which equals ten thousand divided by zero point seven five, which equals thirteen thousand three hundred and thirty-three dollars. When the securities market value falls to thirteen thousand three hundred and thirty-three dollars, the equity falls to three thousand three hundred and thirty-three dollars, representing exactly twenty-five percent of the securities value. Any further decline below thirteen thousand three hundred and thirty-three dollars in securities value triggers a maintenance margin call.
Using a thirty percent house maintenance requirement, the margin call trigger point is ten thousand dollars divided by one minus zero point three zero, which equals ten thousand divided by zero point seven zero, equalling fourteen thousand two hundred and eighty-six dollars — a higher trigger point reflecting the stricter house requirement.
When a margin call is issued, the customer must act within the time period specified by the broker-dealer — typically one to three business days — by depositing cash, depositing additional eligible securities, or selling securities in the account to reduce the debit balance and restore equity above the maintenance requirement. The broker-dealer's margin agreement — and FINRA Rule 4210 — explicitly authorise the broker-dealer to liquidate positions in the account to satisfy a margin deficiency without waiting for customer instruction and without being required to notify the customer before doing so. This broker-dealer right of liquidation without notice is one of the most consequential and most client-critical aspects of margin account agreements that registered representatives must disclose and explain clearly.
When a margin call arises, the amount the customer must deposit is calculated as the amount needed to restore equity to at or above the maintenance margin threshold. In the example above using a thirty percent house maintenance requirement and a securities value of fourteen thousand dollars: the required equity is thirty percent of fourteen thousand dollars, which equals four thousand two hundred dollars. The actual equity is fourteen thousand dollars minus the ten thousand dollar debit balance, equalling four thousand dollars. The margin deficiency — the amount of the margin call — is four thousand two hundred minus four thousand, equalling two hundred dollars. The customer must deposit two hundred dollars in cash or two hundred dollars worth of eligible securities to cure the deficiency.
The debit balance in the margin account — the amount borrowed from the broker-dealer — accrues interest continuously at the rate specified in the margin agreement, typically expressed as the broker call rate plus a spread. The broker call rate — also called the call money rate — is the interest rate at which banks lend funds to broker-dealers to finance margin loans, and it fluctuates with general money market conditions. The margin interest rate charged to customers is typically one to three percentage points above the broker call rate, with the spread varying based on the size of the debit balance — larger debit balances typically earn lower interest rates through tiered pricing structures.
Interest accrues daily on the outstanding debit balance and is typically charged to the account monthly. The interest charge reduces the account equity — it is debited to the account as a cost, reducing the customer's net return on the margin investment. A customer borrowing fifty thousand dollars at an annualised interest rate of seven percent pays approximately three thousand five hundred dollars annually in interest on the margin loan — a cost that must be earned back through the investment return before the margin strategy produces net profit. The interest break-even point is the return required on the total position to cover the interest cost on the borrowed portion and produce a positive net return — a critical concept for margin suitability analysis.
A pattern day trader is defined under FINRA Rule 4210 as any customer who executes four or more day trades — purchases and sales of the same security within the same trading day — within any five consecutive business day period in a margin account, provided that the number of day trades represents more than six percent of the customer's total trading activity in the margin account during that period. Pattern day trader status triggers substantially enhanced margin requirements.
FINRA Rule 4210 requires that broker-dealers impose a minimum equity requirement of twenty-five thousand dollars on all pattern day trader margin accounts — more than twelve times the two thousand dollar minimum for standard margin accounts. This elevated minimum must be maintained at all times, not merely at account opening. If a pattern day trader's account falls below twenty-five thousand dollars in equity, the account is restricted from day trading until the equity is restored to at least twenty-five thousand dollars.
Additionally, the purchasing power of a pattern day trader — the maximum market value of securities the account can hold without triggering a margin deficiency — is capped at four times the maintenance margin excess as of the close of business on the prior day for equity securities. Maintenance margin excess is the amount by which the account equity exceeds the maintenance margin requirement. A pattern day trader whose account has fifty thousand dollars in equity and thirty thousand dollars in securities subject to twenty-five percent maintenance has maintenance margin excess of fifty thousand minus seven thousand five hundred — the maintenance requirement on thirty thousand — equalling forty-two thousand five hundred dollars. Their day trading purchasing power is four times forty-two thousand five hundred, which equals one hundred and seventy thousand dollars.
Certain categories of securities cannot be purchased on margin and must be paid for in full in cash at the time of purchase. Initial public offerings — new issues of common stock in their initial offering period — are not eligible for margin purchase under Regulation T, reflecting the heightened speculative risk of IPO investments and the potential for dramatic price swings in the immediate post-issuance period. Penny stocks — generally defined as equity securities trading below five dollars per share — are typically ineligible for margin purchase at most broker-dealers because their low prices, thin trading volume, and high volatility make them unsuitable collateral for margin loans. Mutual fund shares purchased from the fund cannot be margined during the first thirty days of ownership under Regulation T, though they can be margined thereafter.
Non-marginable securities that are purchased must be paid for in full in a cash account. A cash account operates on an entirely different basis from a margin account — the customer must pay the full purchase price for every transaction and may not borrow any portion of the purchase price from the broker-dealer.
The mathematical impact of leverage on investment returns — both gains and losses — can be illustrated concisely to demonstrate the risk amplification that makes margin trading appropriate only for investors who fully understand and can tolerate significantly elevated risk.
Consider an investor with twenty thousand dollars in capital who buys twenty thousand dollars of stock without margin. The stock rises twenty percent, producing a four thousand dollar gain — a twenty percent return on the twenty thousand dollar investment.
The same investor buys forty thousand dollars of the same stock on margin, depositing twenty thousand dollars and borrowing twenty thousand dollars from the broker-dealer. The stock rises twenty percent, producing an eight thousand dollar gain on the forty thousand dollar position — an eight thousand dollar gain on twenty thousand dollars of equity representing a forty percent return. Leverage doubled the percentage return.
Now suppose the stock falls twenty percent instead. Without margin, the investor loses four thousand dollars — a twenty percent loss on twenty thousand dollars invested. With margin, the investor loses eight thousand dollars on the forty thousand dollar position — an eight thousand dollar loss on twenty thousand dollars of equity representing a forty percent loss on equity. Leverage doubled the percentage loss.
If the stock falls fifty percent, the margin investor loses twenty thousand dollars on the forty thousand dollar position — losing one hundred percent of their equity. The investor still owes the twenty thousand dollar debit balance to the broker-dealer. If forced to sell the securities at twenty thousand dollars — exactly covering the debit balance — they receive nothing and have lost their entire twenty thousand dollar equity contribution. If the stock falls further, the investor can owe more than the value of the securities in the account — producing a net negative equity situation in which the investor owes the broker-dealer funds beyond the value of their securities. This scenario — losing more than the initial investment — is a core risk of margin that must be disclosed and understood.
Under FINRA Rule 2111 and Regulation Best Interest, registered representatives and investment advisers have clear obligations when recommending margin accounts and margin transactions. Margin is not suitable for every customer regardless of their investment objectives or risk tolerance. The significant leverage, ongoing interest cost, margin call risk, and possibility of losing more than the initial investment make margin accounts appropriate only for customers who understand leverage risk, have sufficient financial resources to sustain margin calls without financial hardship, have a sufficient risk tolerance to absorb the amplified losses that margin creates, and have investment objectives that are consistent with leveraged equity investing.
The SEC's Investor Bulletin on margin accounts identifies specific questions that customers should be able to answer affirmatively before opening a margin account: understanding that margin accounts involve substantially more risk than cash accounts, recognising that they may lose more than their initial investment, understanding that the broker may sell their securities without consulting them and without prior notice, and understanding that they must pay interest on the debit balance regardless of whether their investment gains in value.
FINRA rules require broker-dealers to provide customers with specified disclosures before they open margin accounts. The margin disclosure statement must explain the nature of margin accounts, the risks of borrowing money to purchase securities, the fact that the firm can sell the customer's securities at any time to protect itself without first contacting the customer, the fact that the customer may owe more than the funds deposited, and the fact that the firm can increase its maintenance margin requirements without advance notice. The margin disclosure statement must be provided to both institutional and non-institutional customers, with non-institutional customers additionally receiving it in connection with the firm's website if the firm allows online account opening or online trading.
Buying on margin is among the most heavily tested topics on the Series 7 examination, requiring candidates to perform precise numerical calculations, apply the two-layer regulatory framework of Regulation T and FINRA Rule 4210, and understand the risk disclosures required of broker-dealers. The SIE and Series 65 test the conceptual framework of margin rather than detailed calculations.
The core points to retain are these: buying on margin means purchasing securities with a combination of the investor's own funds and borrowed funds from the broker-dealer, creating leverage that amplifies both gains and losses; Section 7 of the Securities Exchange Act of 1934 granted the Federal Reserve Board authority to regulate margin credit, which it exercises through Regulation T at 12 CFR Part 220, establishing a fifty percent initial margin requirement for equity securities — meaning customers must deposit at least fifty percent of the purchase price of any marginable equity security; FINRA Rule 4210 establishes a twenty-five percent minimum maintenance margin requirement — the minimum equity percentage that must be maintained at all times, calculated as equity divided by securities market value — and sets the two thousand dollar minimum equity requirement for all margin accounts; a margin call arises when the equity in the account falls below the maintenance margin percentage, typically because securities prices decline, requiring the customer to deposit additional cash or securities or liquidate positions to restore the required equity level; the broker-dealer may liquidate positions to satisfy a margin deficiency without notice to the customer and without prior consultation under the terms of virtually all margin agreements; pattern day traders — customers who execute four or more day trades in any five consecutive business day period — are subject to a twenty-five thousand dollar minimum equity requirement under FINRA Rule 4210 and a purchasing power cap of four times maintenance margin excess; the debit balance accrues interest at the broker call rate plus a spread that must be earned back through investment returns before margin produces net profit; initial public offerings, most penny stocks, and mutual fund shares within thirty days of purchase are among the securities not eligible for margin purchase; and the investor risks losing more than the total amount deposited, because the debit balance remains even if the securities value falls below the loan amount.
