A margin account lets you buy securities with money borrowed from your broker, using the account itself as collateral. The appeal is obvious: the same amount of your own cash controls a larger position. The mechanics of what happens when that position falls are less widely understood, and they are not in the investor's favor.
Two numbers set the boundaries
The first is the initial requirement. Under the Federal Reserve's Regulation T, brokers can lend a customer up to 50 percent of the total purchase price of a margin equity security, so a $10,000 position needs at least $5,000 of your own money at the outset.
The second is the maintenance requirement, which governs what happens afterward. FINRA rules require equity in the account to stay at or above 25 percent of the total market value of the margin securities. Fall below it and the firm issues a margin call.
That 25% is a floor, not the number most investors actually face. Many brokerage firms set higher "house" requirements, commonly between 30 and 40 percent, and sometimes higher depending on the security. Firms can also raise those requirements, and in volatile markets they frequently do, on the securities where the risk has risen.
A worked example
Buy 100 shares at $100, for $10,000. Put in $5,000 of your own money and borrow $5,000, meeting the Regulation T requirement.
The share price then falls to $60. The position is worth $6,000. The loan is still $5,000, because a falling share price does not reduce what you owe. Your equity is the difference: $1,000.
The ratio that matters is equity divided by market value: $1,000 ÷ $6,000 = 16.7%. That is below the 25% maintenance minimum, so the account is now deficient and a call is triggered.
Look at what leverage did. The stock fell 40%. Your own capital went from $5,000 to $1,000, a loss of 80%. Borrowing half the position doubled the percentage impact of the move on your money. That multiplication is the entire proposition of margin, and it is symmetric: it would have doubled a gain in exactly the same way.
The part that surprises people
Investors tend to picture a margin call as a phone call, followed by a chance to wire funds or choose what to sell. The rules do not work that way.
Brokers, at their discretion, may liquidate an account at any time to eliminate a margin deficiency. The SEC puts the consequence plainly in its own investor bulletin, noting that some investors have been surprised to learn the firm can sell securities bought on margin without any notification and potentially at a substantial loss to the investor.
Nor do you get to pick. Firms do not have to let you choose which securities are sold to meet the call. That has consequences beyond the position itself: the holding the firm sells may be the one carrying your largest embedded capital gain, which turns a market loss into a tax event you did not choose to trigger.
These terms are disclosed in the margin agreement customers sign. They are simply not what most people picture when they open the account.
Why forced selling matters beyond the individual account
One investor being sold out is a private problem. The reason margin appears in discussions of market structure is that these calls do not arrive one at a time.
A sharp fall pushes many leveraged accounts through their maintenance thresholds at once. The resulting liquidations add selling pressure into a market that is already falling, which pushes prices lower, which pushes further accounts through their thresholds. The seller in this loop is not expressing a view. They are meeting a requirement, which means the selling is insensitive to price or value.
The mechanism is visible at institutional scale too. When Archegos Capital Management failed to meet margin calls from its prime brokers in late March 2021, the banks unwound the fund's concentrated positions, and the losses landed on the lenders rather than being contained: Credit Suisse reported roughly $5.5bn and Nomura about $2.85bn. The episode is a useful illustration precisely because the same arithmetic governs a retail account, only with fewer zeros and no negotiation.
The practical summary
Margin is a tool with an explicit cost and an explicit risk, and it is used deliberately by people who model both. The failure mode is treating it as a way to enlarge a position without treating it as a way to enlarge a loss.
Three points are worth holding onto. Your broker's house requirement, not the 25% regulatory floor, is the level that governs your account, and it can move. The firm can sell without asking. And the percentage loss on your own money will always exceed the percentage fall in the security, by exactly the factor you levered.
