Investing often involves making choices with the resources you have today while planning for the future you want to build. Sometimes, investors identify opportunities they believe in but don’t have enough available cash to invest as much as they’d like.
One option available to some investors is margin trading.
Margin trading allows eligible investors to borrow money from their broker to purchase additional securities beyond the cash available in their account. It can increase buying power and provide greater flexibility when investing, but it also comes with additional costs and risks that every investor should understand before using it.
Because margin involves borrowing, it isn’t suitable for everyone. While it can amplify potential gains, it can also amplify potential losses, and investors may face margin calls or even the liquidation of positions if their account no longer meets the required maintenance levels.
That’s why understanding how margin works is just as important as knowing how to use it. If you’re new to investing or looking to understand more advanced investing tools, this guide will help you make a more informed decision.
What Is Margin Trading?
Margin trading is a form of investing that allows eligible investors to borrow money from their broker to purchase additional eligible securities.
It is also known as buying securities on margin or investing with leverage because investors use borrowed funds to increase their purchasing power. The investments in the account then serve as collateral for the borrowed funds.
So rather than investing only the cash you’ve deposited into your account, margin allows you to invest using both your own money and funds borrowed from your broker.
Here’s a simple example:
Imagine you have $3,000 in your investment account.
With a cash account, you can typically purchase up to $3,000 worth of eligible investments.
With an eligible margin account that provides 2× buying power, you may be able to purchase up to $6,000 worth of eligible marginable securities by borrowing the additional $3,000 from your broker.
While this additional buying power can create more investment opportunities, it’s important to remember that the borrowed funds must be repaid, and interest may apply to outstanding borrowed balances.
Margin trading is different from taking a personal loan. The loan is secured by the eligible securities in your investment account, and the value of those securities can affect your borrowing capacity.
Why Do Investors Use Margin?
Investors use margin for different reasons depending on their investment goals, experience, and risk tolerance.
Some investors use it to increase their buying power when they identify an investment opportunity they believe aligns with their strategy. Others may use margin to avoid selling existing investments when they need additional capital to make another investment.
For example, an investor who has built a diversified portfolio over several years may prefer to keep their existing holdings while using margin to purchase additional eligible securities, rather than selling part of their portfolio.
However, using margin is not about investing more simply because borrowing is available. Experienced investors typically consider factors such as market conditions, borrowing costs, portfolio risk, and their ability to absorb potential losses before deciding whether to use margin.
Like any investing tool, margin should support a well-thought-out investment strategy rather than replace one.
How Does Margin Trading Work?
At its core, margin trading involves three components:
- Your account equity
- Borrowed funds from your broker
- Eligible securities that act as collateral
Let me show you how these work together.
Suppose you deposit $2,500 into your US portfolio.
As long as your account qualifies for margin and provides 2× buying power, you may be able to invest up to $5,000 in eligible marginable US securities.
In this example:
- Your money: $2,500
- Borrowed funds: Up to $2,500
- Total buying power: Up to $5,000
Once you purchase securities using borrowed funds, those securities become part of the collateral securing the margin loan.
As the value of your investments changes, so does the value of the collateral supporting the loan. If the value of your portfolio falls significantly, you may be required to deposit additional funds or reduce your positions to continue meeting the broker’s margin requirements.
This is one of the key differences between investing with cash and investing on margin.
Cash Account vs Margin Account
Understanding the difference between these two account types is essential before deciding whether margin trading is right for you.
| Feature | Cash Account | Margin Account |
| Source of investment funds | Your own cash only | Your cash plus eligible borrowed funds |
| Buying power | Limited to available cash | May be higher, subject to eligibility and margin requirements |
| Interest charges | None | Interest may apply to borrowed balances |
| Risk level | Lower | Higher because borrowing can amplify gains and losses |
| Margin calls | No | Possible if maintenance requirements are not met |
What Is Buying Power?
One of the first terms investors encounter when learning about margin is buying power.
Buying power refers to the total value of eligible securities you may be able to purchase based on your account equity and applicable margin requirements.
Think of it as your potential purchasing capacity rather than the amount of cash sitting in your account.
For eligible Regulation T (Reg T) margin accounts, buying power is commonly calculated using a multiple of your account equity.
For example:
| Account Equity | Buying Power (Illustrative 2× Example) |
| $2,000 | Up to $4,000 |
| $3,000 | Up to $6,000 |
| $5,000 | Up to $10,000 |
Eligible Regulation T (Reg T) margin accounts generally receive 2× buying power, while some qualifying accounts may receive up to 4× buying power, depending on account status and applicable broker requirements.
It’s important to remember that buying power is not extra cash. It represents the maximum amount you may be able to invest using both your own funds and borrowed funds, subject to eligibility and applicable margin rules. While increased buying power can provide greater investment flexibility, it also means taking on additional responsibility and risk when using borrowed funds.
Understanding Margin Through a Realistic Example
To see how margin works in practice, let’s follow a fictional investor named Dan.
Dan has been investing in US stocks for some time and has built a US portfolio worth $3,000. After researching several companies, he decided he would like to increase his investment in eligible US equities.
Because Dan’s account meets the eligibility requirements for margin, he is approved for 2× buying power.
This gives him the ability to purchase up to $6,000 worth of eligible marginable securities.
Dan decides to invest $5,000, using:
$3,000 of his own funds.
$2,000 borrowed from his broker.
Over time, one of two things can happen.
If the value of his investments increases, the value of his portfolio may grow. However, he is still responsible for repaying the borrowed amount and any applicable interest on outstanding borrowed balances.
If the value of his investments declines significantly, the value of the collateral supporting his margin loan also declines. Depending on the size of the decline and the applicable maintenance requirements, Dan could receive a margin call requiring him to deposit additional funds or reduce his positions.
This example highlights an important point, which is that margin doesn’t change the quality of an investment. It changes the amount of money at work and, with it, the level of potential risk and reward.
What Is a Margin Call?
One of the most important concepts to understand before using margin is the margin call.
A margin call occurs when the value of your account falls below the minimum maintenance requirement set by your broker. Because your investments serve as collateral for the money you’ve borrowed, a significant decline in their value reduces the equity in your account.
When this happens, your broker may require you to take action to restore your account to the required level.
Depending on your account and the applicable margin requirements, you may be asked to:
- Deposit additional cash into your account.
- Add eligible securities as collateral.
- Sell some of your investments to reduce the outstanding loan.
If no action is taken within the required timeframe, your broker may sell eligible securities in your account without your prior approval to help satisfy the margin requirements.
For this reason, investors should regularly monitor their margin accounts, especially during periods of market volatility.
If a margin deficiency is not resolved within the required timeframe, the broker may liquidate eligible securities in your account to restore the required maintenance margin. Depending on the circumstances, this may happen without prior notice, which is why it’s important to monitor your account regularly and maintain sufficient equity.
Benefits of Margin Trading
When used responsibly, margin trading can provide experienced investors with greater flexibility in managing their portfolios. Some potential benefits include:
Increased Buying Power
Margin allows eligible investors to purchase more securities than they could using only the cash available in their account.
Greater Investment Flexibility
Rather than selling existing investments to fund a new opportunity, investors may use margin to increase exposure while keeping their current portfolio intact.
Opportunity to Respond Quickly
Financial markets can move rapidly. Margin may allow investors to act on investment opportunities without waiting to deposit additional funds.
Portfolio Management
Some experienced investors use margin as part of a broader portfolio strategy, provided they understand the associated costs and risks.
It’s important to remember that these benefits only exist when margin is used carefully and within an investor’s risk tolerance.
Risks of Margin Trading
Margin trading has the potential to increase returns, but it can also increase losses. Before using margin, investors should understand the following risks.
Losses Can Be Larger
Because you’re investing with borrowed funds, losses are calculated on the entire investment, not just the cash you contributed.
Interest Costs
Margin interest is charged only on borrowed funds that remain outstanding. If you open and fully close a margin position within the same trading day, no margin interest is charged.
If borrowed funds remain outstanding beyond the trading day, applicable margin interest may accrue until the balance is repaid. Understanding how margin interest works is important, as borrowing costs can affect your overall investment returns.
Margin Calls
If your account falls below the required maintenance level, you may need to deposit additional funds or reduce your positions.
Forced Liquidation
If a margin call isn’t met, your broker may sell eligible securities from your account to help restore compliance with margin requirements.
Market Volatility
Sharp market movements can affect leveraged positions much more quickly than positions purchased entirely with cash.
For these reasons, margin trading is generally better suited to investors who understand market risks and have a clear investment strategy.
Who Should Consider Margin Trading?
Margin trading isn’t appropriate for every investor.
It may be suitable for investors who:
- Understand how financial markets work.
- Have experience investing in stocks or ETFs.
- Can tolerate higher levels of investment risk.
- Have a long-term investment strategy rather than making emotional decisions based on short-term market movements.
- Understand that borrowed money must be repaid regardless of investment performance.
If you’re still learning the basics of investing, building a diversified portfolio with a cash account may be a more appropriate starting point.
How Margin Trading Works on Trove
Eligible Trove users can access margin trading to increase their buying power when investing in US securities.
Here’s what you need to know before getting started.
Eligibility Requirements
To access margin trading on Trove, your account must meet the platform’s eligibility criteria.
- Your account must have at least $2,000 in account equity to qualify for standard Regulation T (Reg T) margin.
- Accounts with less than $2,000 in account equity are limited to 1× buying power, meaning you can only invest using the cash available in your account.
- Eligible accounts generally receive 2× buying power.
- Some qualifying accounts may receive up to 4× buying power, depending on account status and applicable broker requirements.
- Margin trading is currently available for eligible US securities. However, not all US securities are eligible for margin trading. Margin availability depends on applicable regulations, broker requirements, and the specific security being traded. As a result, the buying power available to you may vary depending on the investments held in your portfolio.
Meeting the minimum equity requirement does not automatically guarantee a specific buying power, as eligibility is determined according to applicable margin rules.
How to Enable Margin Trading on Trove
If you have a US portfolio on Trove, you’ll see the Margin Trading option within your US portfolio.
To use Margin Trading:
- Open the Trove app.
- Go to your US portfolio.
- Locate the Margin Trading toggle.
- Switch the toggle on to enable margin trading or off to disable it at any time.
- Review and accept the applicable terms and disclosures.
- Once approved, your buying power will be updated to reflect your eligible margin limit.
To enable margin trading, your US portfolio must have at least $2,000 in account equity. If your portfolio has less than $2,000 in equity, the margin trading option will remain unavailable, and you’ll only be able to invest using the cash available in your account.
Once enabled, your available buying power will be updated based on your account equity, eligibility, and applicable margin requirements.
Frequently Asked Questions (FAQs)
Is margin trading the same as a loan?
Not exactly. While margin trading involves borrowing money from your broker, the loan is secured by the eligible securities in your investment account rather than being an unsecured personal loan. The amount you can borrow depends on your account equity, the value of your investments, and applicable margin requirements.
Is margin trading risky?
Yes. Margin trading carries more risk than investing with cash alone because it can amplify both gains and losses. If the value of your investments falls significantly, you may receive a margin call or have positions liquidated to meet maintenance requirements.
Do I pay interest on margin?
Interest may apply to borrowed funds that remain outstanding. The amount charged depends on your broker’s applicable margin rates and the size of your borrowed balance. Before using margin, it’s important to understand how interest is calculated and how it may affect your investment returns.
Can beginners use margin trading?
Margin trading is generally better suited to investors who understand how financial markets work and are comfortable managing additional investment risk. If you’re new to investing, building experience with a cash account before using leverage may be a more appropriate approach.
What securities can I buy with margin?
Not every investment is eligible for margin. Brokers typically determine which securities can be purchased on margin based on regulatory requirements and internal risk policies. On Trove, Margin Trading is currently available for eligible US securities.
What happens if my investments lose value?
If your portfolio falls below the required maintenance level, you may receive a margin call asking you to deposit additional funds, add eligible securities, or reduce your outstanding loan. If the margin requirements are not met, your broker may liquidate eligible positions to help restore the required account balance.
How do I qualify for margin trading on Trove?
Eligible users must meet Trove’s margin requirements, including maintaining at least $2,000 in account equity for standard Regulation T (Reg T) margin eligibility. Qualifying accounts generally receive 2× buying power, while some eligible accounts may receive up to 4× buying power, subject to applicable requirements.
Conclusion
Margin trading can be a powerful investing tool when used with a clear strategy and a thorough understanding of the risks involved. By allowing eligible investors to borrow funds against their portfolio, it offers greater buying power and flexibility to pursue investment opportunities without relying solely on available cash.
However, borrowing to invest also introduces additional responsibilities. Interest charges, market volatility, margin calls, and the potential for amplified losses mean that margin should be approached thoughtfully, not impulsively.
Before using margin, take the time to understand how it works, assess your risk tolerance, and ensure it aligns with your long-term investment goals. Responsible investing isn’t about using every available tool. It’s about knowing when a tool is appropriate and using it wisely.
Important Margin Trading Disclosures
Then keep the bullets underneath:
- Margin trading is available only to eligible US accounts that meet the applicable minimum equity requirements.
- Borrowing on margin increases both your potential gains and your potential losses.
- Margin interest applies only to borrowed balances that remain outstanding.
- If your account falls below the required maintenance margin, you may receive a margin call requiring you to deposit additional funds or reduce your positions.
- If margin requirements are not met, eligible securities may be liquidated by the broker, in some cases without prior notice, to help restore the required maintenance margin.
- Not all securities are eligible for margin trading, and maintenance requirements may vary depending on the security.
Ready to Explore Margin Trading on Trove?
Download the Trove app to start building your US investment portfolio. Already a Trove user? Open your US portfolio, check your margin trading eligibility, and turn on margin trading if you’re eligible.
