Bankrate is always editorially independent. While we adhere to strict , this post may contain references to products from our partners. Heres an explanation for . Our is to ensure everything we publish is objective, accurate and trustworthy. Bankrate logo
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money.
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
Unlocking the Power of Borrowed Money in Your Portfolio
Ever looked at your investment account and thought, “If only I had more cash to invest right now”? Margin investing might be the answer you’re looking for—but it comes with some serious strings attached.
As someone who’s spent years helping investors navigate financial decisions, I’ve seen margin accounts both transform portfolios and create nightmares. Today, I’m breaking down everything you need to know about margin investing and whether it’s actually worth the risk
What Exactly Is Margin Investing?
Margin investing is essentially borrowing money from your broker to buy more securities than you could afford with just your cash alone. It’s like getting a loan where your existing investments serve as collateral.
When you invest on margin, you’re using leverage to potentially amplify your returns But—and this is a BIG but—this same leverage can also magnify your losses
According to Robinhood’s description, “Margin investing enables you to borrow money from Robinhood and leverage your holdings to purchase securities. This gives you access to additional buying power based on the value of certain securities in your investing account.”
It’s important to note that margin investing isn’t automatic You need to apply and meet eligibility requirements before you can start using margin in your account
How Margin Investing Works: A Simple Breakdown
Let’s use an example from Robinhood to understand how margin investing works in real life:
The Profit Scenario
Imagine you have $5,000 in cash. With margin investing, you could borrow another $5,000 and buy $10,000 worth of stock (let’s say 100 shares at $100 each).
If the stock price increases to $125 per share:
- Your 100 shares are now worth $12,500
- You still owe $5,000 (your margin loan)
- Your portfolio value is now $7,500 ($12,500 – $5,000)
- Your profit is $2,500
Without margin, you could only have bought 50 shares, which would be worth $6,250 after the price increase, giving you just $1,250 in profit.
The Loss Scenario
But what if the stock price drops to $75 per share?
- Your 100 shares are now worth only $7,500
- You still owe that $5,000 margin loan
- Your portfolio value shrinks to $2,500 ($7,500 – $5,000)
- Your loss is $2,500
Without margin, your 50 shares would be worth $3,750 after the price decrease, meaning your loss would be only $1,250.
See how margin works both ways? It amplifies everything—gains AND losses.
The Hidden Dangers of Margin Investing
Margin investing isn’t for the faint of heart. Here are some serious risks you should know about:
-
You can lose more than your initial investment. With regular cash investing, the worst-case scenario is losing 100% of what you put in. With margin, you could potentially lose MORE than your original investment.
-
Margin calls can force you to sell at the worst times. If your investments drop below certain thresholds (maintenance requirements), your broker can demand more money or force-sell your holdings—often at the worst possible time.
-
Your broker has control. If you get a margin call, your broker can sell any securities in your account without consulting you first. You don’t get to choose which positions they liquidate.
-
Requirements can change without warning. Brokers can change maintenance requirements at any time and aren’t required to provide advance notice.
-
Interest costs eat into profits. Don’t forget you’re paying interest on that borrowed money, which reduces your overall returns.
One Robinhood user I advised learned this lesson the hard way when his tech stock holdings dropped 30% in a week, triggering a margin call that forced him to sell at the bottom. The stocks recovered a month later, but he had already locked in significant losses.
When Might Margin Investing Be Worth It?
Despite the risks, there are situations where margin investing might make sense:
1. Short-Term Opportunities
If you spot a short-term opportunity that you’re very confident about but don’t have enough cash available, margin could help you capitalize on it. Just be prepared to exit quickly if things go south.
2. Portfolio Diversification
If you’re looking to diversify your portfolio but don’t want to sell existing positions, margin could help you add new positions without liquidating others.
3. For Experienced Investors Only
Margin investing is generally not suitable for beginners. If you’ve been investing successfully for years and understand market dynamics deeply, you might be better equipped to handle the risks.
4. When You Have a Safety Net
If you have significant cash reserves elsewhere that could cover potential margin calls, the risk becomes more manageable.
The Costs of Margin Investing
Before jumping in, understand what margin will cost you:
According to Robinhood’s information, their margin rates vary based on how much you borrow. If you’re a Robinhood Gold member, the first $1,000 of margin is included with your subscription fee.
Interest is calculated daily based on settled margin balances. For example:
- If you’re not a Gold member and use $3,000 of margin at a 6.75% rate, you’d pay about $0.56 per day in interest ($3,000 × 6.75% ÷ 360).
- If you are a Gold member, the first $1,000 is included, so you’d pay interest on only $2,000, which would be about $0.38 per day.
These charges accumulate and are billed to your account every 30 days at the end of your billing cycle.
How To Use Margin Responsibly (If You Decide It’s Worth It)
If after weighing the risks and benefits, you still think margin investing could work for you, here are some strategies to use it more safely:
-
Set a personal borrowing limit lower than what your broker allows. Just because you CAN borrow $50,000 doesn’t mean you SHOULD.
-
Use margin conservatively – many professionals suggest using no more than 10-20% of your available margin.
-
Maintain a cash reserve to handle potential margin calls without being forced to sell positions.
-
Invest in less volatile securities when using margin to reduce the risk of rapid price swings triggering margin calls.
-
Monitor your positions closely – margin investing requires much more active management than regular cash investing.
-
Have an exit strategy for every position, including when you’ll take profits or cut losses.
-
Consider setting stop-loss orders to automatically sell if prices fall to certain levels.
How to Get Started With Margin Investing
If you decide margin investing is appropriate for your situation, here’s how to get started, using Robinhood as an example:
-
Apply for margin investing:
- Select Account (person icon) → in the app, Menu (3 bars)
- Select Investing → Margin investing
- Follow the on-screen instructions to apply
-
Meet the requirements:
- You must have a minimum portfolio value of $2,000 to access margin investing
- You’ll need to meet other eligibility requirements set by your broker
-
Set borrowing limits:
- After approval, you can set a borrowing limit to control how much margin you use
- This can be any amount equal to or less than the margin available to you
-
Monitor your margin usage:
- Track how much you’ve invested on margin in your account settings
- Keep an eye on your total margin, margin used, and maintenance requirements
Real Talk: Is Margin Investing Actually Worth It?
After working with hundreds of investors over the years, I’ve come to one conclusion: margin investing amplifies whatever kind of investor you already are.
If you’re a disciplined, knowledgeable investor with solid risk management skills, margin can be a powerful tool that enhances your strategy. But if you’re prone to emotional decisions or still developing your investment approach, margin will likely amplify your mistakes.
For most everyday investors, I believe margin should be used sparingly, if at all. The psychological burden of knowing you’re investing with borrowed money can lead to poor decision-making, and the risks are simply too high for most people’s financial plans.
The Bottom Line on Margin Investing
Margin investing is neither inherently good nor bad—it’s simply a tool with specific uses, benefits, and significant risks.
If you decide to use margin:
- Start small and increase gradually as you gain experience
- Never use all available margin
- Always maintain a safety cushion
- Be prepared for the possibility of losses
- Have a clear strategy and stick to it
If you’re still unsure whether margin is right for you, consider consulting with a financial advisor who can evaluate your specific situation and goals.
Remember, successful investing isn’t about making the most money in the shortest time—it’s about consistently growing your wealth while managing risks appropriately. For most investors, that means using margin cautiously, if at all.
What’s your experience with margin investing? Have you found it to be worth the risks? I’d love to hear your thoughts and experiences in the comments below!
How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication.
- • Investing
- • Wealth management
Calendar Icon 15 Years of experience Brian Baker covered investing and retirement for Bankrate. He is a CFA Charterholder and previously worked in equity research at a buyside investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can better plan for their financial futures.
- • Investing
- • Wealth management
Former Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Bankrate is always editorially independent. While we adhere to strict , this post may contain references to products from our partners. Heres an explanation for . Our is to ensure everything we publish is objective, accurate and trustworthy. Bankrate logo
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money.
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
Can lose more than your initial investment
The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions. Let’s take a look at an example of margin trading.
- Let’s say you buy 2,000 shares of XYZ company with $10,000 of your own cash plus $10,000 in your margin account at a cost of $10 a share. That’s a total of $20,000, excluding commissions.
- The next week, the company reports disappointing earnings and the stock drops 50 percent. The position is now worth $10,000, and you still owe that much to the broker for the margin loan.
- In that scenario, you lose all of your own money, plus interest and commissions.
- Could face a margin call
In addition, the equity in your account has to maintain a certain value, called the maintenance margin. 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 markets or your overall positions decline, your broker can liquidate your account without your approval,” says Ricciardi. “That’s an important downside risk.”
Even those who advocate buying on margin in some situations despite the risk warn that it can amplify losses and requires earning a return that exceeds the margin loan rate.
“Margin trading is for experts who understand the mechanics of it — not your average retiree,” says Ricciardi.
What is Margin Trading? Your Margin Account Explained!
FAQ
What is the $500 margin on a $10,000 position?
Margin is typically expressed as a percentage of the total trade size. For example, if a broker requires 5% margin, you would need to deposit $500 to open a $10,000 position.
How to invest $2000 dollars and double it?
The classic approach to doubling your money is investing in a diversified portfolio of stocks and bonds, which is likely the best option for most investors. Investing to double your money can be done safely over several years, but there’s a greater risk of losing most or all your money when you’re impatient.
What is a disadvantage of margin trading?
What is the 7% rule in stock trading?