How Do Leverage and Margin Actually Work?

Basic mechanics

Margin lets you borrow money from your broker to buy more securities than your cash allows. If you deposit $10,000 and your broker offers 2:1 margin, you can control $20,000 in securities. Your broker charges interest on the borrowed amount, typically a percentage that varies by balance and market conditions.

How gains and losses scale

With leverage, both profits and losses multiply. A 10% rise in a $20,000 position nets you $2,000 on your $10,000 deposit—a 20% return. But a 10% fall costs you $2,000, wiping out 20% of your capital. A 50% drop erases your entire deposit, and you still owe the broker.

Margin calls and forced liquidation

Brokers set a maintenance requirement—the minimum equity you must keep in the account. If losses push you below it, you receive a margin call and must deposit cash or sell positions. If you don't respond in time, the broker force-liquidates your holdings, often at unfavorable prices during volatile markets. Before using margin, understand your broker's specific call thresholds, interest rates, and liquidation procedures.