Margin Lending: A Practical Guide (for People Who Don’t Spend Their Spare Time Reading Term Sheets)

Let’s start with a familiar scene.

It’s payday. You open your banking app, feel briefly flush, and then remember you’ve got a direct debit parade marching through your account like it’s the King’s Birthday. You could do the grown-up thing and spend only what you’ve got. Or you could do what your credit card invites you to do: spend money you don’t have yet, because you’re convinced Future You (richer, wiser) will sort it out later.

Margin lending is the investing version of that. It’s borrowing from your broker so you can buy more shares than your cash would normally allow. When markets behave, it can boost returns. It can also ruin your day when they don’t.

What Margin Lending Is

Margin lending is when your broker lends you money to buy investments, using the investments in your account as security.

So instead of buying £5,000 of shares with £5,000 of cash, you might buy £10,000 of shares by putting in £5,000 and borrowing the other £5,000.

That “extra” buying power is called leverage (meaning: your gains and losses get bigger, because you’re playing with borrowed money).

A quick note on what we’re talking about here: this is borrowing against shares in FTSE 100 companies or Exchange Traded Funds (ETFs). 

We are not talking about Contracts for Difference (CFDs) or spread betting. These are regulated and work differently and come with their own special brand of chaos.

Who offers margin?

• Retail brokers (the app-on-your-phone crowd, plus the bigger platforms).
• Private banks (for clients with larger portfolios).
• Prime brokers (banks lending to hedge funds and institutions, where the numbers have more commas and the consequences arrive faster).

Who gets to use it?

Not everyone. In the UK, firms generally have to check whether the product is appropriate for you.

An appropriateness assessment is the broker asking questions to see if you understand what you’re doing (and whether you realise this can go wrong quickly). Expect an online quiz that boils down to: “Do you understand you can lose a lot of money?” and “Are you the sort of person who panics and sells at the bottom?”

The Margin Loan: The Bit That Costs You Money Every Day

When you use margin, you’ve taken out a margin loan. It’s not usually a fixed-term loan with a nice tidy end date. It’s more like an overdraft: it sits there, it’s convenient, and it starts charging you for the privilege.

What do you pay?

Margin interest is often set as:

• a benchmark rate (like Bank of England Base Rate or SONIA, a UK overnight interest-rate benchmark), plus
• the broker’s spread (their cut).

Rates vary a lot by broker and by account size. The bigger your account, the more likely you’ll get a better rate. The smaller your account, the more likely you’ll be paying “convenience pricing” (which is a polite way of saying “cheers for that”).

A simple example (the “this seemed like a good idea at the time” edition)

You have £5,000. You borrow £5,000. You buy £10,000 of shares/ETFs.

• If the investment rises 10% over the year, your holding becomes £11,000.
• You still owe the broker £5,000, plus interest.

Let’s say the interest cost works out at £400 over the year. You sell, repay the £5,000 loan and the £400 interest, and you’re left with £5,600.

That’s a £600 profit on your original £5,000.

Without margin, you’d have turned £5,000 into £5,500 – a £500 profit.

Now flip it. If the investment falls 10%, your £10,000 becomes £9,000 – but the loan doesn’t shrink. You still owe the broker the same £5,400.

Without margin, a 10% market rise turns £5,000 into £5,500 — a straightforward 10% gain.

With margin, your £10,000 investment rises 10% to £11,000. After repaying the £5,000 loan plus £400 interest, you’re left with £5,600 – a 12% gain on your own capital.

But if the market falls 10%, that same position drops to £9,000. Once you repay the £5,000 loan and £400 interest, just £3,600 remains – a steep 28% loss.

So, the picture looks like this:

No margin → +10% or –10%

With margin → +12% or –28%

The bottom line? Borrowing magnifies both sides. It can make a good market a little better – but a bad market a lot worse.

Margin calls: When Your Broker Stops Being Chill

Brokers don’t lend you money out of generosity. They lend because they’ve got rules that protect them.

Two key terms, translated into human:

• Initial margin: how much of your own money you need to put in to start trading.
• Maintenance margin: the minimum amount of your own money you must keep in the trade to avoid trouble.

Your “own money” in the trade is called your equity (meaning: the value of your investments minus the loan).

If your equity falls below the broker’s maintenance margin requirement, you get a margin call.

A margin call is the broker telling you to add cash or reduce your position, because you no longer meet their minimum safety buffer.

And if you don’t respond in time? They can start selling your investments, and they won’t do it politely or gradually – they’ll do it at whatever price the market is offering at that moment. Your broker is not going to “wait for it to bounce back” because you’ve got a good feeling about Thursday.

Worked example (with numbers that behave like real life)

You invest £10,000 using margin:

• £5,000 is yours
• £5,000 is borrowed
  So your equity starts at £5,000, which is 50% of the position.

The broker requires a 25% maintenance margin. That means your equity must stay at 25% of the current market value.

If the holding falls to £7,000:

• Equity = £7,000 − £5,000 = £2,000
• Equity percentage = £2,000 ÷ £7,000 = about 28.6%
  Still above 25%. No margin call yet.

If it falls to £6,000:

• Equity = £6,000 − £5,000 = £1,000
• Equity percentage = £1,000 ÷ £6,000 = about 16.7%
  Now you’re below 25%: margin call territory.

At that point you’re being asked to fix the gap by adding cash, selling something, or reducing the position. If you can’t (or you don’t notice the notification because you’re in a meeting pretending to listen), the broker can sell assets to protect itself.

This is why margin can feel fine right up until the moment it doesn’t.

“This is Why We Can’t Have Nice Things”: The Archegos Moment

If you want a real-world reminder that leverage isn’t just a retail investing plot twist, meet Archegos Capital (2021).

Archegos used highly leveraged positions (via equity swaps – contracts that give you share-price exposure without owning the shares) with multiple prime brokers. When markets moved against it, it couldn’t meet the margin calls. Banks closed out positions, prices lurched, and several lenders took enormous losses.

You don’t need to be running a secretive family office to learn the lesson. Archegos is just the institutional version of the same problem: leverage removes your time and your choice. When it goes wrong, it can force selling at the worst possible moment.

A Quick Sanity Checklist Before You Touch Margin

If you’re going to borrow to invest, you need fewer motivational quotes and more brutal honesty. Here are the questions that matter:

• If the market drops 20% this month, can I add cash quickly without wrecking my life?
• Do I understand when a margin call happens and what the broker can do without asking me nicely?
• Am I comfortable paying interest even if the investment goes nowhere for months?
• Do I know what happens if the broker changes its margin requirements mid-flight – especially when markets get volatile?
• Is this money I can afford to lose without it turning into a family meeting and a spreadsheet of regrets?
• Am I using margin as a tool, or as a way to chase returns because I’m bored of slow progress? (Boredom is an expensive investment strategy.)

The Last Word

Margin lending isn’t sophisticated or reckless by default. It magnifies whatever judgement you bring to it. Used carefully, it can help you increase market exposure without selling other assets. Used casually, it can force you to sell at exactly the moment you least want to, while charging you interest for the privilege.

If you’re going to use margin, treat it like you’d treat borrowing for anything else: know the cost, know the downside, and don’t rely on optimism as your repayment plan. The market has no obligation to rescue you, and your broker has even less.

This is general information, not financial advice. If you’re considering margin lending, read your broker’s terms properly and, ideally, have a chat with someone who won’t be impressed by leverage for leverage’s sake.