First off, let's answer the question, what’s a margin account?

Margin Account 

A margin account is something similar to a checking account with overdraft protection!  With a margin account, you can purchase shares even if you don’t have cash; the only thing you need to have is marginable securities in your account.

Let’s say you want to own 1000 shares of XYZ Company, but you only have $5,000 dollars.  If the company is trading at $10 per share, you’re only going to be able to afford to purchase 500 shares.  If you have a margin account, you can “borrow” cash against the shares you own.  Depending on your brokerage company, you could borrow an additional sum of money to purchase more shares.  In most cases, you may borrow the full value of the shares you already own, meaning that you could purchase $5,000 more of XYZ Company giving you a total of 1,000 shares.  The broker in turn charges interest on the borrowed money.  The interest rate depends on both the broker and the amount borrowed.  Those who purchase on margin expect that the profits they make on selling the stock will more than offset the interest and commissions paid to buy them.  It’s important to note that not all stocks can be margined; however almost all stocks on the NYSE and NASDAQ are marginable.

Who sets margin requirements?

The Federal Reserve Board, which regulates such matters, allows investors to borrow up to fifty percent of the purchase price of the securities bought on margin.  Some brokerage houses have stricter requirements.

Buying on margin 

Buying on margin is the act of buying shares of stock (it could be other types of securities too) with funds borrowed from a broker while using other shares of common stock as collateral against the loan.

Let’s say a person with $5,000 to invest decides to buy 1,000 shares of XYZ Corporation at a price of $10 a share.  The buyer now owns $10,000 worth of stock, but owes his or her broker $5,000.  The broker charges monthly interest on that $5,000.  The annual interest rate can vary from around 5% to 10%.  In the United States, such interest may be tax deductible if it’s earned to support the purchase of stock.
So while in most cases a buyer can purchase an amount equal to 100% of the value of securities that he owns, those margined securities fluctuate in value.  In our hypothetical example, if the value of the shares doubles to $20 each, the owner now as $20,000 worth of stock and $5,000 borrowed against them; this person could conceivable borrow another $15,000.    There is a downside: if the shares lose value, there are rules that protect the broker whose money is now at risk.    Let’s go to our example again.

What's a margin call? 

Person A owns 1,000 shares of ABC Company; 500 of those shares were bought on margin using the other 500 shares as collateral.  The purchase happens in one fell swoop: all 1,000 shares are bought in the same trade.  The loan is $5,000; the value of the securities is $10,000.  The difference between these two numbers has to stay above a minimum margin requirement.  If the difference falls below the minimum margin requirement, the broker may make a margin call.  The customer must deposit cash or securities into his or her account; otherwise, the broker is entitled to sell the shares.

At what point could this forced sale happen?  Let’s go back to our example again.

At the get-go, with $10,000 worth of stock and $5,000 borrowed, the shareholder has 50% equity in the account.  If the value of the shares drops in half—each share drops in value from $10 to $5—the 1,000 shares in the account are worth $5,000, which is exactly what the person borrowed.  Somewhere between 50% equity and 25% equity, the brokerage house steps in and sets the minimum margin requirement.

Who sets margin requirements? 

In the United States, the Federal Reserve Board and some self-regulating organizations like the New York Stock Exchange and the NASD have rules that govern margin requirements.  Brokerage firms associated with these organizations may set up their own margin requirements; however, they must be at least as restrictive as those of the Federal Reserve Board or the self-regulating organizations (NYSE and NASD in this example).  The NYSE and NASD require that you must have at least 25% equity in your margin account; many brokerage companies have higher requirements.

In conclusion 

In summary, buying on margin means buying on borrowed money.  You may margin no more than 50% of the total value of the marginable securities you own.  The percentage equity in your account cannot fall below 25%.  Some brokerage houses have stricter requirements.