Regulation T (set by the Federal Reserve) requires a minimum 50% initial margin for equity purchases — you can borrow up to 50% of the purchase price from your broker. To buy $10,000 of stock on margin, you contribute $5,000 cash and borrow $5,000 from the broker at the margin interest rate. FINRA's maintenance margin requirement is 25% of total account value — you must maintain equity equal to at least 25% of current position value. Many brokers set higher house minimums (30-35%).

A margin call is triggered when the account's equity falls below the maintenance margin requirement. Example: $10,000 position financed with $5,000 equity and $5,000 borrowed. If the position falls to $6,667, equity = $6,667 - $5,000 = $1,667 = 25% of $6,667 — triggering the maintenance margin floor. The broker issues a margin call requiring either deposit of additional funds or liquidation of positions to restore the equity ratio. If the investor fails to meet the call, the broker can (and will) liquidate positions without further notice to protect the loan.

Leverage amplifies returns in both directions — this is mathematically unavoidable. Using 2× leverage (50% margin), a 10% gain on the underlying position produces a 20% gain on equity (minus margin interest costs). A 10% loss produces a 20% loss. The margin interest rate (typically 6-12% annually at major brokers) is the fixed cost of leverage that creates a drag on returns. At 8% margin interest on 50% borrowed capital, the position must earn at least 4% (8% × 50% = 4%) just to break even on leverage costs.

Kelly-optimal leverage is typically well below 2× for most investment strategies. The Kelly framework shows that excess leverage reduces long-run compound growth because the increased probability of catastrophic drawdowns overcomes the leverage boost to expected arithmetic returns. A 50% drawdown requires a 100% gain to recover; on a 2× leveraged position, a 25% market decline creates a 50% leveraged loss. This drawdown asymmetry is the mathematical argument against excessive leverage even for strategies with genuine positive expected value.

The historical record of leverage destroying wealth is stark. Long-Term Capital Management (LTCM) in 1998 ran over 25× leverage on a $125 billion portfolio — a 4% adverse move caused complete insolvency and required a Federal Reserve-coordinated bailout. The portfolio's strategy was fundamentally correct on longer horizons; the leverage prevented the firm from surviving to realize those returns. Individual investors who used 50% margin in 2000-2002 or 2007-2009 found their accounts wiped out by margin calls at market bottoms — forced sellers at the worst possible time.

The practical rule that preserves long-run wealth: use leverage, if at all, as a modest enhancement (1.2×-1.5× maximum) in low-volatility asset classes (diversified bond portfolios, real estate) rather than high-volatility individual equity positions. The Kelly Criterion recommends leverage significantly below 2× even for highly skilled investors with genuine edges. Margin borrowing to concentrate into a single speculative stock position is one of the most reliable methods of permanent capital destruction that exists in public markets.