How is margin interest calculated?

By Glenn Curtis AAA
A:

Before running a calculation you must first find out what rate your broker-dealer is charging to borrow money. The broker should be able to answer this question. Alternatively, the firm's website may be a valuable source for this information, as should account confirmation statements and/or monthly and quarterly account statements. In any case, once the rate being charged is readily known, grab a pencil, a piece of paper and a calculator and you will be ready to figure out the total cost.

Suppose you want to borrow $30,000 to buy a stock that you intend to hold for a period of 10 days.

In order to calculate the cost of borrowing simply:

Take the amount of money being borrowed and multiply it by the rate being charged:

$30,000 x .06 (6%) = $1,800

Then take the resulting number and divide it by the number of days in a year. The brokerage industry typically uses 360 days - not 365:

$1,800 / 360 = 5

Next, multiply this number by the total number of days you have borrowed, or expect to borrow, the money on margin:

5 x 10 = $50.

Using this example, it costs $50 to borrow $30,000 for 10 days.

To learn more about margin, see the Margin Trading tutorial.

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