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.

RELATED FAQS

  1. How can an investor profit from a decline in the real estate sector?

    Learn how investors profit from declines in the real estate sector by engaging in speculation methods such as short selling, ...
  2. What does it mean when I get a Fed margin call?

    Learn what a fed margin call is, what it means when you receive one and what steps you must take to satisfy the fed's requirements ...
  3. What debt to equity ratio is common for a bank?

    Take a look at the important debt-to-equity ratio, a key metric of financial leverage, and learn what the average debt/equity ...
  4. What is the relationship between degree of operating leverage and profits?

    Find out why a company's degree of operating leverage is an important consideration when predicting future operating income ...
RELATED TERMS
  1. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  2. Gross Exposure

    The absolute level of a fund's investments.
  3. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  5. Ceded Reinsurance Leverage

    The ratio of ceded insurance balances to policyholders’ surplus. ...
  6. David Einhorn

    Known for his short selling strategy, activist investor David ...

You May Also Like

Related Articles
  1. Stock Analysis

    Are These Your Best ETF, ETN Bets for ...

  2. Trading Strategies

    Bucking The Trend With Pattern Failure ...

  3. Brokers

    Private Equity's Returns Are Tempered ...

  4. Trading Strategies

    A Guide Of Option Trading Strategies ...

  5. Technical Indicators

    Use Volume And Emotion To Tackle Topping ...

Trading Center