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.

RELATED FAQS

  1. What is the difference between shorting and naked shorting?

    Short selling involves borrowing shares of a company’s stock and selling it with the hopes it can be bought back at ...
  2. What happens if I cannot pay a margin call?

    Minimum margin is the amount of funds that must be deposited with a broker by a margin account customer. With a margin account, ...
  3. How long can you short sell for?

    When an investor or trader enters a short position, he or she does so with the intention of profiting from falling prices. ...
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ...
RELATED TERMS
  1. Short Call

    A type of strategy regarding a call option, which is a contract ...
  2. Total Debt-to-Capitalization Ratio

    An indicator that measures the total amount of debt in a company’s ...
  3. Leveraged Buyback

    A repurchase of significant amount of shares through the use ...
  4. Equity Multiplier

    The ratio of a company’s total assets to its stockholder’s equity. ...
  5. Capitalization Ratios

    Indicators that measure the proportion of debt in a company’s ...
  6. Long-Short Ratio

    The amount of a security available for short sale compared to ...
comments powered by Disqus
Related Articles
  1. The Uptick Rule Debate
    Active Trading Fundamentals

    The Uptick Rule Debate

  2. Short Selling: Making The Ban
    Active Trading Fundamentals

    Short Selling: Making The Ban

  3. Take On Risk With A Margin of Safety
    Fundamental Analysis

    Take On Risk With A Margin of Safety

  4. Finding Value In A Sideways Market
    Active Trading Fundamentals

    Finding Value In A Sideways Market

  5. The Cost And Consequences Of Bad Investment ...
    Personal Finance

    The Cost And Consequences Of Bad Investment ...

Trading Center