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 are the differences between gross profit and EBITDA?

    Learn how to distinguish between gross profit and EBITDA figures and where to find the information necessary to calculate ...
  2. Can real estate agents give referral fees?

    Learn about the process, laws and guidelines of real estate agents paying other real estate agents for referrals and how ...
  3. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ...
  4. What's the difference between a cash account and a margin account?

    Compare and contrast margin and cash accounts. Margin accounts offer short-term loans, leverage on existing portfolios, and ...
RELATED TERMS
  1. Ceded Reinsurance Leverage

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

    Known for his short selling strategy, activist investor David ...
  3. Short Call

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

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

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

    The ratio of a company’s total assets to its stockholder’s equity. ...
comments powered by Disqus
Related Articles
  1. Pick the Right Brokerage Account for ...
    Options & Futures

    Pick the Right Brokerage Account for ...

  2. Introduction to Margin Accounts
    Active Trading Fundamentals

    Introduction to Margin Accounts

  3. Picking Your First Broker
    Investing Basics

    Picking Your First Broker

  4. 6 Dangerous Moves For First-Time Investors
    Fundamental Analysis

    6 Dangerous Moves For First-Time Investors

  5. The Elder-Ray Indicator: Seeing Into ...
    Active Trading

    The Elder-Ray Indicator: Seeing Into ...

Trading Center