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. Do you have to be an expert investor to trade put options?

    Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ...
  2. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ...
  3. Is short selling a form of insurance?

    Explore short selling and put options. Learn how put options may be used as insurance to protect positions, and costs associated ...
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ...
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. Equity Multiplier

    The ratio of a company’s total assets to its stockholder’s equity. ...
  6. Leveraged Buyback

    A repurchase of significant amount of shares through the use ...

You May Also Like

Related Articles
  1. Trading Strategies

    Spot Chances For Profits In The Three-Step ...

  2. Investing

    How to Short Alibaba

  3. Trading Strategies

    Risk Management Techniques For Shorting ...

  4. Brokers

    Arbitrage Opportunities in Spread Betting

  5. Brokers

    The Exciting World Of The Top Spread ...

Trading Center