One way that investors borrow funds from brokerages is through margin accounts; it is these interest charges that allow them to charge such low commission rates.

How do we calculate the interest charges? Well, each brokerage has a different method of calculation, so you should speak to your broker directly. However, you should use this formula as a general rule:

(Interest Rate/365 Days)*(Amount Being Borrowed)*(Number of Days Borrowing Funds)

The easiest way to find out how much you have borrowed is to take the equity in your account and subtract it by the market value. If you have a negative amount, this will be the amount you owe. If it is equal to zero, then you owe nothing, and if it is positive, you will have cash that you should invest somewhere else or take out of the margin account as it generally doesn't pay much interest.

Once again, this is a general approach and does not necessarily reflect the policy of all brokerages. If you want to find out the exact calculations, you're going to have to give them a call.

For further reading on this subject, see our tutorial on Margin Trading.

  1. 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, ... Read Answer >>
  2. What is a margin account?

    A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. An investor ... Read Answer >>
  3. How is margin interest calculated?

    Before running a calculation you must first find out what rate your broker-dealer is charging to borrow money. The broker ... Read Answer >>
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