Availing borrowed funds for stock market investment is difficult to acquire for investors, other than obtaining the same from brokerages. Facilities like margin funding are among the only means to do so. Thankfully, brokerages charge minimal commission with varying interest rates for the same.
Margin funding is a short term loan that you borrow from your stockbroker to buy stocks from the market. You are charged a pre-determined annual interest by your stockbroker on your margin account over the sum borrowed in return for the funds needed to invest in the market. This facility has proven to be a great form of investing through leverage that allows investors to purchase twice the amount of stocks that they would using their own capital.
To avail this facility, you are required to open a margin account with your brokerage, and determine the maintenance margin applicable on it. The charged interest on your margin account differs from brokerage to brokerage.
So how do you calculate the charged interest? All brokerages have their own method of calculation that is mentioned on the contract upon purchase, it is best to ensure the percentage calculated by asking your broker directly. However, the thumb-rule as mentioned on investment academia website Investopedia is the following calculation:
(Interest Rate/365 Days)x(Amount Being Borrowed)x(Number of Days Borrowing Funds)
To keep a track of how much you have borrowed from your brokerage, you must consider 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.
Interest rates differ with every marginable stock and are set somewhere between 15-18%. The charged interest rate calculated takes into account the quality of the stock you’d like to invest in and your relationship with the brokerage. Active day traders are favoured with cheaper rates by brokerages to retain the client. Even so, brokers have a tendency to increase interest rates noticeably during turbulent times, to avoid taking on unnecessary risk of loss.
Brokerages also charge a minimal commission on trades that have been executed using margin funding. Active day traders are likely to play low commissions of 0.02% on squared off transactions each day, whereas futures traders who would likely go long with trades may be charged as much as 0.05% to 0.1%. The charges depend on your trading volumes.
Interest rates applicable and charges levied on margin trading must be cleared with your broker. The above mentioned rates are simply estimates; you may connect with our advisors.
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