Margin Interest Calculator
Calculate the cost of borrowing on margin and see how margin interest affects your investment returns. Margin can amplify both gains and losses.
Margin Interest Results
Investment Impact
Current Margin Rates
Broker Margin Rates: 6-12% annually
Reg T Margin: 50% initial requirement
Maintenance Margin: 25-30% minimum
Note: Rates vary by broker and credit
Understanding Margin Interest
Margin interest is the cost of borrowing money from a broker to purchase securities. While margin can amplify investment returns, it also increases risk and adds borrowing costs that can significantly impact overall performance.
How Margin Works
- Leverage: Borrow money to increase position size
- Interest Costs: Pay interest on borrowed funds
- Amplified Returns: Both gains and losses are magnified
- Margin Calls: Must maintain minimum equity levels
- Tax Implications: Interest may be tax deductible
Margin Interest Calculation
Margin interest is typically calculated daily and compounded monthly. The interest rate is usually variable and based on the broker's base rate plus a spread.
Daily Interest Formula:
Daily Interest = (Loan Balance × Annual Rate) ÷ 365
Margin Requirements
| Requirement Type | Percentage | Purpose |
|---|---|---|
| Initial Margin (Reg T) | 50% | Maximum leverage allowed |
| Maintenance Margin | 25-30% | Minimum equity required |
| House Maintenance | 30% | Broker house requirement |
Leverage Effects
Margin leverage can significantly amplify both gains and losses. A small move in the underlying asset can result in much larger percentage changes in equity.
- Positive Leverage: 10% gain becomes 20% return on equity
- Negative Leverage: 10% loss becomes 20% loss on equity
- Break-even Point: Must overcome interest costs
- Risk Amplification: Losses can exceed original investment
Margin Call Risks
- Equity Decline: Portfolio value falls below maintenance margin
- Force Selling: Broker sells securities to restore margin
- Tax Implications: Forced sales may trigger capital gains taxes
- Emotional Stress: Can lead to poor decision making
Tax Treatment
Margin interest may be tax deductible for investors, but there are specific rules and limitations.
- Investment Interest: Deductible as investment expense
- Limitations: Cannot exceed investment income
- Carry Forward: Unused deductions can be carried forward
- Alternative Minimum Tax: May affect AMT calculations
When to Use Margin
- Short-term Trading: For experienced traders with high conviction
- Arbitrage Opportunities: When risk-free profits are available
- Hedging Strategies: To offset other positions
- Tax-loss Harvesting: To manage tax situations
Margin vs. Other Financing
- Personal Loans: Lower rates but more restrictive
- Credit Cards: Very high rates, not suitable for investing
- Home Equity Loans: Lower rates but secured by home
- Margin Loans: Convenient but risky for long-term holding
Tip: Margin can be a powerful tool for experienced investors, but it significantly increases risk. Always calculate the break-even point and be prepared for margin calls. Never use margin for long-term investments where you cannot tolerate volatility.