When you buy a stock on a margin, your broker will charge you interest for the borrowed amount. Buying stocks on a margin means that you are borrowing the money for the stock purchase from your broker because you need some leverage. It is a very common practice. In fact, it is so common that popular trading apps and platforms all have margin interest rates built right into their trading products.
If you're just getting into trading, you likely have questions about basics like margin interest rates, how to use a margin interest calculator, the Robinhood margin limit and much more. Take a look at what you need to know about paying margin interest rates as you move forward with investing.
When Is Margin Interest Charged?
The answer can vary by borrower. The margin interest rate that you're given usually represents an annual interest rate. However, you may not necessarily keep your loan for an entire year. Typically, margin interest is charged to your account on the last day of each month.
Do You Pay Margin Interest on Day Trades?
Yes, day trading can be done with a margin account. If you don't have a margin interest calculator, you can use a fairly simple formula to try to determine how your margin interest will be calculated. Simply multiply your interest rate by your margin debt and then divide that number by 360 to represent your daily interest charges per year. The general formula should look like this: Interest Rate x Your Margin Debt/Number of Days Held
It's impossible to use a universal formula because each broker will charge a different interest rate. If you're using a trading app, margin interest will still apply. One of the big questions that newer investors have is how much they can expect to pay in interest when doing margin trading with Robinhood.
In 2020, Robinhood slashed its margin interest rate from 5 percent to 2.5 percent. This move made Robinhood's interest rate one of the lowest in the industry. However, some margin investors on the app may be able to reduce margin interest by paying $5 per month to upgrade to the Robinhood Gold tier to get their first $1,000 of margin waived. All margin over that $1,000 for members will be charged at a rate of 2.5 percent.
Next, you might be curious to know about the Robinhood margin limit. If you invest on the app, you'll actually see your Robinhood margin limit go up whenever you add more money to your account as long as your account is not in deficit. Generally, every Robinhood investor is able to invest up to their current balance with margin investments. For instance, an account with $2,000 in cash can invest up to $2,000 with margin.
What Is the Margin Interest Calculator When You're Trading With TD Ameritrade?
If you're using TD Ameritrade as a platform instead, margin interest rates are slightly more nuanced. TD Ameritrade margin interest per day is calculated based on your base rate and the size of your debt balance. TD Ameritrade also considers things like market conditions, industry conditions and commercially recognized interest rates. The company's current base rate is 8.25 percent.
The bottom line when figuring out margin interest rate on an investment is that a combination of broker-specific rates and your borrowed amount will determine how much you pay in interest. The easiest way to get a clear number is to simply contact your broker to ask for the current annual interest rate. You should also ask your broker how many days are used to define a "full year."
- Robinhood: Robinhood Lowers Margin Interest Rate from 5% to 2.5%
- Robinhood: Increasing Your Margin Available
- TD Ameritrade: Margin Account and Interest Rates
- Forbes. "Cash Account vs Margin Account: Which Do I Need?" Accessed Aug. 15, 2020.
- Corporate Finance Institute. "Maintenance Margin." Accessed Aug. 15, 2020.
- Charles Schwab. "Margin: How Does It Work?" Accessed Aug. 15, 2020.
- Merrill, Bank of America. "Investing in the margins." Accessed Aug. 15, 2020.
- Corporate Finance Institute. "Gross Margin Ratio." Accessed Aug. 15, 2020.
- U.S. Department of Housing and Urban Development. "Adjustable Rate Mortgages (ARM)." Accessed Aug. 15, 2020.
- Consumer Financial Protection Bureau. "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?" Accessed Aug. 15, 2020.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.