How are the interest charges calculated on my margin account?

"There's never a free lunch in the world, somebody has to pay for it." This idea is displayed readily by the many different financial institutions that charge us interest for borrowing money and even sometimes lending it to them.

One way that we borrow funds from brokerages is through our margin accounts, and these interest charges are what help them to offset our use of the brokerage’s capital when we borrow.

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:

Once a month, daily interest charges will be totaled and posted since the last time interest charges were posted to the account.

It might be confusing to find out the exact amount that you have borrowed, but the easiest way 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 be invested or can accrue interest.

Important: Buying securities on margin is not appropriate for all investors. Before investing on margin, please read the Margin Account Agreement for important risk disclosure information, and see ShareBuilder's margin interest rates.