Margin Loan Calculation EXPLAINED (Interactive Brokers, TD Ameritrade, etc)

The best of the Internet. Dedicated to the most funny, interesting, and cool stuff on the Internet today.
User avatar
funnyinterestingcool

Founder
Posts: 484
Joined: Tue Jul 09, 2019 11:54 pm
Contact:

Margin Loan Calculation EXPLAINED (Interactive Brokers, TD Ameritrade, etc)

Post by funnyinterestingcool » Mon Aug 31, 2020 6:34 pm

For those new to margin loans brokerage firms like TD Ameritrade and Interactive Brokers allow, here is an easy to follow scenario explaining how borrowing on Margin will work. This scenario has been blessed by folks at TD Ameritrade and Interactive Brokers so rest assured as of this post, this is how calculations are done.


Note: Currently, Interactive Brokers offer the best Margin Interest rates. In some cases, less than 1% interest on all Margin if you hold a certain amount of liquidity in your account. This referral link will also earn you up to $1000 of free stock.



1. You want to borrow $50,000 to buy a stock that you intend to hold for a period of 10 days and where the margin interest rate is 2.58% annually. In order to calculate the cost of borrowing take the amount of money being borrowed and multiply it by the rate being charged:


$50,000 x .0258 (2.58%) = $1,290


2. Then take that number and divide it by the number of days in a year. The brokerage industry typically uses 360 days and not the expected 365 days.


$1,290 / 360 = 3.58


3. Next, multiply this number by the total number of days you have borrowed, or expect to borrow, the money on margin:


3.58 x 10 = $35.8




Using this example, it will cost you $35.8 in margin interest to borrow $50,000 for 10 days.



The interest will post to cash in your brokerage account monthly, usually first business day of month or so. Any cash credits would offset the margin loan (depositing funds, selling stock, receiving dividends, etc.).

The margin rate is subject to change (it's pegged to the Fed Funds overnight rate, which may fluctuate a couple basis points each day, but if the Fed cuts/hikes then that will have a material effect on the rate). The interest begins and ends with settlement.

Finally, you can hold the loan so long as you stay margin compliant. But if you fully max out the leverage, then if the position moves against you then you risk a margin violation and stock being liquidated to regain margin compliancy. So it would be prudent to keep a margin offer and monitor your exposure closely.




Determining Buying Power

Buying power serves as a measurement of the dollar value of securities that one may purchase in a securities account without depositing additional funds. In the case of a cash account where, by definition, securities may not be purchased using funds borrowed from the broker and must be paid for in full, buying power is equal to the amount of settled cash on hand. Here, for example, an account holding $10,000 in cash may purchase up to $10,000 in stock.

In a margin account, buying power is increased through the use of leverage provided by the broker using cash as well as the value of stocks already held in the account as collateral. The amount of leverage depends upon whether the account is approved for Reg. T margin or Portfolio Margin. Here, a Reg. T account holding $10,000 in cash may purchase and hold overnight $20,000 in securities as Reg. T imposes an initial margin requirement of 50%, which translates to buying power of 2:1 (i.e., 1/.50). Similarly, a Reg. T account holding $10,000 in cash may purchase and hold on an intra-day basis $40,000 in securities given IB’s default intra-day maintenance margin requirement of 25%, which translates to buying power of 4:1 (i.e., 1/.25).

In the case of a Portfolio Margin account, greater leverage is available although, as the name suggests, the amount is highly dependent upon the make-up of the portfolio. Here, the requirement on individual stocks (initial = maintenance) generally ranges from 15% - 30%, translating to buying power of between 6.67 – 3.33:1. As the margin rate under this methodology can change daily as it considers risk factors such as the observed volatility of each stock and concentration, portfolios comprised of low-volatility stocks and which are diversified in nature tend to receive the most favorable margin treatment (e.g., higher buying power).

In addition to the cash examples above, buying power may be provided to securities held in the margin account, with the leverage dependent upon the loan value of the securities and the amount of funds, if any, borrowed to purchase them. Take, for example, an account which holds $10,000 in securities which are fully paid (i.e., no margin loan). Using the Reg. T initial margin requirement of 50%, these securities would have a loan value of $5,000 (= $10,000 * (1 - .50)) which, using that same initial requirement providing buying power of 2:1, could be applied to purchase and hold overnight an additional $10,000 of securities. Similarly, an account holding $10,000 in securities and a $1,000 margin loan (i.e., net liquidating equity of $9,000), has a remaining equity loan value of $4,000 which could be applied to purchase and hold overnight an additional $8,000 of securities. The same principals would hold true in a Portfolio Margin account, albeit with a potentially different level of buying power.

Finally, while the concept of buying power applies to the purchase of assets such as stocks, bonds, funds and forex, it does not translate in the same manner to derivatives. Most securities derivatives (e.g., short options and single stock futures) are not assets but rather contingent liabilities and long options, while an asset, are short-term in nature, considered a wasting asset and therefore generally have no loan value. The margin requirement on short options, therefore, is not based upon a percentage of the option premium value, but rather determined on the underlying stock as if the option were assigned (under Reg. T) or by estimating the cost to repurchase the option given adverse market changes (under Portfolio Margining).
On Social: Facebook, YouTubeInstagram, Twitter For best sellers: here.