Brokerage sites all have about the same interest rate on margin accounts, around 10.5%.

OK, so how are you charged? Is it per year, per month, per trade?

If I borrowed 1000 on margin and sold it a month later, would I be charged $105 or $8.75?

Margin interest is typically charged by the day at the stated rate on a 360 day year.  So, $1000 x .105 x 30/360 = $8.75.

Margin rates are not the same everywhere.  Many firms charge less, particularly for large debits.  I no longer carry debits but I did check one of the firms where I have an account for rates.  The rates started at 7.75% and went down to 5.50% for debits greater than $1,000,000.  This should make people realize that when they are paying 10.5% they are competing with people who are paying around half that rate. 

Can someone help me get some margin math straight ... for simplicity say you borrow on margin for $10k at 10%.  Wouldn't this mean that I need to extract a greater than 10% yearly return on my investment in order to make break even?

Yes, ignoring income taxes that would be true.

Thanks.  Follow-up question(s):

Can I apply for a margin account, without intentions to borrow money?  Basically I want to be able to have buying power right away instead of T+3.  Can I continue trading via cash basis without having to worry about paying any interest?

Also, on the topic of taxes - instead of paying say 10% interest on margin, why not get a HELOC at a cheaper interest rate and use potential tax advantages on the interest payment?  I'm not an accountant, but if this is allowed I think you would get a higher buying power and not have to worry about margin calls when the stocks tank ...?

Yes, you can have a margin account without any intention of using the margin.  You only pay interest on debit balances, so yes, you can keep trading without paying any interest as long as you have 0+ cash in the account.

Now, to your second question.  A HELOC has a tax advantage, yes.  But, only on amounts not to exceed 100% of the value of your home (including any first mortgages or other liens).  Even then, there are some specific qualifiers, like income, that may disallow some or all of your home interest deduction.  I would also strongly caution against using a HELOC in leiu of a margin for 2 reasons. 1)  It's your house.... It's the stock market...  Don't go using your houses equity to speculate.  If you do, then know that you're basically gambling and be very aware of the risks.  2)  Margin accounts are instant funds.  As you noted, the T+3 settlement doesn't seem to exist on a margin account, even though it does.  Your credit supplies the cash during settlement, allowing you to trade with a higher buying power.  Also, if the market goes splat, the maximum you would have been leveraged is ~50%.  In other words, you stand to lose only half again as much as your portfolio (150% loss).  After crying at the total worthlessness of your portfolio and all the money you have to eventually pay back, at least you'll be able to go home because you didn't use the HELOC.

For those tax benefit hunters out there, margin interest can be tax deductable in some cases.  It's not an itemized deduction like home loan interest, but it is deductable from investment interest/income.  You must have at least as much gain as you have interest to get that gain in order for you to write it all off.  For example, let's say you paid $100 in margin interest during the year.  Let's also say that you had a CD at your bank that paid $150 during the year.  You can deduct the $100 from the $150.  Your net investment income then is $50, and that's the amount on which you will be taxed.   It's called the Investment Interest Expense deduction.  Check it out at http://www.irs.gov.

Keep in mind, I'm not an accountant nor a tax professional.  I advise you to find your own answers about tax matters that pertain to your own particular circumstance.  Disclaimer done.

Thanks for the info.  You bring a good point about other potential tax advantages.  Now let me find a way to deduct a tax accountant's consulting fees :D

So in the most basic terms, margins are like credit cards.  But you only get charged interest on them when the money is in play on the market?  when its back in the account, you are in the clear, or still being charged interest.  Today after the sale of some shares I owned I went to go buy another stock and it came back rejected do to NSF.  I was confused, i didnt know about the T+3.  So I am faced with 2 choices, add more funds to the account, or use margins. 

Which would I be better off with?  If your not really paying interest on the margins but for 3 days (the clearing time) thats not that bad, but I do have the funds in another bank.   IMO, the funding would be better.. That way if I lost money, its done and over.. I dont have to pay anything back... I think I need to learn the fundamentals of margins. 

I'm bumping this post about margin interest  because there was a similar question on another thread.

miasmal:

Thanks for the info.  You bring a good point about other potential tax advantages.  Now let me find a way to deduct a tax accountant's consulting fees :D

Funny you should say that... you can!  Form 1040, Schedule A, Line Item 21.  The caviat, however, is that items in the "Job Expense and Certain Miscellaneous Deductions" porton of the Schedule A must exceed 2% of your Adjusted Gross Income.  Take some time and look over the Miscellaneous Deductions in the IRS forms and publications section.  You might be surprised that you can even deduct Safe Deposit Box rent in some cases, or that the mileage you have running to and from business appointments (not counting commuting mileage) for which your employer does not reimburse you is part of this area of deductions.

Again, I'm no tax professional.  Check it all out for yourself.  http://www.irs.gov

I sold a stock that I had purchased partially on margin.  Now that I sold it, will the brokerage automatically apply the money from the sale to pay off the margin balance?  Or do I have to navigate to somewhere on the broker's site to pay off the margin balance?

Thanks,

Tom

Thanks everyone for the overwhelming response!!!!  Yeah right, anyway, my balance is still out of whack and I don't know why.  I guess I'll spend the morning on the phone with ZECCO.

rondogaci:

Yes, you can have a margin account without any intention of using the margin.  You only pay interest on debit balances, so yes, you can keep trading without paying any interest as long as you have 0+ cash in the account.

Now, to your second question.  A HELOC has a tax advantage, yes.  But, only on amounts not to exceed 100% of the value of your home (including any first mortgages or other liens).  Even then, there are some specific qualifiers, like income, that may disallow some or all of your home interest deduction.  I would also strongly caution against using a HELOC in leiu of a margin for 2 reasons. 1)  It's your house.... It's the stock market...  Don't go using your houses equity to speculate.  If you do, then know that you're basically gambling and be very aware of the risks.  2)  Margin accounts are instant funds.  As you noted, the T+3 settlement doesn't seem to exist on a margin account, even though it does.  Your credit supplies the cash during settlement, allowing you to trade with a higher buying power.  Also, if the market goes splat, the maximum you would have been leveraged is ~50%.  In other words, you stand to lose only half again as much as your portfolio (150% loss).  After crying at the total worthlessness of your portfolio and all the money you have to eventually pay back, at least you'll be able to go home because you didn't use the HELOC.

For those tax benefit hunters out there, margin interest can be tax deductable in some cases.  It's not an itemized deduction like home loan interest, but it is deductable from investment interest/income.  You must have at least as much gain as you have interest to get that gain in order for you to write it all off.  For example, let's say you paid $100 in margin interest during the year.  Let's also say that you had a CD at your bank that paid $150 during the year.  You can deduct the $100 from the $150.  Your net investment income then is $50, and that's the amount on which you will be taxed.   It's called the Investment Interest Expense deduction.  Check it out at http://www.irs.gov.

Keep in mind, I'm not an accountant nor a tax professional.  I advise you to find your own answers about tax matters that pertain to your own particular circumstance.  Disclaimer done.