Like paying interest on your mortgage, any loan you take out on margin also incurs interest. Let’s say you have a margin trading account with a broker and decide to borrow $10,000 on margin to purchase stocks. Your broker charges an annual interest rate of 8% on the borrowed money.
If you hold this margin position for one year, the interest on the borrowed amount is calculated as follows:
Interest = Borrowed amount × Interest rate
Interest = $10,000 × 8% = $800
So, you would owe $800 in interest on the borrowed money after one year.
If you decide to hold the position for over a year, the interest will continue accumulating. For example, if you hold the position for two years, the interest would be calculated as follows:
Interest = $10,000 × 8% × 2 years = $1,600
If you don’t repay the interest as it accrues, it will be added to your margin debt.
