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I think I understand the concept behind margin accounts, but I want to be sure so I am using a made up example to ensure that I don't burn myself in real life.

If I have 10,000$ in stocks in a Reg T margin account with 25% minimum maintenance margin requirement, and buy 10,000$ worth of stocks on margin. Suppose the value of my shares that I bought on margin drops by 10% but the original 10,000 stays flat (same value).

  1. Do I owe the broker money now, and if so will I be paying interest on it? How much do I owe interest on?
  2. If the answer to 1 is yes, will adding cash to my account equivalent to the loss and then buying stocks using my newly deposited cash cover my losses and prevent me from paying more interest?

Based on my limited understanding:

The answer to question 1 is yes, and I would own interest on the 1000$ (since that was the amount I lost while margin trading).

The answer to question 2 is yes. As long as the amount I deposited is greater than my loss, I would not owe any interest.

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Margin interest is not associated with "which stock" you bought.

Before

Stock $10,000

Cash $0

Margin Interest = $0

After

Stock $10,000+$10,000=$20,000

Cash -$10,000

Margin Interest per day = -$10,000 x Annual Interest Rate / 365

After the decreased stock price

Stock $10,000+$9,000=$19,000

Cash -$10,000

Margin Interest per day = -$10,000 x Annual Interest Rate / 365

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Unrealized Loss has nothing to do with Margin Interest, but it affects your Leverage and how close you are with Margin Call.

Now if you really Realize the Loss

Stock $10,000+$9,000-$9,000=$10,000

Cash -$10,000+$9,000=-$1,000

Margin Interest per day = -$1,000 x Annual Interest Rate / 365

After depositing additional $1,000

Stock $10,000+$9,000-$9,000=$10,000

Cash -$10,000+$9,000+$1,000=$0

Margin Interest per day = $0 x Annual Interest Rate / 365

After buying stock with the $1,000

Stock $10,000+$9,000-$9,000+$1,000=$11,000

Cash -$10,000+$9,000+$1,000-$1,000=-$1,000

Margin Interest per day = -$1,000 x Annual Interest Rate / 365

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  • upvoted, but suppose I deposit another 1000$ in my account after realizing the 1000$ loss. If I use the newly deposited 1000$ to trade a new stock, does that stop me from paying interest on the 1000$ loss?(assume the new stock I bought never loses value). Thanks – user3586940 Jun 3 '20 at 23:03
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    The total amount of the newly deposited $1,000 cannot serve two masters. Either you use it to purchase more stock or you use it to pay off some of the loan. – Bob Baerker Jun 3 '20 at 23:54
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    @user3586940 we already stated more than once that the "stock value" is useless in Margin Interest calculation. All it matters is how "negative" the Cash Balance is. – base64 Jun 4 '20 at 3:10
  • Thank you so much I now understand it after you edited the answer with those last two examples. – user3586940 Jun 5 '20 at 1:34
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When you utilize long margin, you borrow money from your broker. If you have $10k in cash or marginable securities, you can borrow $10k from your broker to buy another $10k worth of stock. Your loan is $10k so you immediately owe your broker money for each day of the loan based on his daily borrow rate times $10k. In terms of margin interest due, it doesn't matter what the price of either stock is. You have a $10k loan.

Since you mentioned a 25% minimum maintenance margin requirement, the formula for that is 4/3 times the loan balance or in this case, $13,333. Assuming that there is no cash or any other positions in your account, when the total value of all these two stocks drops below $13,333, you will either receive a margin call or your broker will sell some/all of your position(s), depending on broker policy.

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  • What I want to know is what does "each day of the loan" mean in this context. For instance, if I deposit another 15,000$ and use it to buy stocks after taking out that 10000$ loan, do I still owe get charged interest on the 10,000$? – user3586940 Jun 3 '20 at 3:41
  • Let's not complicate this. If you borrow $10k at 5% then you owe 0.05 times $10k divided by 365 for every day that your loan balance is $10k (unless the borrow rate changes). – Bob Baerker Jun 3 '20 at 3:52
  • I understood that. But when does my loan balance become 0. How do I pay back the loan? Do I just deposit cash into the account? – user3586940 Jun 3 '20 at 3:55
  • You can pay the loan back by depositing cash or you can sell off securities to pay it off. – Bob Baerker Jun 3 '20 at 13:10

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