Margin interest

In a margin account, your broker lends you cash to buy more investments. A broker is the firm that buys and sells investments for you. Your investments and cash in the account back the loan.

Like any loan, a margin loan has interest. This is margin interest. Rates can be very different from one firm to another.

Your equity is the value of your investments minus what you owe the firm. If your equity falls below the firm's minimum, the firm makes a margin call. You must add cash or investments, or the firm sells your investments.

Why it matters

Margin lets you buy more, but it can also make your losses bigger. The interest lowers your return, so your investments must earn more just to break even. In a margin call, the firm can sell your investments, even at a low price.

A worked example

You borrow $50,000 on margin at 7% interest a year. The interest is $3,500 a year, or about $9.59 a day. Your investments must gain at least $3,500 a year just to cover it.