The Costs and Fees of Margin Agreements - dummies

The Costs and Fees of Margin Agreements

Some day traders borrow money or stock from their brokerage firm to leverage their stock trades. Every brokerage firm charges interest on margin. Some charge additional fees. Make sure you fully understand your brokerage’s interest and fee schedule before signing and trading on the margin account.

The stated interest rate is usually an annualized rate; if the rate given is 8 percent, for example, then you’d owe that much if your loan was outstanding for the entire year. (Some investors have margin loans in place that long.)

A day trader, whose loan may only be outstanding for a few hours, probably has to pay interest, too. Some brokerage firms charge by the day; others may charge interest over three days because it takes three days for a trade to settle.

On top of margin interest, some firms charge a higher commission on margin trades than for cash trades. They justify this policy with the higher levels of paperwork and risk management required on margin accounts. Some firms go with the higher commission rather than charge interest on intra-day loans. Find out your firm’s policies and fees before you open a margin account, and your trading life will be easier.

If you trade derivatives, margin works differently. The contract itself is leveraged, so you aren’t charged interest. You have to settle your profits and losses at the end of the day, however (don’t worry; the exchange’s clearinghouse does it for you). You can’t use the money held as margin for other trades.