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How to Calculate Margin Trading Interest Rates?
- 4 min read 0•
- 09 Jan 2025
“Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe” - Warren Buffet.
The quote from Warren Buffet drives home an essential point. Just as an increase in gravity causes objects to fall faster, a rise in interest rates increases the cost of borrowing. A vital aspect of trading on margin is knowing your interest rates for margin trading, which can help you effectively manage your trade.
What is a margin trading interest rate?
Simply put, a margin trading interest rate is the interest you need to pay to your broker on funds availed through margin trading. Margin trading increases your buying power with borrowed funds from your broker. Just like any borrowing entails paying interest, the same goes for margin trading.
How to calculate interest rates on margin trading?
To calculate margin trading interest rates, you need to know:
- Principal amount: It refers to the amount you’ve borrowed from your broker.
- Margin trading interest rate: It’s the annual rate the broker charges on borrowed funds
- Duration: It refers to the time until which you’ve borrowed the funds
Once you know these, you can calculate the margin interest using this formula:
Interest = (Principal Amount × Annual Interest Rate × Number of Days Borrowed) / Number of Days in a Year
For example, if you have borrowed ₹ 1 lakh on margin from your broker at an interest rate of 9.75% per annum. The duration of which you hold your MTF position is 30 days. Using the above formula, the interest amount comes to ₹ 801.36. It means you paid this amount as interest on the margin availed. Today, brokers offer online calculators that help you calculate the amount you need to pay as interest on margin trading.
Assess whether you want to use margin trading or not
Let’s break down an example to compare your net profit with MTF versus without MTF in the 30 days holding period :
| Details | Trading with margin (in Rs.) | Trading without margin (in Rs.) |
|---|---|---|
Investment amount | 1,00,000 | 1,00,000 |
Margin availed | 1,00,000 | NIL |
Total buying power | 2,00,000 | 1,00,000 |
Shares purchased (at Rs. 100 each) | 2,000 | 1,000 |
Selling price per share (at 10% profit) | 110 | 110 |
Total selling price | 2,20,000 | 1,10,000 |
Gross profit | 20,000 | 10,000 |
% Gross profit (On the initial investment of Rs. 1,00,000) | 20% | 10% |
Interest paid | Rs. 801.36 (at 9.75% pa on Rs. 1 lakh for 30 days) | Nil |
Net profit excluding brokerage and other costs | 19,198.64 | 10,000 |
Importance of factoring margin trading interest rates
You need to factor in interest rates while trading on margin because:
Higher rates can affect the interest amount
If rates are high, you need to pay a higher interest amount towards your trade (see table). This can have a bearing on the end outcome. To see how much initial margin has been paid by you and how much is borrowed, you can use the Margin Trading Facility Calculator before taking any trade.
| Margin Borrowed | Duration | Interest Rate Per Annum | Interest Amount |
|---|---|---|---|
₹ 1 lakh | 30 days | 9.75% | ₹ 801.36 |
15% | ₹ 1232.87 |
Let us understand the above example to understand your net profit after considering the interest amount paid:
| Details | Amount (in Rs.) |
|---|---|
Investment amount | 1,00,000 |
Margin availed | 1,00,000 |
Total buying power | 2,00,000 |
Shares purchased (at Rs. 100 each) | 2,000 |
Buying price | 100 |
Selling price (at 10% profit) | 110 |
Total selling price | 2,20,000 |
Gross Profit (before incurring brokerage and other cost and on the initial investment of Rs. 1 lakh) | 20,000 |
Net profit by paying 9.75% interest p.a (Rs. 801.36) on the borrowed sum | 19,198.64 |
Net profit by paying 15% interest p.a (Rs. 1,232.87) on the borrowed sum | 18,767.13 |
Note: Net profit does not include brokerage and other charges. Now you can now avail low margin trading rates @9.75% p.a. with Trade Free Pro.
As you can see, when your interest rate changes from 9.75% p.a to 15% p.a, the difference in your net profit changes from Rs. 19,199 to 18,767 a difference of Rs. 432!
As a result, proper evaluation of interest rates can help you assess whether you want to use margin trading facilities. Also, knowing the cost can help you evaluate the actual cost of borrowing.
Factors Affecting Rate of Interest Charged on Margin Trading Facility
Several factors influence the rate of interest charged on margin trading. Some of them are as follows:
-
Brokerage Policies
While almost all brokerage houses offer margin trading facilities to clients, their policies differ. They set their own MTF interest rates as per their policy. No two brokerage houses have the same rates. Hence, choosing a broker offering the most competitive interest rates is essential. Kotak Securities offers one of the most competitive interest rates on MTF with charges as low as 0.028% per day.
-
Economic Indicators
The condition of a nation's economy plays a vital role in determining interest on margin trading. When the economy is doing well, investors are more optimistic about markets. They are more willing to take risks. In this scenario, margin interest rates tend to be generally lower. On the contrary, during economic uncertainty or high market volatility, brokers may increase their rates as investors turn risk-averse.
-
Base Interest Rate
When base interest rates are lower, the interest rate on margin trading facilities also tends to decrease. This is because investors are willing to take on more risks and invest in the market. On the other hand, if interest rates are higher, you may need to pay a higher interest rate for availing funds under the margin trading facility.
-
Broker’s Cost of Funds
The cost at which the broker can access funds to lend to traders also influences the MTF interest rate. Brokers that have lower fund costs can offer more competitive rates to their clients.
Summing it up
Knowledge of calculating margin trading interest rates can help you effectively manage your trade. If you want to use borrowed funds for a long period, you can use them to analyse the long-term impact on your portfolio.
Read more:
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
“Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe” - Warren Buffet.
The quote from Warren Buffet drives home an essential point. Just as an increase in gravity causes objects to fall faster, a rise in interest rates increases the cost of borrowing. A vital aspect of trading on margin is knowing your interest rates for margin trading, which can help you effectively manage your trade.
What is a margin trading interest rate?
Simply put, a margin trading interest rate is the interest you need to pay to your broker on funds availed through margin trading. Margin trading increases your buying power with borrowed funds from your broker. Just like any borrowing entails paying interest, the same goes for margin trading.
How to calculate interest rates on margin trading?
To calculate margin trading interest rates, you need to know:
- Principal amount: It refers to the amount you’ve borrowed from your broker.
- Margin trading interest rate: It’s the annual rate the broker charges on borrowed funds
- Duration: It refers to the time until which you’ve borrowed the funds
Once you know these, you can calculate the margin interest using this formula:
Interest = (Principal Amount × Annual Interest Rate × Number of Days Borrowed) / Number of Days in a Year
For example, if you have borrowed ₹ 1 lakh on margin from your broker at an interest rate of 9.75% per annum. The duration of which you hold your MTF position is 30 days. Using the above formula, the interest amount comes to ₹ 801.36. It means you paid this amount as interest on the margin availed. Today, brokers offer online calculators that help you calculate the amount you need to pay as interest on margin trading.
Assess whether you want to use margin trading or not
Let’s break down an example to compare your net profit with MTF versus without MTF in the 30 days holding period :
| Details | Trading with margin (in Rs.) | Trading without margin (in Rs.) |
|---|---|---|
Investment amount | 1,00,000 | 1,00,000 |
Margin availed | 1,00,000 | NIL |
Total buying power | 2,00,000 | 1,00,000 |
Shares purchased (at Rs. 100 each) | 2,000 | 1,000 |
Selling price per share (at 10% profit) | 110 | 110 |
Total selling price | 2,20,000 | 1,10,000 |
Gross profit | 20,000 | 10,000 |
% Gross profit (On the initial investment of Rs. 1,00,000) | 20% | 10% |
Interest paid | Rs. 801.36 (at 9.75% pa on Rs. 1 lakh for 30 days) | Nil |
Net profit excluding brokerage and other costs | 19,198.64 | 10,000 |
Importance of factoring margin trading interest rates
You need to factor in interest rates while trading on margin because:
Higher rates can affect the interest amount
If rates are high, you need to pay a higher interest amount towards your trade (see table). This can have a bearing on the end outcome. To see how much initial margin has been paid by you and how much is borrowed, you can use the Margin Trading Facility Calculator before taking any trade.
| Margin Borrowed | Duration | Interest Rate Per Annum | Interest Amount |
|---|---|---|---|
₹ 1 lakh | 30 days | 9.75% | ₹ 801.36 |
15% | ₹ 1232.87 |
Let us understand the above example to understand your net profit after considering the interest amount paid:
| Details | Amount (in Rs.) |
|---|---|
Investment amount | 1,00,000 |
Margin availed | 1,00,000 |
Total buying power | 2,00,000 |
Shares purchased (at Rs. 100 each) | 2,000 |
Buying price | 100 |
Selling price (at 10% profit) | 110 |
Total selling price | 2,20,000 |
Gross Profit (before incurring brokerage and other cost and on the initial investment of Rs. 1 lakh) | 20,000 |
Net profit by paying 9.75% interest p.a (Rs. 801.36) on the borrowed sum | 19,198.64 |
Net profit by paying 15% interest p.a (Rs. 1,232.87) on the borrowed sum | 18,767.13 |
Note: Net profit does not include brokerage and other charges. Now you can now avail low margin trading rates @9.75% p.a. with Trade Free Pro.
As you can see, when your interest rate changes from 9.75% p.a to 15% p.a, the difference in your net profit changes from Rs. 19,199 to 18,767 a difference of Rs. 432!
As a result, proper evaluation of interest rates can help you assess whether you want to use margin trading facilities. Also, knowing the cost can help you evaluate the actual cost of borrowing.
Factors Affecting Rate of Interest Charged on Margin Trading Facility
Several factors influence the rate of interest charged on margin trading. Some of them are as follows:
-
Brokerage Policies
While almost all brokerage houses offer margin trading facilities to clients, their policies differ. They set their own MTF interest rates as per their policy. No two brokerage houses have the same rates. Hence, choosing a broker offering the most competitive interest rates is essential. Kotak Securities offers one of the most competitive interest rates on MTF with charges as low as 0.028% per day.
-
Economic Indicators
The condition of a nation's economy plays a vital role in determining interest on margin trading. When the economy is doing well, investors are more optimistic about markets. They are more willing to take risks. In this scenario, margin interest rates tend to be generally lower. On the contrary, during economic uncertainty or high market volatility, brokers may increase their rates as investors turn risk-averse.
-
Base Interest Rate
When base interest rates are lower, the interest rate on margin trading facilities also tends to decrease. This is because investors are willing to take on more risks and invest in the market. On the other hand, if interest rates are higher, you may need to pay a higher interest rate for availing funds under the margin trading facility.
-
Broker’s Cost of Funds
The cost at which the broker can access funds to lend to traders also influences the MTF interest rate. Brokers that have lower fund costs can offer more competitive rates to their clients.
Summing it up
Knowledge of calculating margin trading interest rates can help you effectively manage your trade. If you want to use borrowed funds for a long period, you can use them to analyse the long-term impact on your portfolio.
Read more:
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
