Understanding Margin Interest
A margin loan—secured by securities and/or cash—can provide more buying power for traders to use to purchase additional securities or cover short-term financial needs. But trading on margin isn't appropriate for every trader—it requires account approval, strict attention to margin requirements, and acknowledgment of the associated risks. One risk of trading on margin is margin interest. It's critical to know which transactions can trigger margin interest and how to track margin loans.
What is margin interest?
Margin interest is the interest charged when a trader borrows money from their brokerage using their existing portfolio as collateral. Interest compounds daily and is posted on the second-to-last business trading day of every month, reflecting all interest accrued over the prior monthly billing cycle.
On the billing date, an outstanding loan increases by the amount of margin interest charged. Any order that pushes a trader into a loan will begin accruing interest as of the settlement date of that trade (T+1).
How do margin loans work at Schwab?
What types of transactions can lead to a margin loan?
Borrowing can happen even if "trading on margin" wasn't intentional. Here are a few common scenarios:
- Withdrawing unsettled funds: The industry operates on a T+1 settlement basis, which means all trades (even in a margin account) take one business day to settle. Let's say a trader with a margin account owns $1,000 worth of stock and sells it on Monday—they'll have $1,000 in cash in their account, but it isn't yet settled. If they withdraw it before settlement, they'll accrue margin interest until the trade settles on Tuesday. To avoid this, the trader can wait until the next business day to withdraw the proceeds.
- Withdrawing more than available cash: Depending on the equity held, a margin account may offer buying power in excess of available cash. The account owner can withdraw up to the full buying-power amount; however, any amount withdrawn above the actual cash balance is effectively a loan. For this reason, it's important to compare the cash balance level to "cash + borrowing" on Schwab.com. Note that withdrawing the full buying power can lead to a concentration call if a trader's account is heavily concentrated in one specific symbol.
- Trading beyond available cash: Trading beyond available cash can trigger margin interest and is similar to withdrawing more than the available cash in an account. For example, if a trader opens a position worth $1,000 with only $500 in cash—and holds that position overnight—they're borrowing the extra $500 overnight and accruing interest on it.
- Options assignment: If a long or short option is exercised in a trader's account, they'll be required to purchase or deliver shares, which can create a margin loan if they don't have enough cash on hand to settle.
Here's an example that could lead to several days of interest accrual.
A trader has no cash in their account and is short one 50-strike put option on ZYX. On the Friday morning before expiration, the trader checks their account and sees they have been assigned early and are now obligated to purchase 100 shares at $50 per share. That's $5,000 worth of stock, which the trader will be borrowing as of Friday morning when the trade assignment settles.
The options assignment settles on Friday, and interest on the borrowed $5,000 begins to accrue. Also on Friday, the trader sells the ZYX shares to cover the loan. However, the loan keeps accruing interest until the stock sale also settles. That settlement doesn't happen until Monday (the next business day), which means the trader accrues interest over the weekend.
Tracking borrowing and interest on Schwab.com and thinkorswim
Fortunately, there are a few ways to track borrowing activity on the thinkorswim® trading platform and Schwab.com.
Schwab.com
1. Select Accounts > Balances
2. Select an account from the drop-down menu
3. Scroll to Balance Details
4. If applicable, traders will see Margin Details & Buying Power:
- Balance Subject to Interest is the margin loan. This only shows a value if a trader held a margin loan overnight.
- Month-to-date interest owed shows how much interest has accrued during the current month.
Traders should check their monthly statement or transaction history to verify the margin interest charge.
thinkorswim (desktop)
1. Check the Cash & Sweep Vehicle balance at the top of the screen. If the settled cash balance is negative, it means the trader now holds a debit balance, or loan. Note that it's possible for the Cash & Sweep Vehicle amount to be negative prior to settlement and not reflect borrowing activity.
2. Go to Monitor > Account Statement > Cash & Sweep Vehicle to view a ledger of transactions.
Source: thinkorswim platform
3. Filter by a date range to see which transactions pushed the Cash & Sweep Vehicle into the red. There's important nuance here. Short sellers, for example, may still be borrowing even if their Cash & Sweep Vehicle appears positive.
Source: thinkorswim platform
4. Find posted margin interest: On the second-to-last business day of the month, the Cash & Sweep Vehicle ledger will show a debit for margin interest if the trader was borrowing that month.
Bottom line: Margin interest is an important calculation
Understanding margin interest is crucial for anyone trading in a margin account. Knowing how it's calculated, when it's charged, and how to track it can help traders potentially make more informed decisions about their next trades.
How do margin loans work at Schwab?
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Equity and Index options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled "Characteristics and Risks of Standardized Options" before considering any option transaction. Supporting documentation for any claims or statistical information is available upon request.
Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information please refer to your account agreement and the Margin Risk Disclosure Statement.
This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned are not suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
For illustrative purposes only. Individual situations will vary. Not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin. Margin trading increases your level of market risk. Your downside is not limited to the collateral value in your margin account. Schwab may initiate the sale of any securities in your account, without contacting you, to meet a margin call.
Schwab may increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice. You are not entitled to an extension of time on a margin call.