At The Close: New Margin Rules (Part II) by J.L. Lord
New Margin Rules (Part II)
AS I wrote in the June 2007 issue of STOCKS &
COMMODITIES, while the new margin rules are a
powerful addition to retail traders, they do not imply there is
free money to be had. Interest is a key component of the new
margin requirements. Under the old rules, the interest component
was overshadowed largely by the excessive capital
requirements that unnecessarily reduced your purchasing
power. In the new world of risk-based margin, the interest
component now stands out as a significant portion of the
WHY IS THERE AN INTEREST CALCULATION?
Suppose you purchase 100 shares of Google, Inc. (GOOG),
for $450 per share. The total cost of that investment would be
$45,000. There are several ways to come up with the money.
You can take the money out of your bank account. If you had
$45,000 sitting in the bank, it was comfortably earning a
certain amount of interest. Another way to make the purchase
is to borrow some or all of the money. In this case, you would
be responsible for making interest payments to the establishment
that lent you the money. A third way would be a
combination of the two. When a broker allows you to buy
stock on 50% margin, you are responsible for coming up with
the interest on the 50% of the money you borrowed in order to complete your stock purchase.