What is the Rate of Interest Charged on Margin Trading Facility?

What is Interest on Margin Trading?

MTF Interest Rate, often called the ‘Interest on Margin Trading’, is the interest that your broker charges from you for the funds offered. When you trade on margin, you essentially take money to purchase more securities than you could with your available capital. This money entails an interest you must pay your broker. The interest rate isn’t fixed and differs across brokers.

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.

Calculating Interest on Margin

Calculating interest on margin is fairly simple. All you need to know is:

• Margin amount funded by your broker
• The rate of interest charged on margin trading
• The number of days for which the margin is held (Divide it by 365 to get daily rates)

For example, if you take Rs 1 lakh from your broker at a margin trading interest rate of 12% per annum and hold the margin for 30 days, the interest you pay on your margin is calculated as per the following formula:-

Interest on margin = (Margin used x Margin interest rate X Number of days for which the margin is held) / 365

Using this formula, it comes to Rs 986.30. It means you paid an interest of Rs 986.30 to hold on to your margin position for 30 days.

Summing it Up

Choose a reliable broker with competitive MTF interest rates to minimize margin interest rate costs. At the same time, manage your risks effectively. Understanding this cost will help you make more informed decisions and potentially improve your trading success.