Margin Loan Calculator

To start, input your initial equity. This is the money you own and want to invest, for example, $10,000. Then, decide on the leverage. A leverage factor of 2 means you want to raise your total investment (trading amount) to twice your own funds. The initial margin is calculated as the initial equity divided by the trading amount. Different security types have different minimal initial margin requirements, according to the regulation and the broker's policy. For example, you may need to put at least 50 percent as the initial margin to purchase stocks but only need to put 30 percent to buy corporate bonds. The borrowing amount, equal to the trading amount minus the initial equity, is what you need to borrow from the brokerage firm using a margin loan.

Check the margin interest rate. This is the borrowing rate of the margin loan. The rate can be found on your brokerage firm's website. For example, to check the current loan rates from Fidelity or Interactive Brokers. The rate will determine the interest cost you need to pay when using a margin loan. Unlike mortgage rates that are fixed for many years, the margin interest rate is floating and can change quickly with the market interest rates, which are affected by the Federal Reserve's decision. The margin loan rate is usually higher than mortgage rates. A higher loan rate will significantly lower your net investment yield when you invest this security longer with a margin loan. If you don't know the loan rate yet, don't invest using a margin loan.

Maintenance margin requirement. Compared with the initial margin, the maintenance margin is the minimum amount of equity an investor must maintain in a margin account after making a purchase. When investing in stock securities, the maintenance margin is currently set at 25% of the total value in the account according to the requirements of the Financial Industry Regulatory Authority (FINRA). Some brokerage firms may raise the margin percentage to 30% to 40%.

Estimate the dividend yield. You can find the forward dividend yield of the stock you want to invest from the public financial information. This example from Yahoo! Finance shows Apple Inc (AAPL)'s forward dividend yield of 0.48% (quarterly). To convert it to the annual yield to input here, simply multiply the yield by 4 (0.48% * 4 = 1.92%).

Consider the trading cost. Today, most brokerage firms offer zero commission on trading listed stock online, so the trading cost will be only the minimal transaction tax when selling the stock, at about $0.02 per $1,000 traded, a rate of 0.002%. However, if your trading cost is significantly higher than zero or your trade frequently, it would be better not to ignore it.

Determine how long you will hold this stock. Holding stocks longer may generate larger potential appreciation and lower the capital gain tax if the holding period is longer than one year. Still, it will also incur more interest from the margin loan.

Prepare for the possible adverse scenario. Input an adverse shock percentage that the stock price might decline the most in a reasonable likelihood. For example, a small-size growth stock will possibly have a return of -40% during a year of downturn market, while a large-size value stock will perhaps have a less worse return of -20% due to its less riskiness.

Be aware of how likely the margin call may happen. A margin call occurs when an investor's equity in a margin account falls below the broker's threshold. The broker then demands that the investor deposit additional cash or securities into the account to raise the % of the investor's equity to the minimum level indicated by the maintenance margin requirement. The threshold is calculated based on your leverage and the input of the maintenance margin requirement above. When the leverage is higher, or the required maintenance margin is higher, in a downturn market, you will have less buff (threshold) to absorb the loss, and a margin call will happen more likely.

Calculate the expected investment return. After filling in all required inputs, you can now analyze the investment return. Freely input a possible change in stock price, and you can get the crucial components of the investment return:

• Capital gain & loss = Trading amount x Testing price change
• Trading expenses = Trading amount x Trading fee & commission x 2 (for buying and selling)
• Dividend received = Trading amount x Dividend yield x Holding period / 12
• Margin loan interest = -Borrowing amount x Margin interest rate x Holding period / 12
• Holding-period total return = Capital gain & loss + Trading expenses + Dividend received + Margin loan interest
• Total investment yield = Holding-period total return / Initial equity

In this example, when the stock price goes up 10% after three months, your net investment return is 18.2% after loan interest, demonstrating the significant impact of the 2x leverage provided by a margin loan.

Test an adverse price change. Although margin loans can magnify your portfolio gains by allowing you to buy more securities than you could otherwise afford, you should not ignore the risk when the price drops. In the chart above, when the stock price drops 33%, not only is the loss double, but you may also receive a margin call because your equity falls below the maintenance margin required. Once a margin call is issued, unlike an investor not using a margin loan, who can hold the stock and wait for the price to bounce back, a margin loan investor needs to take one of these three actions immediately:

• Deposit enough cash into the margin account to meet the maintenance requirement.
• Move marketable securities from another account into the margin account, but this may take a few days to complete.
• Sell some stocks in the margin account to pay off the margin loan, and you may immediately realize some loss.