Does adding stocks/cash equal-in-value to my losses on margin prevent me from owing more interest?
I think I understand the concept behind margin accounts, but I want to be sure so I am using a made up example to ensure that I don't burn myself in real life.
If I have 10,000$ in stocks in a Reg T margin account with 25% minimum maintenance margin requirement, and buy 10,000$ worth of stocks on margin. Suppose the value of my shares that I bought on margin drops by 10% but the original 10,000 stays flat (same value).
Do I owe the broker money now, and if so will I be paying interest on it? How much do I owe interest on?
If the answer to 1 is yes, will adding cash to my account equivalent to the loss and then buying stocks using my newly deposited cash cover my losses and prevent me from paying more interest?
Based on my limited understanding:
The answer to question 1 is yes, and I would own interest on the 1000$ (since that was the amount I lost while margin trading).
The answer to question 2 is yes. As long as the amount I deposited is greater than my loss, I would not owe any interest.
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Margin interest is not associated with "which stock" you bought.
Before
Stock ,000
Cash [CO]
Margin Interest = [CO]
After
Stock ,000+,000=,000
Cash -,000
Margin Interest per day = -,000 x Annual Interest Rate / 365
After the decreased stock price
Stock ,000+,000=,000
Cash -,000
Margin Interest per day = -,000 x Annual Interest Rate / 365
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Unrealized Loss has nothing to do with Margin Interest, but it affects your Leverage and how close you are with Margin Call.
Now if you really Realize the Loss
Stock ,000+,000-,000=,000
Cash -,000+,000=-,000
Margin Interest per day = -,000 x Annual Interest Rate / 365
After depositing additional ,000
Stock ,000+,000-,000=,000
Cash -,000+,000+,000=[CO]
Margin Interest per day = [CO] x Annual Interest Rate / 365
After buying stock with the ,000
Stock ,000+,000-,000+,000=,000
Cash -,000+,000+,000-,000=-,000
Margin Interest per day = -,000 x Annual Interest Rate / 365
When you utilize long margin, you borrow money from your broker. If you have k in cash or marginable securities, you can borrow k from your broker to buy another k worth of stock. Your loan is k so you immediately owe your broker money for each day of the loan based on his daily borrow rate times k. In terms of margin interest due, it doesn't matter what the price of either stock is. You have a k loan.
Since you mentioned a 25% minimum maintenance margin requirement, the formula for that is 4/3 times the loan balance or in this case, ,333. Assuming that there is no cash or any other positions in your account, when the total value of all these two stocks drops below ,333, you will either receive a margin call or your broker will sell some/all of your position(s), depending on broker policy.
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