Buying stock on margin gets you more bang for your buck on your investment. You put up only a portion of the purchase price, and your broker lends you the rest. Because you acquire more stock without paying the full cost, your gains and losses are magnified.
You can calculate your return on investment to analyze the effects of using margin. ROI measures your total profit or loss as a percentage of your initial investment. Using margin increases your ROI if your stock rises, but it causes a lower negative ROI if your stock drops.
Calculating the percentage ROI for stock bought on margin requires determining the total profit or loss, dividing that figure by your cash investment in the stock and then multiplying the result by 100 to get a percentage value.
Figure Out the Total Cost
Multiply the number of shares you bought by the price you paid per share to figure the total cost. For example, assume you bought 100 shares of a $10 stock. You'd multiply 100 by $10 to get a $1,000 cost.
Determine Your Cash Investment
Multiply the percentage of the cost you paid for with your own money by the amount of the cost to determine your cash investment. In this example, assume you paid 50 percent toward the cost. Multiply 50 percent, or 0.5, by $1,000 to get a $500 cash investment.
Determine the Total Sale Amount
Multiply the number of shares by the price for which you sold the stock to determine the total sale amount. In this example, assume you sold the stock for $12 per share. Multiply $12 by 100 to get a $1,200 sale amount.
Calculate Loss or Profit
Subtract the total cost from the total sale amount. Continuing the example, subtract $1,000 from $1,200 to get $200. Next, subtract the interest and commissions you paid your broker from your result and add any dividends you received to calculate your profit or loss. A negative result represents a loss.
In this example, assume you paid $25 in interest on the borrowed money, paid $20 in commissions and received $3 in dividends. Subtract $25 and $20 from $200 to get $155. Add $3 to $155 for $158 in profit.
Calculate Your Return on Investment
Divide your profit or loss by your cash investment and multiply your result by 100 to calculate your return on investment as a percentage. Concluding the example, divide $158 by $500 and multiply by 100 to get a 31.6 percent ROI. This means you generated profit equal to 31.6 percent of your $500 cash investment. Without margin, your ROI would’ve been only 15.8 percent, or $158 divided by the full $1,000 cost.
Rules for buying stock on margin vary among brokerage firms. Always read your margin agreement and the fine print before buying on margin.
- Rules for buying stock on margin vary among brokerage firms. Always read your margin agreement and the fine print before buying on margin.
- If stock purchased on margin drops, you might lose more money than you initially invested.
- If your stock drops to a certain price, your broker might require you to deposit more cash into your account, or it might automatically sell your stock without notice.