When you invest "on margin," you’re borrowing money to buy stocks. If the returns from those stocks exceed the interest you pay on the loans, you’ll profit from the deal.
Today, interest on margin loans generally ranges from 7.25 percent to 9.75 percent. The highest interest is paid on margin loans under $25,000 while you need to borrow over $2.5 million to get the lowest rate.
Generally, the maximum margin allowed is 50 percent. By borrowing $50,000 on margin, for example, you can buy as much as $100,000 worth of stocks.
Suppose, for example, you buy $100,000 worth of stocks on margin, as above. Say you pay 8.25 percent interest on your $50,000 loan. Your interest cost would be $4,125 in Year One. Therefore, if your $100,000 of stocks go up by 10 percent ($10,000), you’d have a gain of $5,875: $10,000 in profits minus $4,125 in interest cost.
You’ve put $50,000 into those stocks, in this example, so your $5,875 gain is a return of nearly 12 percent. Investing on margin is risky, though, so you shouldn’t use margin unless you can afford to take a loss if the stocks you buy head south.