Real Example of Margin Loan

Last December 2, 2011, I borrowed money from Citiseconline and bought SCC shares. This kind of loan is called margin loan. I bought the stock at 209 per share and now the current price is 213 already. I plan to sell it on Monday so that I can take my profits from it.

Make no mistake about it, margin loans are too risky for investors and this is not for everybody. You need to seek the advice of your consultant before plunging into it. In fact, if you don’t know anything about stock market, I advice don’t do it. You need to know a lot of the seasonality of the stock market, the fundamentals, the technical and your own research.

I just wanted to share how the computation of the interest on this margin loan. Let me provide a real example on this. But before that, just remember these two things. Borrowed money + interest = Total cost. Just stick to that. Borrowed money + interest = total cost. My goal is to sell the SCC shares more than the total cost I borrowed and take the profit.

Computation of interest is like this: (Amount Borrowed * No. of Days * 18%) / 365 days) + 12%VAT.

OK, here is the real example of it. If you have an excel sheet and just copy the formulas I presented here, you will have a clearer picture when you do your own computation.

Borrowed Money	100,615.95
No. of Days of Borrowed Money	(Dec 11 minus Dec 2)                                  9 days
Interest	18% per year
No of Days in one Year	365
Interest	(100,615.95 x 9 days x 18% ÷ 365 days)      446.57
VAT	(446.57 x 12%)                                             53.59
Total Interest Cost	101,116.11

My total interest cost for 9 days is 500.16. When you sell, you incur tax again. My previous computation on selling transaction cost is 0.795% of the stock value. So, that is another cost to consider. If I will sell my 480 SCC shares at 213, the total value is 102,240. Selling cost would be 812.80 (102,240 x 0.795%).

Stock Value - Total Interest Cost - Selling Cost = Profit

102,240 – 101,116.11 – 812.80 = 311.09

My profit for 9 days is 311.09 without spending any pesos. Not bad. My prepaid card for the week is covered because of this. Wink.

If you are not prepared to go through the emotional roller coaster ride just in case the stock go down, ignore this margin loan.

“There are risks that you cannot afford to take, but there are also risks that you cannot afford not to take”.