Lesson Margin 101

What you need to know about Margin Accounts

Discover how margin accounts can fit into your portfolio.

What is a Margin Account?

A margin account is much like a cash investment account. You can deposit any amount of money to invest in the market. It has the added benefit of also allowing you to borrow against the assets in the account, if you wish to do so. This is known as “buying on margin” and allows investors to take larger positions than the amount they deposited in their account. Because of this, margin is usually only used by more intermediate to advanced investors.

Benefits of a margin account

  • No contribution limits

    Unlike registered accounts, margin accounts have no limit to the amount you deposit in the account. You can also withdraw money from the account at any time.

  • Capital gains are taxed at 50% of profit and you receive preferential Canadian dividend tax treatment

    Unlike interest in a savings account, where 100% of the amount you make is taxed, when you sell investments a margin account, only 50% of the profits will be subject to capital gains tax (added to your taxable income for the year). Dividends from Canadian companies also have preferential tax treatment in this account.

  • Leverage your assets for extra buying power

    Unlike in registered accounts (TFSAs, RRSPs, etc.), you can borrow money from Questrade to invest in your margin account. This gives you more flexibility to jump on possible trading opportunities without needing to deposit more of your own money. While you can earn more money using this method, if your investments decrease in value you may also be open to larger losses.

  • Shorting capabilities and access to over-the-counter U.S Markets

    You’re able to short stocks, ETFs and other securities (profit from when a security falls) in margin accounts. You can also access some smaller U.S. exchanges (like the Pink Open Market). These markets aren’t allowed to be traded in your registered accounts because securities on these markets may carry greater risk.

  • Place complex options trades

    In a margin account, you can trade more complex types of options. You can enable level 3 & 4 options which include spreads, naked options, and more. Complex options are reserved for more advanced options traders.

Risks of borrowing on margin

  • Cost of interest

    While borrowing money in a margin account is by no means required, choosing to borrow funds is one way to be more flexible with your trading, as mentioned above. Any amount borrowed will gather interest charges, and you can "pay back" the negative balance by selling your positions, transferring funds, or depositing new funds. We will update the interest rate whenever the prime interest rate changes.

  • Bigger losses

    Leveraging your assets (see above) is a great way to maximize your potential profits, but it can also hurt your bottom line more if your investments move against you. Not only will you lose money on the trades you make, but you will have to repay any money borrowed, plus the interest that was generated.

  • Over borrowing (margin call)

    The amount of money you can borrow to trade is determined by your current assets and the cash in your account. When these values change (because of a withdrawal, your positions falling in value, or other events), your account can be “over borrowing” and you will be in a margin call. If this occurs, you will be notified of the margin call, and you will then have to take action (like deposit more money or close out positions) to get your account back in good standing. Otherwise, Questrade may need to take action for you. Please refer to your account opening documents for more information regarding margin calls.

How to use margin

  • Buying on margin at Questrade

    The trading platforms will use any remaining cash in your margin account before borrowing funds to invest. If you do not have cash available for the full position, you will begin to borrow as long as you meet the margin requirements for the specific security.

  • What are margin requirements and how they work

    Every security (stock, ETF or otherwise) has its own unique margin requirement. The margin requirement is the amount of equity you’re required to have to borrow the remaining on margin. For example, if a stock has a margin requirement of 30%, to purchase $1000 worth of the stock, you would only require $300 to make the purchase. The other $700 can be borrowed on margin.

  • Using margin with U.S. securities

    When you buy U.S securities with a margin account, you have two options.

    • Default option. Your margin account will borrow U.S. dollars and keep the Canadian dollar equivalent in your account, ready to use for another trading opportunity. You will be charged interest as soon as the trade settles.
    • You can exchange your Canadian dollar funds to U.S. funds to avoid borrowing U.S. dollars and instead using the cash that is in your account. Questrade does not automatically convert funds in margin accounts.

Investments you can hold in a margin account

You can hold almost any type of investment in a margin account:

  • Stocks (both Canadian and international)
  • ETFs (Exchange Traded Funds)
  • Options
  • Mutual funds
  • Bonds
  • Gold and silver bars
  • GICs
  • Cash

Benefits of a Questrade margin account

  • No annual account fee. No opening fees.
  • Hold both Canadian and U.S. dollars in the account at the same time.
  • Open the account in minutes.
  • Ability to increase your buying power in your margin account by linking it to the assets in your TFSA with Margin Power

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Note: The information in this blog is for information purposes only and should not be used or construed as financial, investment, or tax advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.

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