Lesson Margin 101

Margin accounts

Learn about margin accounts and you can use them.

As a margin account holder, you have the option to borrow money from us to invest. By doing so, you’ll have more money to buy more shares than you’d normally be able to. If your investments increase in value – you earn more money. On the flip side, if your investments decrease in value, you’ll incur larger losses.

While margin accounts are primarily known for their borrowing feature, they have many other benefits, such as:

  • Short-selling - Short-selling is only available in non-registered (margin) accounts
  • No contribution limits - Unlike registered accounts, there are no limits on the amount you can contribute to your non-registered margin account
  • Joint account ownership - Margin accounts can have two account holders
  • Greater trading flexibility - With margin accounts you have access to trade a greater variety of securities when compared to registered accounts.
  • Tax advantages - For Canadian individuals, only half (50%) of your first $250,000 in realized capital gains is included in your taxable income. For instance, if you realize $1,000 in capital gains, only half of that ($500) is subject to tax. For capital gains in excess of $250,000, two-thirds (66.67%) of the capital gains are subject to tax. For instance, if you realize $400,000 in capital gains, you’ll pay tax as if you made $225,000 (half of the first $250,000 in gains, plus two-thirds of the remaining $150,000). For corporations and most trusts, two-thirds (66.67%) of all capital gains are brought into taxable income.
  • Enable complex option trading - with margin accounts, you can enable level 3 & 4 options which include spreads, naked options, and more.

Suppose you have $5,000 in your trading account, and you’re interested in buying this stock that is trading at $10 per share. Normally, you’d only be able to purchase 500 shares [$5,000 / $10 = 500]. If ABC shares increased by $5 a share, you would make a profit of $2,500. However, with margin accounts, you can borrow money from us by using the assets (cash/investments) in your account as collateral for the loan. Equities with a 30% margin requirement will allow you to buy securities by paying only 30% of the trade value upfront while borrowing the remaining 70%. Equities with a 50% margin requirement, can be purchased by paying just 50% of the trade value upfront and borrowing the remaining 50%.

Each exchange-listed security has its own margin requirement. To check the rate for securities, log in to your trading platform, go to Level 1 and look for Long MR for long requirement position or Short MR for short positions. Instead of investing just the $5,000 as described in the previous example, margin account holders can purchase up to $10,000 of company ABC or 1,000 shares by borrowing $5,000 from us (given the security has a 50% margin requirement). That same $5 price increase would result in earning a $5,000 profit in comparison to the $2,500 profit earned by the trader in the first example who only invested his own cash amount of $5,000.

On the other hand, buying on margin can also result in larger losses when securities decline in value. When borrowing to invest, you’re required to maintain a certain amount of assets in your account (in the form of cash or securities) as collateral for your loan. A margin call is triggered when the combined value of cash or securities in your account used as collateral drops below the minimum required amount.

 

Here are some important things to know about margin accounts:

  • Interest charges are applied to your account automatically. To view interest charges, log in to Questrade, click Reports, and tap Account activity. To view rates, visit our website
  • If your investments go down in value, your losses are magnified and you still have to pay back your loan, plus the interest
  • Margin requirements can change at any time without prior notice
  • Cash you receive from shorting shares will not offset a negative cash balance in your account when it comes to calculating interest charges

Log in to any Questrade platform and navigate to the balances area.

You will see four columns (or pages, depending on the platform): “CAD”, “USD”, “All in CAD” and “All in USD”.

If either of the “CAD” or “USD” columns show a red number in parenthesis, this means that you are borrowing money in the respective currency. Keep in mind that it’s possible for your “All in CAD” and “All in USD” cash balances to be positive (written in black) and still be borrowing funds from Questrade.

Margin account borrowing example

For example, if you deposit $1,000 CAD into your account and buy $100 USD worth of shares, those shares will be purchased on margin. However, if you exchange $100 USD worth of currency before you buy the stock, then you will purchase using the USD in your account.

Borrowed funds are subject to interest charges and fluctuations in the USD/CAD rate may cause you to borrow cash or your account to go into a margin call.

Check out our Understanding your balances article for more details.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment 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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