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What is margin trading?

Find out how you can set up a margin account to boost your purchasing power and leverage your investments.

You can open a margin trading account in a matter of minutes with many online stock trading brokers in Canada. All you need to do is follow a couple of simple steps to get started. Find out what margin trading is, how it can benefit you and what you need to do to open a margin account today.

What is margin trading?

Margin trading is an investment strategy that lets you borrow money from your broker to purchase stocks and other investments. This gives you the leverage you need to buy more stocks or engage in advanced trades that you might not be able to access without a margin account.

The money you borrow works just like a loan, meaning you have to pay interest on it. You’ll also typically need to pay it off by a set date, though this will vary depending on which broker you choose. You can repay your margin trading loan over time by making regular payments or by selling off your stocks to repay whatever you owe.

How does margin trading work?

Margin trading works just like regular trading, except you borrow money to execute your trades rather than paying in cash. This means that if your investments don’t perform well, you not only lose the money you borrowed but you’ll also be stuck paying back your margin trading loan to your broker, with nothing to show for it.

Features of margin trading

  • Specialized account. You need to have a specialized account for trading on margin – which you can set up if your broker supports margin trading.
  • Borrowing against securities. Your investments are used as collateral to insure your loan, which means your broker can sell them off if you can’t repay your balance.
  • Minimum balance. You’ll need to keep a minimum balance or “maintenance margin” in your account as a buffer to help pay back your loan if your investments underperform.
  • Potential for margin calls. Your broker can ask you to deposit additional money or sell off your stocks to make sure your account meets minimum balance requirements.
  • Interest rates. Interest rates for your margin trading loan will be applied to your account or incorporated into monthly payments.

How do I set up a margin trading account?

You can open a margin trading account by following these steps:

  1. Compare brokers offering margin trading accounts. Compare brokers to find the margin trading account that best suits your needs and budget.
  2. Fill out an account application. Fill out your personal and financial information and submit your application to open a margin trading account.
  3. Load funds into your account. Load the required minimum balance into your margin trading account (usually at least $2,000).
  4. Start trading on margin. Borrow between 10% and 50% of the purchase price of the stocks that you want to buy to start trading on margin.

Margin accounts vs cash accounts

The difference between margin accounts vs cash accounts boils down to the way you spend money out of your account.

FeatureMargin trading accountCash account
Investment mechanismInvest using a partial loanInvest using only your own money.
Return on investmentProceeds go first to paying your margin trading loan off (unless you pay your account off in cash)100% of proceeds go directly into your pocket
Minimum balanceAt least $2,000Varies by broker – sometimes no minimum balance is required
Interest ratesYesNo
Mandatory top-upsYes (if you drop below minimum balance requirements)No

What will I pay for a margin trading account?

It doesn’t usually cost anything to open a margin account, but you’ll need to pay margin account interest rates if you borrow money. These interest rates may vary based on the following factors:

  • Your broker. You’ll pay different rates with different brokers, which is why it’s important to compare at least three to four providers before settling on a margin account.
  • Type of account. Your margin account interest rates may vary depending on what type of account you have. For example, you could get lower rates with premium accounts.
  • Size of loan. You may pay different rates based on the size of your loan. Larger margin trading loans tend to come with lower interest rates.

Sample of margin trading account interest rates

This sample is based on the rates of the Canadian branch of Interactive Brokers. Make sure to compare several providers before you settle on a margin trading account.

Size of loanPremium accountBasic account
$5,0001.579%2.579%
$300,0001.312%2.579%
$1 million1.149%2.579%

Example of margin trading: Sally invests in a new tech company

Sally wants to invest in a burgeoning Canadian tech company. She’s interested in buying $10,000 worth of stocks but only has $5,000 to spend. The stock she wants to buy requires a 50% margin, so she uses her margin account to borrow an additional $5,000. See how her transaction might play out in the table below.

Feature of loanScenario A (stock falls)Scenario B (stock goes up)
Total investment$10,000$10,000
Loan amount$5,000$5,000
Interest on loan5% for 1 year = $136.455% for 1 year = $136.45
Number of stocks purchased for $10,0001,0001,000
Price of stock at sale date$8 (stock decreases)$12 (stock increases)
Sold for price:$8,000$12,000
Net gain or loss with interest deductedLoss of $2,136.45Gain of $1863.55
Net gain or loss without margin trading loanLoss of $1,136.45Gain of $863.55

As you can see from this example, a margin trading loan only benefits you if your stock prices increase. If they decrease, you’ll end up with a more significant loss if you take out a margin trading loan.

Margin account requirements

Every stock or other security has its own unique margin requirement. This number specifies the amount of money you have to put up in order to purchase the stock vs the amount of money you can borrow. See the table below for some examples:

Margin account requirementsAmount of stocks purchasedAmount you need to pay upfrontAmount you can borrow
20%$1,000$200$800
35%$1,000$350$650
50%$1,000$500$500

The maximum margin account requirement for most investments is 50%.

Open a margin account today

Name Product Available Asset Types Stock Fee Option Fee Account Fee ETF Transaction Cost Feature Table description
Scotia iTRADE
Bonds, Options, Mutual Funds, ETFs, GICs, International Equities
$4.99-$9.99
$9.99 + $1.25 contract ($4.99 + $1.25 contract if completed 150 trades or more a quarter)
$0
$9.99 ($4.99 if completed 150 trades or more a quarter)
Pay no annual account fees.
Buy, sell and trade ETFs, Equities, Options and more with competitive commissions.
CIBC Investor's Edge
Stocks, Bonds, Options, Mutual Funds, ETFs
$4.95 - $6.95
$4.95 - $6.95 (+$1.25 per contract)
$0 if conditions met, otherwise $100/year
$6.95
$4.95 - $6.95 is applicable for online stock, ETF and option trades only. Pay $4.95 when you qualify as an Active Trader (trade 150+ times per quarter).
An intuitive and easy-to-use platform with access to a variety of tools that help you make smart decisions and trade with confidence.
Interactive Brokers
Stocks, Bonds, Options, ETFs, Currencies, Futures
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
$0
Min. $1.00, Max. 0.5% of trade value
Extensive trading capabilities and global investment tracking.
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95-$9.95
$9.95 + $1 per contract
$0
Free
Get $50 in free trades when you fund your account with a minimum of $1,000.
Opt for self-directed investing and save on fees or get a pre-built portfolio and take some of the guesswork out.
OFFER
Qtrade Direct Investing
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
$6.95 - $8.75 + $1.25 per contract
$0 if conditions met, otherwise $25/quarter
$0 - $8.75
Get up to 50 free trades. Be one of the first 100 new Qtrade clients to use the promo code 50FREETRADES and deposit a minimum of $10,000 (or top up to $15,000 to get $150 transfer fees waived). Valid until September 30, 2021.
Qtrade Direct Investing offers low trading commissions and an easy-to-use platform with access to powerful tools and a wide selection of investment options. Trade 100 ETFs free of charge and thousands more for $8.75 or lower.
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Compare up to 4 providers

What investments can I make with a margin account?

You can make the following investments using a margin trading account:

Less riskyMore risky
Individual company stocks

Index funds

Exchange-traded funds

Bonds

Guaranteed investment certificates

Gold/silver

Options

Futures

Penny stocks

Initial public offerings

Margin account crypto

Margin account short selling

  1. Traditional investments. You can use a margin trading account to make almost any type of investment you can think of. That said, the most common approach is to borrow money to purchase company stocks or exchange-traded funds.
  2. Margin account crypto. Margin account crypto is becoming very popular since it lets investors borrow money to amplify gains from market swings. However, this is a risky practice since margin account crypto borrowing can lead to losses given that crypto markets are extremely volatile.
  3. Margin account futures. Margin account futures allow you to speculate and bid on how an asset is going to perform on the stock market. Trading in margin account futures requires you to buy or sell shares at a specific time for a set price (no matter what the cost of each share is on the market).
  4. Margin account short selling. Margin account short selling gives you the chance to borrow stocks from your broker with the intention of selling them immediately. You then buy them back at a lower price and keep the profit.

How does margin account short selling work?

Margin account short selling involves the following steps:

  1. Borrow stocks from your broker if you believe their price will fall.
  2. Sell your stocks on the open market and get the money you make on the sale credited to your account.
  3. Wait until the price of the stock you sold drops and then use the credits in your account to buy them back at a lower price.
  4. Return the borrowed stocks to your broker and keep any profit you made.

Margin account short selling can be lucrative but also comes with some risks. For example, you could end up having to pay more for the stocks you sell if their price increases.

Pros and cons of margin trading

Pros

  • Boosts purchasing power. You’ll be able to invest more than you would using only your own money – which could lead to higher returns.
  • More investment options. Can open the door to advanced trading practices such as margin account short selling (or trading options such as margin account futures).
  • Interest may be tax deductible. You can write off any interest you pay on your margin trading loan when you file your taxes.

Cons

  • Riskier. You risk losing a significant amount of money if your stocks perform poorly.
  • Interest costs. You’ll have to pay interest on any money you borrow to invest with a margin trading loan.
  • Subject to margin calls. You may be required to sell off some of your investments to replenish your account if your balance dips below the minimum requirements.

Is margin trading riskier than regular investing?

Margin trading is riskier than regular investing because it uses borrowed money to fund your investments. This means you risk losing more money than you have in the bank if your stock prices fall. However, if you bet on a stock that increases in price, you’ll gain more than you would have if you had only used your own money to invest. As with any investment, it helps to determine your risk tolerance ahead of time and invest accordingly.

Bottom line

Margin trading accounts are designed to let you borrow money from your broker to fund your investments. You’ll have to pay interest on margin trading loans so it’s important to factor this into your overall costs. Find out more about margin trading and learn how to open a margin account today.

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