INVESTING BASICS
Buying on Margin: How It Works, Interest, and Key Risks
Learn how margin works at Questrade—buying power, interest, requirements, and margin calls, plus neutral risk notes and Canadian tax context.
Buying on margin refers to borrowing against eligible securities held in a margin account to increase buying power beyond available cash. It is commonly used by investors who understand leverage and its risks, but it also introduces the possibility of amplified losses.
Understanding the mechanics of margin accounts, including buying power, interest calculations, maintenance requirements, and margin calls, provides essential context for evaluating whether margin trading aligns with investment objectives and risk tolerance. This guide breaks down how margin works at Questrade, with clear explanations and practical illustrations for Canadian investors.
Key Overview
- Definition:
Borrowing against eligible securities in a margin account to increase buying power.
- When borrowing begins:
Borrowing typically starts when an order exceeds available cash and the security is eligible for margin.
- Maintenance margin and margin calls:
Margin accounts maintain a minimum level of equity. If the account falls below this level, a margin call might occur, requiring additional funds or a reduction in positions.
- Buying power (high-level):
Buying power is generally based on account equity and applicable margin requirements, which determine the amount that could be borrowed.
- Interest accrual:
Margin interest accrues daily on borrowed amounts, with posted rates outlined later in this article.
- CAD vs. USD handling:
Margin accounts do not automatically convert currencies; borrowing occurs in the currency of the trade, which could affect interest costs.
This guide is for educational purposes only and does not constitute financial advice.
What a Margin Account Does
A margin account allows borrowing against eligible securities held in the account, increasing buying power beyond available cash. Unlike a cash account—where purchases are limited to settled funds—a margin account permits transactions that partially rely on borrowed funds, subject to margin requirements set by the firm and the broader CIRO margin framework. The borrowed portion is secured by the assets in the account, and interest accrues on any outstanding balance.
In market practice, margin accounts are commonly used to support a range of activities that require flexibility beyond cash-only trading. These include maintaining positions without immediately settling additional cash, managing temporary timing differences between trades, or accessing short-selling functionality. The defining feature across these uses is leverage: the ability to control a larger position size relative to the account's equity, with gains and losses magnified accordingly.
Not all securities qualify for margin. Eligibility depends on factors such as liquidity, price, and regulatory treatment, and is governed by firm-specific criteria aligned with CIRO requirements. Securities that do not meet these standards are generally purchased with cash, even within a margin account. Here is a list of acceptable exchanges and market tiers whose listed securities are eligible for margin in Canada and the United States.
Margin accounts also enable short selling, which involves selling borrowed securities with the obligation to repurchase them at a later date. Short selling is operationally available only in margin accounts and remains subject to margin requirements, borrowing availability, and ongoing equity thresholds.
How Questrade Margin Account Works (Step by Step)
Order Funding Sequence
When a trade is placed in a Questrade margin account, available cash is used first. If the order exceeds the cash balance and the security is eligible for margin, borrowing automatically covers the remainder, and interest applies to the borrowed amount. Margin borrowing is determined at the time the trade is executed, not at settlement, so a margin balance could arise immediately. If additional cash becomes available before settlement, the borrowed amount might be reduced. Only margin-eligible securities could be purchased this way; non-eligible securities are fully funded with cash.
Ongoing Maintenance Requirements
Margin accounts are subject to ongoing maintenance margin requirements. Maintenance margin represents the minimum level of equity to be maintained relative to the market value of marginable positions. Equity is generally calculated as the total value of securities in the account minus any borrowed amounts.
If the market value of securities declines or borrowed balances increase, account equity might fall below the required maintenance level. When this occurs, the account is considered to have a margin deficiency. Maintenance requirements vary by security type and are aligned with CIRO's general margin framework, as implemented by the firm.
Detailed margin percentages and maintenance calculations are covered in related educational lessons.
Margin Call: Operational Overview
If an account falls below maintenance requirements, a margin call might be issued. Margin calls are usually communicated through account notifications or electronic messages and indicate that action is required to restore the required equity level.
To address a margin call, investors might add funds, transfer eligible securities, or reduce positions by selling holdings. If the call is not resolved in time, the firm might liquidate positions without notice. The timing and method of liquidation follow account agreements and internal risk controls.
Note that this overview explains the operational process only. It does not assess individual circumstances or recommend specific actions.
Buying Power Explained
Buying power in a margin account represents the total value of securities that could be purchased using a combination of available cash and borrowed funds. At a high level, the required equity for a position is determined by the security's margin requirement (MR%), while borrowing covers the remainder. This enables investors to hold larger positions than cash alone would allow, with both gains and losses amplified proportionally. Actual margin requirements vary by security type and are published in the firm's margin requirements list.
For example, consider an investor with $5,000 in cash placing a trade for a security with a 50% margin requirement (MR 50%). To acquire $10,000 worth of the security, the investor would provide $5,000 of equity and borrow the remaining $5,000. If the security had a lower MR of 30%, the same $5,000 could support a larger position of approximately $16,700 ($5,000 ÷ 0.30), with $11,700 borrowed. Conversely, a higher MR of 70% would reduce the position to about $7,100 ($5,000 ÷ 0.70), with $2,100 borrowed.
This illustrates how buying power changes with different margin requirements. The example uses rounded figures for clarity and is provided for educational purposes only; it does not indicate potential outcomes or recommended actions.
Buying Power Examples
| Security Price | Margin Requirement (MR%) | Equity Needed | Amount Borrowed | Illustrative Position Size |
|---|---|---|---|---|
| $25 | 30% | $3,000 | $7,000 | $10,000 |
| $50 | 50% | $5,000 | $5,000 | $10,000 |
| $100 | 30% | $3,000 | $7,000 | $10,000 |
| $200 | 70% | $7,000 | $3,000 | $10,000 |
This table shows how different margin requirements change the split between equity and borrowed funds, illustrating buying power clearly and neutrally.
Margin Requirements (Canada Context)
Initial vs. Maintenance Margin
Margin accounts in Canada are governed by two primary requirements: initial margin and maintenance margin. Initial margin represents the minimum equity required to open a new position, based on the security's margin requirement (MR%). It determines how much cash or collateral is provided upfront before borrowing. Maintenance margin, on the other hand, is the minimum equity to be maintained once the position is open.
These requirements directly influence buying power–a higher initial margin reduces the size of positions that could be opened, while maintenance margin affects when a margin call might occur if the account equity falls. Both measures are designed to manage leverage risk, helping ensure that borrowed funds remain adequately secured by the account's holdings. Positions could be subject to calls if maintenance requirements are not met, even if the initial margin was satisfied at the time of purchase.
Firm Overlays and Changes
Margin requirements vary depending on the security type, volatility, and liquidity. Firms might apply overlays–additional margin requirements beyond the regulatory minimum–to manage risk. These overlays could change over time in response to market conditions, ensuring that accounts remain adequately collateralized.
Some diversified products might have reduced margin requirements, reflecting lower risk profiles, but eligibility for such reductions is determined by regulators and firm policies rather than individual security characteristics.
Where to Check Current Requirements
Current margin requirements are published by the firm and aligned with CIRO's general margin framework. Access up-to-date figures through the firm's official margin requirements page or related educational lessons, which provide details by security type and product category.
All figures are informational and reflect the framework in effect at the time of publication. Requirements may change due to regulatory updates or market conditions, so referencing the official source ensures the most accurate, timely information.
Costs of Margin (Interest and Fees)
Interest in a margin account accrues only on the amount borrowed, not on the total position. If unpaid, interest compounds, increasing the outstanding balance over time. The firm sets posted margin rates, which may reference the prime rate, and these rates are updated periodically. Interest typically begins accruing as soon as borrowing occurs, following standard settlement mechanics.
Margin interest could differ depending on the currency of borrowing. For accounts holding both CAD and USD balances, borrowing in USD incurs interest in USD, while CAD borrowing accrues in CAD. Conversion between currencies does not occur automatically, so the borrowed currency determines both the interest rate applied and the accrual calculations.
The following table provides illustrative daily interest calculations based on rounded figures. These examples do not indicate actual borrowing costs or recommended actions.
| Borrowed Amount | Posted Annual Rate | Approx. Daily Interest | Notes |
|---|---|---|---|
| $5,000 | 14.5% | $1.99 | CAD borrowing example |
| $10,000 | 11% | $3.01 | Mid-size position |
| $25,000 | 8.5% | $5.82 | Larger borrowing |
Note: Rates used in the table above are for calculation purposes only and do not reflect current market rates or specific account terms.
Interest accrual reflects the firm's posted rates at the time of borrowing and compounds if unpaid. For precise figures, current rates are available on the firm's official margin interest rates page. All calculations are provided to illustrate mechanics only and are not financial guidance.
Risks and How Margin Calls Work (Operational)
Risk Overview
Margin accounts involve leverage, which could magnify both gains and losses. Key operational risks include:
- Increased exposure: Borrowed funds increase the total position size, so even small market movements could have a proportionally larger impact on account equity.
- Interest impact: Charges on borrowed amounts raise the breakeven point for profitable positions.
- Liquidity risk: Limited cash or access to funds could make it difficult to meet obligations promptly.
- Gap risk: Significant price changes between trading sessions could cause sudden equity shortfalls.
- Concentration risk: Holding a large portion of the account in a single security or sector amplifies exposure, as declines in that holding have a larger effect on overall equity.
These operational risks are inherent to margin trading and are monitored continuously through margin requirements and maintenance checks.
Margin Call Sequence
A margin call happens when account equity drops below the required maintenance level. The operational process works as follows:
- A deficiency is detected in the account.
- Notification is sent through account alerts or electronic messages.
- There is a set time period to correct the shortfall. Accepted actions may include:
- Adding funds.
- Transferring eligible securities.
- Reducing positions by selling holdings.
- If the shortfall is not resolved in time, the firm may liquidate positions to restore the required equity.
This sequence is designed to ensure that borrowed funds remain properly secured.
Observational Checklist
- Positions in highly volatile securities.
- Concentration in a single security or sector.
- Large after-hours or overnight market gaps.
- Rapidly changing margin requirements due to regulatory or firm updates.
This section explains operational mechanics and risks only.
Using Margin with U.S. Securities
When trading U.S. securities in a margin account, borrowing usually occurs in U.S. dollars if the positions are funded in USD. Interest accrues in the borrowed currency, so U.S. margin positions generate interest charges in USD, keeping borrowing and repayment calculations consistent.
Canadian dollars are not automatically converted for these transactions. Any currency conversion is completed separately, either before placing the trade or afterward, depending on account settings and available balances. This separation allows the account to clearly track borrowing and interest in the currency of the trade while avoiding automatic foreign exchange adjustments that could affect margin calculations.
Settlement and interest accrual for U.S. securities work the same way as for domestic trades. Interest starts accruing as soon as borrowing occurs. While changes in U.S. security prices or CAD/USD exchange rates could affect account equity when reported in Canadian dollars, borrowing and interest stay in the currency that was borrowed.
What Can Be Held or Traded in Margin Accounts
Margin accounts could hold and trade a variety of securities, provided they meet firm and regulatory eligibility rules. Common margin-eligible assets include stocks, exchange-traded funds (ETFs), options, and certain bonds. Each security type is subject to specific margin requirements, which determine the portion of the position that must be funded with equity versus borrowed funds.
Margin accounts also support short selling, which involves selling borrowed securities with the obligation to repurchase them later. The availability of short selling depends on the ability to borrow the security, and not all securities are eligible for short positions. Borrowing availability could vary based on market conditions, liquidity, and regulatory considerations.
Whether a security could be used in a margin account depends on firm policies and regulatory rules, such as CIRO guidelines, and these rules may change over time. Up-to-date information on eligible securities and their margin requirements is available through the firm's official resources.
Glossary
- Buying power: The total value of securities that could be purchased using a combination of account equity and borrowed funds in a margin account.
- Borrowed amount: The portion of a position financed through margin borrowing rather than available cash.
- Initial margin: The minimum equity required to open a new position in a margin account.
- Maintenance margin: The minimum equity that must be maintained in an account to support open positions and avoid a margin call.
- Margin requirement (MR%): The percentage of a security's value that must be funded with equity rather than borrowed funds.
- Equity: The total value of securities in a margin account minus any borrowed amounts.
- Forced liquidation: The sale of securities by the firm to restore required account equity if a margin call is not resolved within the designated timeframe.
- Short selling: Selling borrowed securities with the obligation to repurchase them later, typically used in margin accounts.
- LSERM/reduced margin (concept): Certain diversified or lower-risk products may qualify for reduced margin requirements under firm or regulatory rules, lowering the equity needed to open positions.
