A beginner's guide to investing on margin

Key details

• What is it? A margin account is a type of brokerage account that allows you to borrow money against the value of the assets you hold to purchase more investments.
• The main benefit: It gives you the flexibility to seize investment opportunities without needing the full cash amount upfront. This is often called using leverage.
• The main risk: If the value of your investments drops, you could face a "margin call," which is a demand from your brokerage to add more funds or sell assets to cover the potential loss. Using leverage amplifies both gains and losses.
• The Questrade advantage: Features like Margin Power give you access to more buying power than a standard margin account, and our competitive interest rates help keep your borrowing costs down.

Seize more moments

It feels like this one could be the moment. The trade. You had the company on your watchlist for months, following every up, and every down. You know the business—you know the opportunity.

But then, the same dilemma finds you that’s found so many investors before: your conviction is bigger than your cash balance.

The opportunity is right there, and it won’t wait, but payday is too many days away and you don’t have assets to part with, and you sit there, hating the sidelines.

Having a Margin account changes all this.

What is a Margin account?

It bridges the gap between opportunities and action, letting you borrow money against the value of the assets you hold to purchase more investments.

Margin accounts don’t have contribution limits and, because they let you use borrowed money, come with different risks than standard investing accounts.

But, to be clear, they aren’t about reckless borrowing or throwing ever-larger sums of money at high-risk trades. They’re about the flexibility of turning your assets into even more opportunities.

What does it mean to invest on margin?

Investing on margin just means you are using a combination of your own money and money borrowed from your brokerage (like Questrade) to buy securities.

Think of it like a flexible line of credit that is secured by the stocks, ETFs, or other assets in your account. By borrowing, you can increase your buying power, allowing you to control a larger investment position than you could with your cash alone.

When you do this, you are using leverage. This can amplify your potential returns if your investments increase in value, but it's crucial to remember that it also amplifies your potential losses if they decrease.

The Questrade advantage: More buying power, less red tape

Not all margin accounts are created equal. Where you choose to invest on margin can have a significant impact on your flexibility and your costs.

At a traditional bank, a margin loan is often treated like any other loan product—with rigid rules and potentially higher interest rates. At Questrade, margin accounts are built for active, self-directed investors.

The biggest difference? A unique source of leverage.

At Questrade, you have access to a feature called Margin Power. Instead of just getting buying power from the cash and assets in your margin account, Margin Power gives you access to the combined value of your margin *and* registered accounts (like your TFSA and RRSP).

This gives you significantly more borrowing power and flexibility to act on your ideas, all while your registered accounts remain untouched and continue to grow tax-free or tax-deferred. It’s designed to give you the maximum ability to execute your strategy, without the restrictive red tape.

Into options trading? Margin unlocks whole new strategies

For options traders, a margin account isn’t just a source of extra leverage (though, it’s still that, too). It’s also the key to unlock a wider range of sophisticated strategies.

While other trading accounts let you execute basic options trades (like buying calls and puts or selling covered calls), a margin account is required to access more complex, and potentially more powerful, strategies.

Here’s how a margin account helps:

1. It allows for the sale of uncovered options: Selling an option without owning the underlying asset is known as selling "naked" or "uncovered." For example, selling a naked call option without owning the 100 shares to deliver if assigned. Due to the potentially unlimited risk associated with these trades, brokerages require you to have a margin account. The margin in your account acts as the necessary collateral to ensure you can cover the position if the trade moves against you.
2. It enables complex spreads: Strategies like credit spreads (e.g., bull put spreads or bear call spreads) involve simultaneously buying and selling multiple options contracts. A margin account is necessary to execute these multi-leg strategies and to handle their specific, and often lower, margin requirements compared to trading single naked options.
3. It provides capital flexibility: Even for a strategy like selling cash-secured puts, where you intend to have the cash to buy the shares if assigned, a margin account offers more flexibility. It allows your capital to be used more efficiently across your portfolio instead of being strictly set aside and tied up for one potential trade.

The most important risk: Understanding margin calls

The single most important concept to understand before you invest on margin is the margin call.

A margin call happens when the value of your investments falls, shrinking your equity (the portion you own) below the brokerage's minimum requirement (known as the "maintenance requirement").

Here's a simple example:

• You want to buy $10,000 worth of a stock.
• You use $5,000 of your own cash and borrow $5,000 on margin from Questrade.
• The stock's value suddenly drops to $7,000.
• Your loan is still $5,000, but your equity has shrunk to just $2,000 ($7,000 value - $5,000 loan).
• If your brokerage's maintenance requirement is 30% of the total value (0.30 x $7,000 = $2,100), your $2,000 in equity is now *below* that threshold.

Your brokerage will issue a margin call, demanding that you cover the shortfall. You will typically have to either deposit more cash into your account or sell some of your investments (potentially at a loss) to bring your equity back up to the required level.

The top 5 mistakes margin beginners make (and how to avoid them)

Navigating margin requires a clear head and a solid plan. Here are five common missteps to watch out for:

1. Using it without a strategy. Borrowing just because you can is a recipe for trouble.
   How to avoid it: Only use margin when it aligns with a specific, well-researched investment thesis. Know your entry point, your target price, and—most importantly—your exit plan if the trade goes against you.
2. Going "all in.” Maxing out your available margin on a single investment is extremely risky. A small dip in that one position could trigger a devastating margin call.
   How to avoid it: Use margin in moderation. Consider allocating only a small percentage of your available margin to any single idea to ensure your portfolio remains diversified.
3. Ignoring interest costs. The interest you pay on a margin loan is a direct drag on your returns. A winning trade can quickly become a losing one if you hold it for too long and the interest costs pile up.
   How to avoid it: Always factor margin interest into your profit calculations. Know Questrade’s current interest rates and understand how they will impact your bottom line.
4. Not having a margin call plan. Panic is not a strategy. When a margin call happens, you need to be able to act quickly and rationally.
   How to avoid it: Decide in advance what you will do. Will you deposit more cash? Which specific investments will you sell first? Having a plan removes emotion from the decision-making process.
5. Setting and forgetting. Margin trading is not a passive activity. The market moves fast, and a position that was safe yesterday could be on the verge of a margin call today.
   How to avoid it: Monitor your portfolio and your maintenance excess regularly—ideally, daily. Set up alerts, and be ready to act before it becomes mandatory.

Is investing on margin right for you?

Margin is a powerful tool, but it's not for everyone. It's generally best suited for experienced investors who have a high tolerance for risk, a deep understanding of the markets, and a clear, disciplined strategy.

Before you take the leap, ask yourself:

• Am I comfortable with the possibility of losing more than my initial investment?
• Do I have a strong plan for how I will manage the risks of a margin call?
• Is my decision to use margin based on careful research or on emotion?

Answering these questions honestly will help you decide if you're ready to move from the sideline to the starting line.