Margin 101

Learn more about non-registered margin accounts.

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, there are many other benefits to this type of account, such as:

  • Short-selling: only available in non-registered (margin) accounts
  • No contribution limits: unlike registered accounts, there are no limits on the amount you’re can contribute to your non-registered margin account
  • Joint account ownership: you can have two account holders
  • Greater trading flexibility: with margin accounts you have access to trade greater variety of securities when compared to registered accounts.
  • Tax advantages: in Canada, capital gains are taxable at 50%. For instance, if you earn $1,000, you’ll pay tax as if you made $500.
  • 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

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.

businessman looking thoughtfully at desktop

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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Build your own portfolio

Self-directed Investing

Take matters into your own hands. Build your own investment portfolio with a self-directed account and save on fees. Make your money work harder.

With a self-directed Margin account, you are able to leverage your investments to borrow money to trade/invest. When you place a trade in a Margin account, your available cash is used first. If your order’s dollar amount exceeds your available cash, that’s when ‘borrowing’ starts.

Important to note: Margin accounts do not automatically convert your currency from CAD to USD (or vice-versa). All of your trades are settled in the currency of the investment, (whether you’re buying or selling) with no automatic conversion. This allows you to keep your CAD & USD balances separate, and only convert when you need to. Registered accounts like a TFSA and an RRSP have different currency settlement options available.

Check out this great guide on currency conversions within a Margin account for more information.

What is a margin requirement (MR)?

Every investment has its own margin requirement, shown as a percentage. This percentage represents the amount of buying power you have to set aside when borrowing to trade. For example, if stock ABC has a 30% margin requirement you only have to pay 30% of the trade value, while the other 70% can be borrowed from Questrade. If a security has a 50% MR, you can fund half the trade value, and the other half can be borrowed from Questrade. Some securities may have a 100% MR. With these types of investments, you cannot use margin, and have to pay for the full value of the trade without borrowing.

Every investment’s minimum margin requirement is set by our regulator IIROC and in addition, Questrade can choose to maintain higher than minimum margin requirements as it sees fit. Margin requirements are subject to change at any time with no prior notice, especially for securities dealing with high volatility, regulatory issues, or other risk-related concerns.

Example of changing margin requirements

Since margin requirements established by IIROC state that a security trading between $1.50-$1.74 has an 80% MR, let’s take a look at the following example:

Suppose you own a stock that’s trading at $2.50, and has a MR of 50%. If this stock has some bad earnings news for example, and declines to $1.70 a share, the MR would increase to 80% due to the previously mentioned IIROC rule. This can potentially cause issues if before the drop in price, your buying power was close to zero. Since the drop in price causes the Margin requirement to increase, this can potentially lead to a Margin call as a result. This is because as the margin requirement increases, your buying power would decrease.

Important to note: “Trading on Margin/borrowing” only applies after you’ve used all the available cash in your margin account. If you don’t spend more cash than what’s available in the currency of the trade, you will not be borrowing, and will not be charged interest.

Let’s check out some more examples:

Suppose you would like to buy shares of company ‘X’ shown below in the screenshot. Since this company trades for more than $2 a share, and is part of IIROC’s “List of Securities Eligible for Reduced Margin”, the MR is only 30%.

Level 1 quote margin requirements highlighted

A 30% MR means you can “leverage” or borrow up to 3.33:1. 

With a $1,000 cash balance for example, your Max buying power for this specific stock would be $3,333.33.

Please note: “Maxing out” your leverage could lower your account’s buying power balance to close to zero ($0). If you choose to do this and the investment declines by any amount in value while your buying power is “maxed out”, you will enter a Margin call as a result.

You can learn more about Max buying power and buying power in our Understanding your account balances article. There is also a separate ‘Long MR’ and ‘Short MR’ shown. Long MR refers to buying the security, and Short MR is when you’re shorting.

Let’s see an example trade using margin

If you have a $5,000 cash balance in your Margin account, and are looking to buy shares of company ‘X’ from earlier, your maximum buying power would be $16,650 ($5,000 x 3.33). Suppose you’d like to leave some extra buying power, so you only buy $10,000 worth of company ‘X’ shares.

Before your trade:

Margin requirements - example 1

Cash is untouched, and your buying power equals your cash balance.

Your total buying power is $16,650.

Note: Every security has its own margin requirement, and they may be higher than 30%. That could lead to your max buying power being lower than you assumed.

(CAD balances hidden for simplicity)

After your trade:

Margin requirements-example 2

Your cash balance is now negative since you’re borrowing to trade.

The margin required on your position is $3000 = 10,000 x 30%

Your buying power has now dropped to $2,000.

This is calculated as:

Buying Power = Total Equity - Margin Required

Buying power = $5,000 - (10,000 x 30%)

Buying power = $2,000

Your new Max buying power is 3.33 x your Buying power at $6,660.

To explore the impact of changing security prices on your balances and buying power, please check out our helpful guide to your balances.

When borrowing funds on margin, you’re required to maintain a certain amount of assets (in the form of cash and/or securities) as collateral for your loan. A margin call is triggered when the combined value of cash and/or securities (used as a collateral for your loan) drops below the minimum amount you require to maintain in your account when borrowing funds.

We typically notify customers by email when their account is in a margin call (on a best efforts basis).

There are a number of reasons why we may issue margin calls:

  • The securities bought with borrowed money have decreased in value
  • The exchange rate between Canadian and U.S. currency fluctuated
  • Administration charges were deducted from the account (interest charges or other fees)
  • Margin requirement increased for the individual securities (explained in detail below)
  • As mentioned earlier, there aren’t enough assets in the account. Customers who borrow funds must maintain a certain amount of assets in their account as a layer of protection

Margin calls are payable on demand. However, on a best-efforts basis, we give customers the opportunity to cover the owed amount by the due date. At times, due to market conditions, we’re required to immediately close positions in customers’ accounts to satisfy the margin call before the given due date and time without further notice (see section 1.14 of Questrade’s Account Agreements & Disclosures documents).

You can cover a margin call by using one of the following methods or a combination of them:

Action Description
Deposit the amount due into your account Instant deposit

 

You can fund your accounts instantly using your Canadian Visa Debit card by going to Funding > Instant deposit under the ACCOUNTS page. Deposits of up to $3,500 (or your bank’s daily transaction limit) are accepted per day. Each bank may have a daily limit of how much money can be withdrawn using this method. To increase your daily limit, please contact your bank and request for a limit increase on your Visa Debit card. The maximum instant deposit transfer we can process is $10,000 per day.

Alternatively, depending on your bank, you may be able to make instant deposits to your Questrade account using Interac Online. Log in to Questrade to check if your bank offers this service.

Since these funding methods are instant, proof of payment is not required.

Online bill payment

You can fund your accounts by having your Questrade account be a “Payee” on your online banking system. The bank account that is used must be held in the same name as the Questrade account holder.

Since bill payments can take 1-3 business days to arrive, you must send a screenshot as proof of payment to margincall@questrade.com, or by fax to 1.888.767.1819. You must also include their account number in the email or fax.

Proof of payment screenshots are assessed on a best efforts basis and there may be circumstances, especially in extreme market conditions where the account is liquidated even after proof of funding has been provided.

Note: Pre-authorized deposits (PADs) are not acceptable as a funding method to satisfy margin calls.

Close enough positions to satisfy the entire amount of the margin call
Close enough positions in your account to satisfy the margin call.
Cancel orders to open positions If you have orders to open a position that require margin, you can cancel them.
Activate Margin Power®

If you have a tax-free savings account (TFSA), you can connect your margin account to the assets in your TFSA to increase your buying power. To activate Margin Power, an exclusive service from Questrade, log in to Questrade and go to the ACCOUNT MANAGEMENT page. If you decide to activate margin power to satisfy your margin call, please notify us by email margincall@questrade.com.

Here are some key things to know about margin calls:

  • Each security has its own margin requirement. For example, if stock ABC has a margin requirement of 30%, it means Questrade will lend 70% and the customer will pay with cash 30%. This data shows as Long MR (for long positions) and Short MR (for short positions).
  • All margin requirements that appear in our trading platforms are for information purposes only. Questrade is not responsible for how you use this information to make investment decisions.
  • Margin requirements for securities vary due to market fluctuations.
  • When making a deposit to a Questrade trading account, your bank account (where the money is coming from) and the Questrade account (where the money is going to) must have identical names. For example, if your name at the bank is “James Smith”, your Questrade trading account must be identical to that for us to accept the deposit.
  • If you don’t take action to satisfy the debit balance by the due date or if market conditions require it, we may close positions in your account. If we close positions for you, we will charge a $45 fee for each trade we make.

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