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.
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.
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.
| Response | Male | Female |
|---|---|---|
| Investment types covered | 34.41% | 34.12% |
You can open a margin trading account by following these steps:
The difference between margin accounts vs cash accounts boils down to the way you spend money out of your account.
| Feature | Margin trading account | Cash account |
|---|---|---|
| Investment mechanism | Invest using a partial loan | Invest using only your own money. |
| Return on investment | Proceeds 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 balance | At least $2,000 | Varies by broker – sometimes no minimum balance is required |
| Interest rates | Yes | No |
| Mandatory top-ups | Yes (if you drop below minimum balance requirements) | No |
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:
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 loan | Premium account | Basic account |
|---|---|---|
| $5,000 | 1.579% | 2.579% |
| $300,000 | 1.312% | 2.579% |
| $1 million | 1.149% | 2.579% |
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 loan | Scenario A (stock falls) | Scenario B (stock goes up) |
|---|---|---|
| Total investment | $10,000 | $10,000 |
| Loan amount | $5,000 | $5,000 |
| Interest on loan | 5% for 1 year = $136.45 | 5% for 1 year = $136.45 |
| Number of stocks purchased for $10,000 | 1,000 | 1,000 |
| 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 deducted | Loss of $2,136.45 | Gain of $1863.55 |
| Net gain or loss without margin trading loan | Loss of $1,136.45 | Gain 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.
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 requirements | Amount of stocks purchased | Amount you need to pay upfront | Amount 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%.
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You can make the following investments using a margin trading account:
| Less risky | More 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 |
Margin account short selling involves the following steps:
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.
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.
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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