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What is a Margin Account?
A margin account is a brokerage account where the broker lends you money to invest beyond what you've deposited. Your existing securities act as collateral for the loan. The ratio of borrowed money to your equity is called leverage.
Example: you deposit $10,000. With 2:1 margin, you can invest $20,000 — the broker lends you the other $10,000. If the investment rises 20%, you've made $4,000 on your $10,000 — a 40% return on your actual capital. But if it falls 20%, you've lost $4,000, a 40% loss on your original investment — and you still owe the broker interest on the loan.
Margin accounts are for experienced investors who fully understand leverage risk. Losses can exceed your initial deposit. Most new investors should start with a TFSA and zero leverage before considering margin.
How Margin Works in Canada
Canadian regulations (IIROC rules) set minimum margin requirements for different security types:
- Large-cap Canadian/US stocks: Typically 30–50% margin requirement (meaning you must provide 30–50% of the investment's value)
- ETFs: Typically 30% margin requirement for broad-market ETFs
- Volatile stocks: Higher requirements, or not eligible for margin at all
You pay margin interest on the borrowed amount, which accrues daily. At Questrade, margin rates typically range from 7–9% annually depending on account size. This interest is tax-deductible if the borrowed money is used to invest in income-producing securities.
The Margin Call Risk
If your account's equity falls below the required minimum (due to falling investments), your broker will issue a margin call — demanding you deposit more money or sell securities immediately. In a fast-moving market, this can force you to sell at exactly the wrong time.
During the 2020 crash, thousands of margin investors received margin calls within days of the most dramatic declines — forcing them to sell at the bottom right before markets rebounded. Leverage cuts both ways.
When Does a Margin Account Make Sense?
- Short selling: Margin accounts enable short selling — betting a stock will fall — which requires borrowing shares
- Settlement convenience: Sometimes margin accounts are used simply for the flexibility of short settlement periods
- Experienced investors with high conviction: Some seasoned investors use modest leverage on stable, dividend-paying portfolios — but this requires deep understanding of the risks
✅ Potential Advantages
- Amplified returns if investments rise
- Enables short selling
- Margin interest may be tax-deductible
- Flexible liquidity for experienced traders
❌ Significant Risks
- Amplified losses — can exceed your deposit
- Margin interest eats into returns
- Margin calls can force selling at losses
- Not suitable for volatile or speculative securities
- Psychological pressure during drawdowns