Margin Trading Basics
Margin trading means trading using borrowed money to amplify potential returns. It’s a strategy used by both self-directed investors and professionals.
Explore the basics, benefits, risks and more with this simple guide.
What is a margin account?
A margin account is a type of trading account that allows investors to borrow money from their broker to buy securities or sell them short. This borrowed money increases the investor's purchasing power, enabling them to take larger positions than they could with just their own funds.
- In the investment world, buying stocks using borrowed money is known as trading “on margin.”
- Stocks held in your account are used as collateral for the loan, and the brokerage charges interest for the duration of the loan.
- When the price of a stock is rising, trading on margin allows investors to use leverage to increase their gains. However, when stock prices fall, losses mount much more quickly.
- Explore other margin trading definitions.
What are the benefits?
Margin trading offers several compelling benefits that make it attractive to self-directed investors. Here are some of the key advantages:
- Margin trading allows you to borrow funds from a brokerage to purchase more securities than you could with your own capital alone. This leverage may amplify your returns if the trade moves in your favor.
- With more capital available, you can diversify your portfolio more effectively, potentially reducing risk by spreading investments across different assets.
- Margin accounts are typically required for short selling, which allows you to profit from declining asset prices.
- Margin accounts can provide quick access to funds for trading without needing to liquidate existing positions.
- Margin can be used for advanced strategies like hedging or options trading, giving experienced traders more tools to manage risk and enhance returns.
What are the risks?
Although margin trading can offer significant profit potential, it also comes with a range of risks that traders should understand before diving in. Here are some of the key risks:
- Just as margin trading can amplify gains, it also can amplify losses. If the market moves against your position, you can lose more than your initial investment.
- If the value of your account falls below the broker’s maintenance margin requirement, you’ll receive a margin call. You must then deposit more funds or sell assets to cover the shortfall—often on short notice.
- If you fail to meet a margin call, the broker can liquidate your assets without your consent to bring the account back into compliance. This can lock in losses and disrupt your investment strategy.
- Borrowed funds accrue interest, which can eat into profits or deepen losses, especially if positions are held long-term.
- The high stakes of margin trading can lead to emotional decision-making, such as panic selling or overtrading.
Margin Trading Tips
Here are some practical tips for margin trading to help you manage risk and make more informed decisions:
| Understand How Margin Works Know the initial and maintenance margin requirements. Understand how interest is calculated on borrowed funds. |
Use Leverage Conservatively Avoid using the maximum margin available. Start with small positions and scale up as you gain experience. |
Set Stop-Loss Orders Always use stop-loss orders to limit potential losses. Consider trailing stops to lock in profits as prices move in your favor. |
Monitor Your Positions Closely Margin trading requires active management. Keep an eye on market movements, account equity, and margin levels. |
| Diversify Your Portfolio Don’t put all your borrowed funds into a single trade. Spread risk across different assets or sectors. |
Be Prepared for Margin Calls Keep extra cash or liquid assets in your account to meet margin calls. Avoid overextending your account to reduce the risk of forced liquidation. |
Stay Emotionally Disciplined Stick to your trading plan and avoid impulsive decisions. Don’t chase losses or let greed drive your trades. |
Keep Learning Stay updated on market trends, economic indicators, and trading strategies. Consider using demo accounts to practice margin trading without real risk. |
Additional resources
Margin Trading Requirements
A. In order to trade on margin, you need to open a margin account. You can’t trade on margin within a cash account or within a registered account such as a TFSA, RRSP, RRIF, or RESP.
B. When you open a margin account, you will start by depositing a minimum amount of cash or margin-eligible securities.
C. Qtrade will lend you a portion of the market value of those assets, which act as collateral to secure the loan. The brokerage charges interest on the borrowed funds as long as the loan is outstanding.
D. People most commonly borrow on margin in order to purchase stocks, although other securities can also be purchased, including ETFs, mutual funds, bonds, and options. You can also use a margin account to short sell stocks.
Qtrade margin account rates and policies
Start Margin Trading with Qtrade
- Complete our online application from your desktop or mobile device.
- Read our Customer Service and Disclosure Document, which provides the terms and conditions governing your margin account, and acknowledge that you’ve read and understood it.
- Fund your account using Direct Deposit, Interac e-Transfer, or bill payment from your banking account; or by transferring assets from another investment account.
- Start investing!
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