Buying on margin is a trading strategy that involves borrowing money from a brokerage to purchase investment assets (usually a security like stocks or bonds). It amplifies your buying power, allowing you to invest more, which can increase returns: even though all the money you're investing isn't yours, the gains that may come with it are.
Margin trading increases both gains and losses and includes borrowing costs such as interest. The sections below explain how margin works, how interest is calculated, and key risks like margin calls.
The actual "margin" in margin trading is the amount of money you need to deposit in order to borrow money from your brokerage. So if your brokerage requires a 30% margin and you want to purchase $10,000 worth of a security, you would need to fund your account with at least $3,000. The brokerage would lend you the other 70% and charge you interest on the loan.
Below, we'll cover how margin accounts work, what margin costs, the rules that govern margin trading in Canada, and how to weigh the possible rewards against the very real risks.
What is a margin account?
A margin account is a special non-registered brokerage account that lets you borrow money to buy securities and perform advanced trades like short selling and complex options. You can't use margin with registered accounts (like a Tax-Free Savings Account or Registered Retirement Savings Plan) or standard non-registered (cash) accounts.
Because buying on margin is a higher-risk investment strategy, you'll need to apply for a margin account. Brokerages often need more information or have higher requirements with margin accounts than with other investment accounts.
How do I trade on margin?
Step 1: Open and fund your account
After opening your margin account, you'll need to fund it. Most margin accounts have minimum funding requirements, although the specific amount can vary. You'll need to fund your account by depositing cash or transferring in margin-eligible securities (typically stocks that trade on major indices for over a certain price; low-priced stocks (often called 'penny stocks'), for example, are not eligible).
Step 2: Determine your buying power
Your buying power is the total amount you can invest using your equity plus borrowed funds. For example, if you deposit $3,000 and your brokerage has a 30% margin requirement, your maximum purchase amount is $10,000 ($3,000 of yours + $7,000 borrowed).
Step 3: Make a purchase
Once you make a purchase, you start owing interest on the borrowed amount. Your interest cost depends on:
The interest rate set by your brokerage
The amount borrowed (shown as a negative cash balance)
How long the position is held (interest accrues daily)
In Canada, margin interest may be tax-deductible against investment income.
Step 4: Maintain your account
You must maintain the minimum buying power in your account at all times. Dips below the maintenance margin usually occur when the value of the securities in the account decreases. If that happens, your brokerage will issue a margin call.
Step 5: Sell your position
When you sell, the brokerage pays itself back first (loan amount plus interest), then sends you what's left. The outcome depends on the stock's performance:
Stock went up: You keep the profit after repaying the loan
Stock went down: Losses come from your equity; you may owe additional funds if losses exceed your initial deposit
You can repay the loan early by depositing enough to turn your cash balance positive.
Margin interest rates and costs
When you trade on margin, you're taking out a loan from your brokerage, and you pay interest on that borrowed amount. Interest accrues daily and is typically charged monthly.
Key factors that affect margin interest costs:
Interest rate: Set by the brokerage and may vary by borrowing amount
Benchmark rate changes: Rates may change when the prime rate changes
Time outstanding: The longer the position is held, the more interest accrues
Interest charges can quietly eat into your returns, especially over weeks or months.
How much loan value can I get in my margin account?
If margin is the amount you need to deposit, loan value is how much you can borrow against that security (if eligible). How much loan value you can get depends on a few different factors:
Regulatory bodies. The Canadian Investment Regulatory Organization (CIRO) sets minimum requirements for securities that can be bought on margin. The margin rate depends on the type of the security. Relatively low-risk bonds can have a margin requirement as little as 1%, while investors can typically borrow up to 70% for equities.
The price of the stock itself. If an equity is trading at $2 or more, the minimum margin rate required by CIRO is 50%. To calculate your loan value, multiply the market value by the number of shares, then subtract the margin rate.
For example, if you're buying 10 shares at $2 each:
Market value: 10 shares x $2 = $20 Net loan value: $20 x (1-0.50) = $10.00
Keep in mind, loan value fluctuates with market price. If the share price increases to $4, you'd have $20 in loan value. But if it drops below $1.50, the minimum margin rate required by CIRO is 100%, so you couldn't borrow against it anymore.
You. Generally speaking, the more equity you have in your margin account, the more you can borrow. You can increase your loan value by depositing additional funds or margin-eligible securities to your account.
Margin rules in Canada and broker limits
In Canada, margin trading is governed by two layers of rules:
CIRO rules: Set minimum requirements for eligibility and borrowing limits (often up to 70% for many stocks)
Brokerage requirements: May impose stricter limits, including concentration limits (caps on borrowing against a single stock)
These limits protect both you and the brokerage from excessive risk.
If you're used to seeing U.S. investing content, you might come across references to Regulation T (Reg T), the U.S. Federal Reserve's initial margin rule. In Canada, CIRO rules apply instead.
What is a margin call?
If you fail to maintain the required margin in your account, your brokerage will issue a margin call requiring you to add funds. You can respond by:
Depositing cash into your account
Transferring margin-eligible securities into your account
Selling existing positions to free up equity
If you don't meet the margin call within the brokerage's specified timeframe (often 24-48 hours), they can liquidate your securities without your input.
Examples of buying on margin
Let's say you funded a margin account with $5,000 with a 50% margin requirement. You can borrow another $5,000, giving you $10,000 in available funds to invest. Here's how two scenarios would play out:
Scenario | With margin ($10,000 invested) | Without margin ($5,000 invested) |
|---|---|---|
| Stock rises 5% | Profit: $500 (minus interest) | Profit: $250 |
| Stock falls 5% | Loss: $500 (plus interest) | Loss: $250 |
As you can see, margin doubles both your gains and your losses.
Benefits of using margin
There are three key benefits of buying on margin:
Greater potential returns. Buying on margin increases your buying power, which could potentially increase your returns. If you can invest $10,000 instead of $5,000, and the security you purchase goes up in value, you double your profits.
Flexibility. Buying on margin allows you to move quickly to take advantage of timely market opportunities that you might otherwise miss out on by not having enough cash or liquid assets.
Access to cash. With a margin account, you can withdraw funds against your assets as long as there is available margin to do so. This is similar to a secured line of credit, using your securities as collateral. Withdrawn money is not taxed and interest charged is often tax-deductible.
Risks of buying on margin
On the flip side, there are a few big risks of buying on margin:
Greater potential losses. Buying on margin can open up the potential to lose more money than your initial investment. The same leverage that magnifies your gains can also magnify your losses. If you buy a security and its price falls, you'll still need to repay what you borrowed — whether that's dipping into other savings or finding other means.
Cost of interest. As with any loan, the more you borrow, the more interest you'll have to pay.
Margin calls. If your account falls beneath the maintenance margin, you may receive a margin call. If you don't respond in time, the brokerage can sell some or all of the securities in your account.
Is margin trading for you?
The extra buying power can create opportunity, but the losses can be serious. Margin trading is an investment strategy that should only be used by experienced investors with a high risk tolerance. If you want to begin margin trading, make sure you understand the potential consequences.
Get started with investing
Margin trading isn't for everyone. It adds complexity and risk that many long-term investors simply don't need. If you're just starting out, or prefer a set-it-and-forget-it approach, a standard investment account is likely a better fit.
When you're ready to start investing — with or without margin — consider comparing brokerages based on fees, account features, interest rates on margin, and risk controls before opening an account.
