A margin account is a brokerage account which allows you to borrow money against the investments in your account.
Let’s say you purchase stock in a margin account. As the buyer, you pay a portion of the purchase price and the broker lends you the difference. You pay interest on the broker’s loan and it holds the security as collateral. Any income or interest earned in your account may be used to help offset the cost of borrowing.
The portion of the purchase price that you pay depends on the security. To learn more, see Eligible Securities and Applicable Margin .
The outstanding loan value is initially determined using the purchase price of the security. However, from that point on, the outstanding loan value is generally based on the market. This means that every day, as the value of your holdings and cash balance change in your margin account, the amount you are able to borrow against them will vary.
In a favourable (bull) market, this can be an effective strategy—but it can work against you in an unfavourable (bear) market. We explain more below:
Depending on daily market fluctuations, your account may either be in a “margin call,” or margin excess (available credit) position. If the loan value, based on current market price, is less than the loan value extended to you when you purchased the stock (i.e. the stock price has dropped), you could be faced with a margin call. This is when a brokerage requires you to put up more cash against the loan to bring your account back to a margin excess position. You may need to place a sell order, deposit money or transfer in margin-eligible securities. On the upside, if the loan value is more now than at purchase (i.e. the stock price has risen), your account may have excess margin, which you can use for other purposes (to purchase more stock, for example).
Example: Let’s say you had $10,000 cash in your margin account and used it to buy a Canadian stock that requires a 50% margin. Using your cash and a $10,000 investment loan, you can buy $20,000 worth of the stock. The following table shows what happens to your margin position if the stock price changes.
Change in Stock Price
Up 10%
Down 10%
Market Value