Buying Stocks on Margin

Buying on margin is an investing strategy in which you borrow money from your broker or bank to buy stocks, bonds, options, or other securities. The idea is that with more money at your disposal, you can buy more stock, helping you to potentially increase your gains. Yet, as you might expect, with higher rewards come much higher risks: you could very likely lose more money than you’re willing to stomach. 

What exactly is buying on margin, how can you start, and what are the risks? Below we’ll break down this high-risk trading technique and see if it’s right for you. 

What is buying on margin?

Buying on margin is simply using borrowed money to buy more stock than you would otherwise be able to do. 

In financial lingo, “margin” refers to what you must deposit with a broker in order to conduct margin trades. Think of margin as a security deposit. In order to borrow money from your broker, you need to put some skin in the game, so to speak. For instance, your broker may require you to put 50% of margin in your account. If you wanted to buy $10,000 of stock, you would have to put $5,000 in your margin account in order for your broker to feel comfortable lending you the other $5,000. 

As an investor, $10,000 may sound far more lucrative than $5,000. But here’s the thing: the stocks you buy with that $10,000 serve as collateral for your $5,000 loan. If your entire holding drops by $5,000, your broker may force you to sell your shares and pay them back. As you can imagine, this is why buying on a margin is a risky strategy, as you could easily lose double what you invested. 

What is an example of buying on margin?

Buying on margin means borrowing money from your broker to purchase more stocks than you could with just your own cash. This strategy can amplify your gains when stock prices rise but can also magnify losses if prices fall. Here’s an example of how it works:

1. Opening the margin position

• You have $5,000 in cash and want to buy $10,000 worth of Stock Y (trading at $50 per share).
• You’re confident the stock will go up, so you open a margin account, deposit your $5,000, and borrow an additional $5,000 from your broker.
• You purchase 200 shares of Stock Y (200 × $50 = $10,000).

2. The stock goes up

• In the first week, Stock Y rises from $50 to $62.50 per share (+25% gain).
• Your holding is now worth $12,500 (200 × $62.50).
• After repaying the $5,000 you borrowed, you walk away with $7,500 total, giving you a $2,500 profit (a 50% return on your original $5,000 investment).

3. The stock crashes

• Instead of selling, you hold on. The company releases poor Q3 earnings, and Stock Y falls to $37.50 per share.
• Your 200 shares are now worth $7,500 (200 × $37.50).
• After repaying your broker’s $5,000 loan, you’re left with just $2,500, meaning you lost half of your original investment.

How do you start buying on margin?

Buying on margin allows you to borrow money from your broker to purchase more stocks than you could with just your own cash. While it can amplify your gains, it also increases your risk of significant losses, so understanding the process is essential before getting started. Here’s a step-by-step guide to opening and using a margin account in Canada.

1. Check if your broker offers margin accounts

Not all brokers allow margin trading, so confirm whether your brokerage supports it. If you don’t already have a broker, look for one that offers competitive interest rates and clear margin trading policies.

2. Apply for a margin account

You’ll need to complete a detailed application to open a margin account. Most brokers will check your credit history to assess whether you’re a responsible borrower. You’ll also be required to sign a consent form acknowledging that you understand the risks involved and that you’re responsible for repaying any borrowed funds.

3. Meet the minimum margin requirement

Once approved, you must deposit a minimum margin (sometimes called the maintenance margin) into your account. This is the minimum equity you must maintain at all times. If your balance falls below this level, your broker may issue a margin call, requiring you to deposit more cash or sell investments to restore the required amount.

4. Understand your borrowing limit

Each broker sets different rules for how much you can borrow and which stocks you can buy on margin. Make sure you understand these restrictions before placing any trades.

5. Review interest rates and costs

Buying on margin isn’t free. Brokers charge interest on borrowed funds which can quickly eat into your profits if you hold positions for long periods. Always factor in interest costs when calculating your potential returns.

6. Start trading with caution

Once everything is set up, you can begin trading on margin. However, be careful—margin trading can amplify losses just as easily as gains. Consider setting stop-loss orders or limiting the amount of borrowed funds you use to reduce risk.

What are the pros of buying on margin?

Buying on margin offers several benefits, primarily by increasing your purchasing power and allowing you to amplify returns. However, it is best suited for short-term trades due to the interest costs involved.

1. Increased buying power

The greatest benefit of margin trading is its ability to boost your buying power. Instead of being limited to the cash in your account, you can borrow funds from your broker to purchase more shares. In Canada, most brokers allow you to borrow 50% to 70% of a security’s price.

For example, if a stock trades at $50 per share, you could borrow between $25 and $35 per share, enabling you to buy nearly twice as many shares as you could with cash alone.

2. Leverage for higher potential returns

Margin trading uses leverage, which means small price increases can lead to larger percentage gains on your original investment. For instance, if a stock rises 10%, your gains could be magnified to 20% or more, depending on how much you borrowed.

3. Best for short-term trading opportunities

Margin trading works best for short-term trades where you expect quick price movements. The shorter you hold the position, the less interest you’ll pay to your broker, keeping more of your profits.

4. Flexibility in market opportunities

Having access to borrowed funds allows you to act quickly on opportunities without waiting to add more cash to your account. This can be advantageous in volatile markets where timing is crucial.

What are the risks of buying on margin?

Before you get your hopes up, we’ll be straightforward with you. Buying on margin is extremely hard to do well, let alone do enough to make extraordinary gains. In fact, when you factor in money lost to interest, the odds of getting rich are fairly low. 

Before you open a margin account, here are some common risks you should be aware of. 

1.Major losses  

Whenever you invest in securities, whether stocks, bonds, or even cryptocurrency, you also run the risk of losing money. But with traditional stock investing you can only lose what you initially invest — and never more. If your stock’s company goes bankrupt, your holding will go to zero. But under no circumstance will your broker ask you to pay more than what you invested. 

With margin trading you can lose more than you originally invested. Let’s take our example from above: you invest $5,000 of your own money in Stock Y, along with $5,000 borrowed from your broker, for a total of $10,000. All it takes is a 50% hit on Stock Y’s value, and you instantly lose 100% of your original investment ($5,000). On top of that, you still have to pay your broker the remaining $5,000. Factor in interest rates and fees, and you can see how margin trading can result in major losses. 

2. Margin calls 

Recall that every margin account has a built-in minimum called the maintenance margin. At any given time, your margin account must have at least the maintenance, and no — that doesn’t include the money you borrowed from your broker. 

When your margin account falls below the minimum threshold, your broker will issue a margin call. This call forces you to add more funds to your account or sell some of your investments to cover the difference. 

For example, let’s say you buy shares of Stock Y with $5,000 of your own money and $5,000 on the margin. Let’s also say your account has a maintenance margin of $2,000. If the value of your Stock Y holding falls by 31%, you’d be left with $6,900. Your broker will always subtract the borrowed amount by the value of your holding to decide if you still meet the minimum. In this case, you’re below the minimum ($6,900 – $5,000), and your broker will issue a margin call. 

As you can see, this is where the margin game gets serious. If you add more funds, and Stock Y continues to fall, you’ll lose more money. On top of that, you still have to pay your broker back. 

3. Interest

When you buy on margin, you’re essentially taking out a loan through your brokerage. And, like other loans, you’ll pay an interest rate for every day you don’t pay your loan back. 

The exact interest rates on margin trades depends on the brokerage. Occasionally, brokers will give you lower interest rates if you trade at high volume. But don’t expect a favor — interest rates on margin trading aren’t typically generous.

The biggest risk with interest rates is that they will cut your gains by a significant amount. If your broker charges an 8% margin interest rate on $5,000, for instance, you’ll pay $400 each day. Unless you make more than that on your first day, the interest charges could easily outweigh the gains. 

Should you buy on margin?

First off, if you’re a beginning investor, you should think twice before engaging in margin trading. Spend some time learning the basics of investing, such as how to judge good quality stocks as well as how to diversify your portfolio, before you graduate to more advanced techniques. 

If you think you’re up for the challenge, take a step back and gauge your risk tolerance. Buying on margin is an extremely risky investing strategy, and it’s done well in the hands of someone who doesn’t react strongly to market volatility. If your risk tolerance is moderate or low, it might not be right for you. 

You should also have a significant amount of money to play with. If you have a well-rounded investment portfolio, with holdings in numerous companies across different sectors and countries, and you think you’re set to retire the way you want, you may want to try your hand at margin trading. On other hand, if you’re thinking about using a significant portion of your investment money as collateral in a margin account, you could be setting yourself up for a hard loss. 

FAQs of buying on margin

How long do you have to pay back margin?

There’s no fixed repayment date for margin loans. You can keep the borrowed funds as long as you maintain the required margin level in your account. However, interest accrues daily, so holding the loan longer increases your borrowing costs.

How long can you keep a stock on margin?

You can hold a stock on margin indefinitely, provided you meet the broker’s maintenance margin requirements. If your equity falls below this level, you may face a margin call, forcing you to deposit more funds or sell shares.

Can I withdraw my margin?

Yes, you can withdraw available margin (borrowed funds or excess equity) if you have sufficient collateral in your account. However, doing so increases your loan balance and interest charges, and it may bring you closer to a margin call if stock prices drop.