My non-registered investment portfolio with Questrade is called a margin account. I don’t actually use the margin in that margin account, though. Kind of funny, this is kind of like opposite thinking- the margin account is called a margin account but you shouldn’t use the margin. The TFSA is called a Tax Free Savings Account but you shouldn’t use it as a savings account. With the margin account it is somewhat tempting to use margin but I’d rather not and just invest with my own cash to invest. I will admit that I have used margin in the past though- more on that later.
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In a nutshell, a margin account is an account where you can borrow money from your investment brokerage to be able to afford more stocks (and buy more shares) than you would normally afford. I’m not sure what they are called with other online brokerages, but my non-registered account (e.g. not my registered TFSA or my RRSP account) is called a margin account.
How Does Margin Work and Which Accounts Can Be Under Margin?
Basically, when you use your Questrade margin account you have the option of borrowing against your current investments. The amount that you can borrow is determined by the IIROC, or the Investment Industry Regulation Organization of Canada. The amount varies for the share price- if you are using margin to buy cheap stocks, like penny stocks, you can borrow more on margin. For stocks that are more than $2 for the share price, the maximum loan value is 50%. For stocks that are less than $2, the maximum loan value decreases.
For example, in my margin account, my maintenance excess is high. I can borrow or leverage the current equity and cash in my margin account by 60%. Let’s say my margin account had $100,000 in equity and cash, my maintenance excess is $258,000. The maintenance excess is how much excess margin I have in my account.
You cannot use margin or borrow against your investments with a registered account in Canada, like for example the RRSP and the TFSA. However, Questrade has something called Margin Power and you can use your TFSA (not as margin) but when you connect the two you have more buying power.
How Much Interest Does Borrowing on Margin Charge?
For the Questrade margin account, the fees for margin is prime + 3.5% (for a non-registered account) on balances under $100,000 and for balances over $100,000 the fees for borrowing on margin are prime + 2.5%. This is pretty expensive since that works out to be over 6% to borrow to invest! People are having a hard time even making 6% per annum on their investments especially in 2018 so when you the 6% to ‘beat’ that’s pretty hard.
The interest may be tax deductible, as per details on Line 221 on the Canada Revenue Agency website.
Can claim most interest you pay on money you borrow for investment purposes, but generally only if you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.
Here is the chart of Questrade fees associated with using margin. The interest is charged daily and paid by mid month.
The Risks With Using Margin
There are many risks with using margin, which is why I haven’t touched the margin available on my Questrade margin account.
The big risk with using margin is that you could have a major paper loss in your investments, and you still have to return the debt on your margin and interest. You will still have the keep the proper proportion of margin available otherwise you could get a margin call, and then your brokerage will automatically sell some of your investments and realize your losses.
The other risk, is that the interest rate is linked to the prime rate, and so your interest rate, or the cost to borrow. Obviously, the cost of investing will go up- you will have to pay interest on your margin account in addition to the trading fees or commissions that you’re already paying.
My Experience with Questrade Margin
Back in my crazy investing days in my 20’s where I learned my fair share of investing lessons, I didn’t have enough money to invest (or my cash balance was accidentally close to zero) or do my day trading.
I did use my margin account with Questrade. It just looked so easy and the Questrade fees weren’t very obvious, so I really don’t know how much I actually spent on these fees, though they were limited in duration since the trade would go through and I wasn’t holding the stock for very long, maybe a few days at most.
That’s how disorganized when I first started investing. Since those early days, I have definitely have learned my lesson and transcended this preliminary stage of investing. Now I just index invest mainly with VXC.
A Better Margin Alternative?
Obviously the better margin alternative is having cash on hand to invest! Cash is king, remember?
“Only when the tide goes out do you discover who’s been swimming naked.”
— Warren Buffett
Leverage is risky but some people use it to their advantage. Instead of using margin from your brokerage, a better margin alternative might be to use the Smith Maneuver where the interest rate will be lower than the one charged by your investment broker in a margin account.
The Smith Maneuver, in a nut shell, is when you use your home equity and borrow against it (e.g. using your HELOC) to fund your non-registered account. For example, the RBC Homeline Plan (which I have but haven’t tapped into, it’s nice to know it’s there) is Prime Rate + 0.5%, which is better than the fees that Questrade charges for their margin account which is Prime + 2.50-3.5%. The Prime Rate in Canada is 3.95% at the time of writing.
So that’s 4.45% of interest vs 7.45% of interest to borrow to invest. Hmmmm which one seems more palatable?
The interest paid from borrowing to invest is tax deductible. Frugal Trader from Million Dollar Journey has a great ‘how to’ on what a Smith Maneuver is and how to use it to your advantage to build wealth.
For me, I still have not dabbled with it and feel uncomfortable with it given the rising interest rate environment we have right now so I’m not planning to use my Questrade margin account to its “full potential”. I have definitely thought about it though, and even wrote a post on whether I should borrow to invest in a bear market.
However, it has seemed to work well for a lot of investors in Canada and is a form of tax efficient investing.
If you’re interested in setting up a Questrade margin account, you can sign up through this link and get $50 in free trades.
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Have you touched your margin account?
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