Everything you need to know about owning a margin account

Investing is hard enough, investing in a margin account is something I do, but it's not something that is recommended or that I recommend. Derek Foster doesn't recommend investing on borrowed money either, he also said so during his speech at his latest MoneyShow conference. I don't recommend you have a margin account link to your non-register broker account, and you'll understand why with what comes next. I often write about my margin account, so you already know the drill.

Personally, I don't mind having a margin account, it actually gave me the leverage I needed back in the time, which is several years ago, and I don't think that I would now have a net worth in the $200 000 without it. But that being said, I wouldn't recommend opening a margin account now, with this current really bad economic environment, and I wouldn't recommend either way to invest using borrowed money, even if it's what I still do from time to time.

Holding on to a margin account comes with high risks. Personally, I follow the stock market every business day. A margin account contains two important numbers: the first number is a minus number that contains all the money you had borrowed using your margin. That number is static and will only move whenever you borrow money from your margin account. That static number that represents your debt is not exactly static because unfortunately, that debt will increase on a monthly basis upon reception of the interest earned on the borrowed money.

The amount that you have at your disposal to borrow is base on the value of your portfolio. While borrowing money from your margin account to invest or to do whatever else with the money, it's of a wise advise to recommend not to use all of the money that is at your disposal. Actually, it's better to simply borrow as little as possible and the real best is not to invest at all using a margin account. The best is really not to have a margin account at all. The reason behind this is simple: the amount you have at your disposal to borrow on a margin account is directly linked to the value of the different stocks that you hold in your non-registered portfolio, and that value vary every single business day when the stock market is open. You can only have a margin account with non-registered portfolio, which can be in US and Canadian dollars. I actually have a margin account in my US non-registered portfolio, but I never use it, and I plan to never ever use it.  A Canadian margin account is risky enough, imagine now in US dollars! Because US dollars worth more than Canadian ones, it would be an extra risk to take. I already have enough on my plate in terms of risks.

The second number that is really important while dealing with a margin account, after the minus number that contains the amount of money that is borrowed, is the amount (and that one is positive +) of money that you have left at your disposal to invest. For example, in my current situation, my margin debt is of -46 000$, and the amount of money left at my disposal to invest using my margin is around $15 000. That positive amount is what is being left, what remains at your disposal varies on each and every single trading day, depending on the value of your portfolio.

And the value of my portfolio is directly link to each and single stocks that I hold in my non-registered portfolio. Each stock has it's own margin value, which can represent, for the best stocks, 70% of the stock value. Let say that I have a $1 000 invested in X stock which has a margin value of 70%, that specific stock brings on a $700 in buying power - which represents the margin account on itself. Of course, and we know that for sure, a $1 000 that is invested in a stock won't remain at a $1 000 value. That value could go up or down, depending on the stock market situation, and depending on the situation for the stock itself. All of those ups and downs are being defined as a splendid word: volatility. 

Another great thing to know is that the margin value that each stock owns is being determined by the broker, and is subject to be change. Usually, good quality stocks equal a good margin value, which is generally in the 70%, but that value is subject to be changed from time to time by the broker. The broker published updates from time to time, when margin value change for stocks.

For all of those reasons, you shouldn't do like me, you shouldn't borrow money on a margin account to invest, to be used as a banking account or to pay down other debts. And yes, I did all of the above.