Margin investing involves borrowing money from a broker to buy securities.
Margin investing is a respectable investing strategy, but it carries more than the usual amount of risk.
The main cost involved with buying on margin is the interest on the money you borrow. Plus, when you sell a security that you’ve bought on margin, you must first pay back the loan from your broker.
Interest rates remain low in margin investing. That does add to the appeal of buying stocks on margin.
However, a big concern with buying stocks on margin is that it increases your leverage. Leverage works two ways: It magnifies your profits when the market moves in your favour, but it magnifies your losses just as surely when the market moves against you. That’s because the amount you owe on your investment loan stays the same, so every dollar lost in your portfolio comes straight out of your equity.
When you buy on margin, you’ll be able to write off your margin interest in full against ordinary income in the current year. However, you’ll pay less than ordinary income tax rates on dividends from Canadian stocks, thanks to the dividend tax credit.
Due to its increased risk, buying stocks on margin is certainly not for everyone. We continue to recommend that if you are going to use margin to invest, it’s all the more important to stick with our three-part investing strategy.
At TSI Network, we recommend using our three-part Successful Investor philosophy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Here are some key tips to help you zero in on the best stock buying strategy for successful investors
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When buying stocks on margin, you’re essentially borrowing money from your broker to buy securities.
Understandably, the main cost involved in buying stocks that way is the interest you pay. Plus, when you sell a security that you’ve bought on margin, you must first pay back the… Read More
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From time to time, investors ask whether they should buy stocks “on margin.” That is, whether they should borrow money from their brokers to buy securities. This is a respectable investing strategy, but it carries more than the usual amount of risk.
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