Hey guys,
today we're talking about the difference between a margin account and a cash
account and I mean who doesn't like margins and who doesn't like cash?
Am I right? I'm Rob Tétrault from robtetrault.com,
Head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth
Management. And if you like what you see here folks, give us a follow,
give us your comments, we'd love to hear from you.
And if you want to chat with me, go to www.speaktorob.com,
you can book a no obligation consultation right there.
We'd love to hear from you. So a cash account and the margin account.
First of all, these are non-registered accounts,
so this is different than obviously a registered account.
What is a registered account? That would be an RRSP, a RIF,
a LIRA. I should probably define those acronyms.
A Registered Retirement Savings Plan. The RIF is the Registered Income Fund.
The LIRA is the Locked-In Retirement Account.
These are all pension type accounts where you've invested over time year by year
and you will be drawing down on this in retirement. Your LIF is also one.
And then you also have the TFSA, which is the tax free savings account.
Those are all traditionally defined as registered accounts.
There are typically tax consequences involved with either drawing down on them
or contributing to them, etc. The cash and the margin account.
These are non-registered accounts. So the main difference for you, first of all,
is there's no tax benefit whatsoever to contribute to that account.
There's also no tax consequences when you're pulling the money out of the
account.
Now that doesn't mean that when you're pulling money out of the account,
you're not going to have to sell an asset class,
which would generate potentially a capital gain. So the key difference...
we'll call them taxable accounts,
so the margin in the cash account or taxable accounts,
meaning that the income that is being generated in those accounts is taxable
income.
If you're getting interest income that's taxed at the highest tax bracket,
it gets added to your T4 income.
If you're getting dividend income from a Canadian eligible dividend,
you get a dividend tax credit. If you're getting a capital gain,
well then you're paying tax on half of the amount of the capital gain.
And finally, if you're getting return on capital,
you're not being taxed in the year it's received.
You're deferring that capital for the future.
So those are generally the four types of taxable consequences that you receive
in your two accounts. Now,
what is the actual difference between a margin and a cash account?
So in a cash account,
the key factor is that you must at all times have enough cash in the account to
meet the requirements of the stocks and securities you are purchasing.
In other words,
you cannot borrow ever any amount of money to purchase securities in your cash
account. If you have $100,000 in your cash account,
you can purchase $100,000 of securities, not a dollar more.
So there is no lending that's going on.
And if ever you were to accidentally buy more than a hundred thousand dollars,
stocks will settle a few days after you buy them.
Stocks or bonds will settle a few days after you actually purchase them in the
market.
And you would immediately be asked to either deposit more money depending on the
institution,
or they would actually sell those assets for you on the margin account.
You automatically,
at all financial institutions that have given you a margin account,
you automatically have access to what's called margin.
Margin is a loan on your investments.
So if you own assets that are defined as marginable,
then you can borrow money from your margin investment account.
You can borrow the money in two ways. You can take the money out,
put it in your checking account and spend it on a trip or spend it on a new
roof. Or you can actually borrow,
leave it in your investment account and purchase more securities,
purchase more stocks, or more bonds, or more alternative assets.
So both of those can be done. Now, first of all,
I'm not a fan of borrowing off your investment portfolio to fund a trip or to
fund something on a discretionary basis.
I just don't think that's prudent and I think you should strongly reconsider
that. But if you know, for some people it does make sense to borrow,
to invest. A couple of reasons why you would consider it.
It's definitely not for everyone and you definitely need to make sure you
understand the risks that entail this, the leveraging.
But for some people you get the benefit of writing off the interest that you're
paying on that loan. So you're borrowing money.
The institution where you deal with will lend you money usually at a less
favorable rate than you could get at the bank or at a credit union.
But you're borrowing money. You then use that money.
You could write off that interest provided you're using it to invest further.
For some people that make sense. And the reasoning is this,
if you can generate more returns than you're paying interest,
then you're actually ahead.
You're using someone else's money to generate income for you. But again,
you need to understand what that entails. But in a margin account, the big risk,
the big kind of term that people have heard is the world famous margin call.
You get a margin call. And what's a margin call?
A margin call is a situation where you have borrowed to invest.
Your securities have dropped in value.
Those securities are marked to market every single day.
They are given a value and if the loan that you have exceeds the allowable
margin on the securities that you have, you get a margin call,
which means you need to either deposit more money in your account or you need to
start selling securities.
A lot of people have been wiped out in the history of investing with respect to
improper use of margin and setting up over leveraging and using margin too much
basically. So be extremely careful about that. Today,
we talked about the difference between a margin and a cash account.
If this is confusing for you or you'd like to learn more about it,
you want to speak to Rob, go to www.speaktorob.com,
I'd love to book a no obligation consultation.
So what you're doing on a margin account, some of you might be saying,
do I have to borrow to invest? Must I invest on margin? Absolutely not.
Most institutions, what they will do... most of them do not open cash accounts.
Most of them will open automatically for you a margin account and it's there
should you ever want it.
If you have $100,000 and you own blue chip securities and they're all blue chip
securities, you could generally leverage up to, you know,
50 to 70% of those securities. That means you could borrow that money.
You don't have to, but it's there for you should you ever need it.
So most institutions will automatically set that up for you.
It's another kind of source of capital for you should you need it in the future
and it's there whenever you may or may not need it. Cash account,
you can only buy the amount of securities you have. Margin account,
you have margin, which is a loan on the securities you have.
Remember not all securities are equally marginable.
Some are marginable at 70% of their value. Some,
such as bonds and fixed income and term deposits are marginable at 90% of their
value. Some are marginable at 50% and some the smaller stocks,
the ones that kind of don't trade on a major exchange or some of the
alternatives, you get zero margin on them.
So they will not lend you anything on those stocks.
So if you are borrowing to invest it's important for you to consider those
things, consider how that makes a difference in your margin amount,
if anything at all. Thanks for tuning in guys. Again,
go to www.speaktorob.com if you'd like to chat with me about this.
I'm Rob Tétrault from robtetrault.com.
Head of the Tétrault Wealth Advisory Group here at Canaccord Genuity Wealth
Management. Thanks for tuning in.