Recently, I heard that when you buy U.S. stocks with Canadian money in a Questrade account, they actually make a loan of the U.S. dollar amount you bought even if you have enough money to do the conversion.
Interest will then be charged as long as you keep that loan and you could get a surprise a year later when you sell the stock.
The reason it's not automatic is that Questrade doesn't want to force you to convert in margin accounts at the time of buying the stock. What if you bought a US stock today and the exchange rate happened to be very unfavorable (due to whatever), wouldn't you rather wait a few days to exchange the funds rather than lose on conversion right away?
In my opinion, Questrade is doing you a favor by letting you convert at your own convenience.
I personally spoke with a Questrade agent about my question. To make a long story short: in a margin account, you are automatically issued a loan when buying U.S. stock with a Canadian money. Whereas, in a registered account (e.g. RRSP), the amount is converted on your behalf to cover the debit balance.
Me:
What happens if I open an account and I place an order for U.S. stocks with Canadian money? Is the amount converted at the time of transfer? How does that work?
Agent:
In a margin account, you are automatically issued a loan for a currency you do not have, however, if you have enough buying power, it will go through. The interest on the overnight balance is calculated daily and is charged on a monthly basis. We do not convert funds automatically in a margin account because you can have a debit cash balance.
Agent:
In a registered account, the Canada Revenue Agency does not allow a debit balance and therefore, we must convert your funds on your behalf to cover the debit balance if possible. We convert automatically overnight for a registered account.
Agent:
For example, if you buy U.S. equity you will need USD to buy it, and if you only have CAD, we will loan you USD to cover for that transaction. For example, if you had only $100 CAD and then wanted to buy U.S. stock worth $100 USD, then we will loan you $100 USD to purchase the stock. In a margin account we will not convert the funds automatically. Therefore, you will remain to have a $100 CAD credit and a $100 USD debit balance (or a loan) in your account.
Me:
I see, it means the longer I keep the stock, the higher interest will be?
Agent:
Well, yes, however, in a registered account there will be not be any interest since we convert your funds, but in a margin account, there will be interest until the debit balance is covered, or you can manually convert your funds by contacting us.
I don't believe from reading the responses above that Questrade is doing anything 'original' or 'different' much less 'bad'.
In RRSPs you are not allowed to go into debt. So the costs of all trades must be covered. If there is not enough USD to pay the bill then enough CAD is converted to do so. What else would anyone expect?
How margin accounts work depends on whether the broker sets up different accounts for different currencies. Some do, some don't. The whole point of using 'margin' is to buy securities when you don't have the cash to cover the cost. The result is a 'short' position in the cash. Short positions accrue interest expense which is added to the balance once a month. Every broker does this.
If you buy a US stock in a USD account without the cash to cover it, you will end up with USD margin debt. If you buy US stock in an account that co-mingles both USD and CAD assets and cash, then there will be options during the trade asking if you want to settle in USD or CAD. If you settle in CAD then obviously the broker will convert the necessary CAD funds to pay for it. If you settle in US funds, but there is no USD cash in the account, then again, you have created a short position in USD.
