Lower Cost with Interactive Brokers
Everyone likes a discount, especially personal finance enthusiasts. We tend to get hyped over even marginal deals. 😀
Speaking of margin-al discounts. I recently lowered my stock margin rate from 4.45% to just 1.95%. Hot damn! It’s even lower than my mortgage now, haha. 😁
One of the best things investors can do to increase our net returns is to reduce the cost of investing. When it comes to leverage, or borrowing money to invest, the best way to reduce our cost is to find a broker which charges the lowest interest rates. 🙂
In the past I have held my margin account with TD Direct Investing. The current interest rate they offer is 4.25% or 4.75% per year, depending on which currency investors borrow in.
Although TD’s rates are already competitive relative to the other large banks in Canada, it is not the lowest. After doing some research online I’ve discovered that a U.S. based brokerage firm called Interactive Brokers offers the lowest margin rates, and has cheap trading commissions. So I recently transferred my entire margin portfolio from TD to IB to reap the benefits of lower cost borrowing. 🙂
Interactive Brokers Advantages
Here are 4 reasons why I switched to IB.
- Reduced margin rates for more cost-effective leverage. I currently have about $54,000 of margin debt. I was paying on average 4.45% a year for this massive loan with TD. But with Interactive Brokers I’m now paying only 1.95% on average because I have both US and Canadian dollars. This represents a difference of 2.50% between the two brokers, which translates into $1,350 of interest rate savings every year! 😀 “BM” in the table below refers to the benchmark rate set by Central Banks.
- Cheaper trading commissions. TD and many other brokers charge a flat fee of $9.99 per trade when buying stocks. But IB charges 0.5 cent per share for U.S. accounts, and 1 cent per share for Canadian stocks. The minimum cost per transaction is $1. For example if I buy 200 Shares of BMO (Bank of Montreal) shares, then my total commission would be $2.00 CDN. My trades are typically worth between $1,000 to $3,000. This means I rarely buy more than a few hundred shares of anything because most companies I prefer to own are dividend growth stocks, which tends to be priced at $20 per share or higher.
- Access to global markets. This isn’t a big deal for most people, but for more advanced investors Interactive Brokers allows trading in foreign currencies outside of North America. This means we can buy European stocks in Euros, or Australian stocks directly from the ASX using Aussie money. 🙂 TD used to have a platform that lets Canadians like myself trade internationally, but they cancelled that service last year. 🙁 I’ve mentioned in a previous post, that I want to diversify into other countries and there could be some good opportunities in the U.K. after the Brexit event earlier this year. So having access to a global trading platform is important for my financial goals. 😉
- Great for options trading. $0.70 per contract; $1 minimum order; volume discount available. And in the unlikely chance that our open options are exercised or assigned, there is $0 assignment fee, unlike $43 for TD or BMO.
Disadvantages of IB
Here are a couple drawbacks with IB.
- Penalty for not being an active trader. If investors do not spend at least $10 in commissions per month, we will be charged the difference. Furthermore, there’s a $10 fee for real-time quotes each month which is waived if at least $30 in commissions is spent. I typically trade once or twice a month so I will be paying these fees.
- $10,000 USD minimum balance to open up an account. This isn’t an issue for me, but some investors might have trouble coming up with $10K.
Overall I would say IB is a better choice for myself when it comes to margin trading. Hands down it has the lowest margin rates, even compared to other U.S. brokerages. Plus the more money investors deposit into their accounts, the cheaper the borrowing cost will be due to the tiered margin system that most brokers have.
When all things are considered I am looking at saving about $1,200 a year in net fees by transferring my TD margin account to IB. Not bad. 🙂 I should’ve done this sooner.
The online user interface of IB is a bit different than many Canadian brokers. Here’s a look at my new Interactive Broker account.
As we can see, I currently have about $137K of stock holdings and have borrowed about $54K, which gives me a leverage ratio of 1.64. This means for every $1.00 of stock equity, I’m borrowing $0.64 from IB at roughly 2% annual interest rate. The highest leverage rate I’m allowed to have is about 3.00 before I get a margin call. Since I’m only at 1.64 right now, I still have quite a bit of room to maneuver. 🙂
The platform is clearly geared towards more experienced traders. The user interface takes some time to get use to. There are tons of features, graphs, reports, and data to play around with. Here’s a rough look at some of the other tools IB has.
I would say IB’s learning curve is more steep than using something else like Questrade or RBC.
Interactive Brokers has been consistently rated as a top broker by Barron’s for 6 years in a row. But it’s not very well known. The Globe and Mail compares and reviews different discount brokerages every year and ranks them. But for some reason it doesn’t include Interactive Brokers in its list. Oh well. I guess it’s up to bloggers to talk about things the mainstream media won’t. 😏
I’ve only covered the basics here today but there are many more advanced features, rules, additional costs, tools, and details about this discount broker. I paid $135 to TD to transfer out my margin account. Everyone should do their own research about brokerage companies. My TFSA, RRSP, and cash trading accounts are still with TD. I’ve only moved my margin accounts to IB. Anyway, I think IB does a good job of pairing all the trading features I want with low commissions and borrowing costs. I don’t think it’s the right platform for everyone, but I would recommend looking into it, especially for margin investors. 🙂
Random Useless Fact:
CNN reports that Americans spend more than 10 hours a day looking at screens.