Oct 312016

Last month I blogged about opening up a new Interactive Brokers account to invest in stocks. I’ve received some reader’s questions since then. So in today’s follow-up post,¬†I’d like to discuss the following topics. ūüôā

  1. How to Open an IB Account
  2. How to transfer funds between your bank and IB
  3. How margin accounts work with IB
  4. How to enter a stock trade
  5. Overall thoughts and Review of Interactive Brokers

1) How to Open an Interactive Brokers Account

To begin the process of creating an¬†IB account, go to¬†https://www.interactivebrokers.com and choose the “OPEN ACCOUNT” option near the top right of the¬†page. Then follow the online instructions.


Sometimes Interactive Brokers may need to verify your identity before you can start using its service. This means you’ll have to take your ID to an accredited professional such as an accountant or doctor and get them to guarantee your identity. This happened to me. So I took my Driver’s License to a notary public and paid $35 to verify my identity. This extra security measure¬†makes it more difficult for criminals to open fake trading accounts under someone else’s name.

2) Transferring Funds to Your IB Account

There are 2 ways to deposit funds into an IB account.

  • Fund Transfers. Use this to deposit cash¬†into the account.
  • Position Transfers.¬†Use this to transfer your current¬†stocks & balance from an existing account at another brokerage to IB.

For example, in my case I used the Position Transfer method because I wanted to move my existing stocks from TD to IB. Make sure to choose¬†the correct settings when creating the transfer instructions. For the transfer method, choose¬†ATON if you are transferring from a Canadian broker like TD. For the transfer type choose “Full” rather than “Partial” if you want to make a complete switch like I did.¬†Choose the correct institution and your account number that the portfolio will be transferred from.


I noticed that TD Direct Investing breaks up Canadian and U.S. margin accounts. So I had to put in 2 separate transfer orders; one for my $CAD account, and another one for my $USD account. If both instructions are not entered around the same time then TD will reject the transfer instructions because the pair of accounts must move together. Transferring funds from TD to Interactive Brokers will take about 1 week. TD charges a $135 fee for closing an account, which will happen automatically once all the funds have transferred out.

Getting money out from your IB account is more straightforward. ¬†ūüôā Just use the Fund Transfers option again. But this time, choose to withdraw funds, and select the¬†currency. Then choose¬†a method such as Electronic Funds Transfer.


Then enter your bank’s information like its transit and inst. number, as well as your personal account number. After a few business days the money will¬†deposit¬†into the bank account of your choice. The deposit description at your bank¬†will say something like “INTERACTIVE BRO MSP.”

3) Using Margin Inside an IB Account

Interactive Brokers allows traders to buy stocks on margin. This means you can borrow money to buy stocks using your existing holdings as collateral. In the past I’ve described how margin accounts work, and walked through how to execute a trade on margin, so I won’t¬†go into that¬†here. This section will be specific to using margin with IB.

Interactive Brokers calculates margin based on Regulation T for US accounts, and CDN margin rules for Canadian accounts. The maintenance margin is¬†the amount of equity which must be maintained in order to continue holding a position. If this number is too low then traders will risk getting a margin call.¬†The actual calculations for the maintenance margin requirement depends on a number of different factors. So the effective maintenance margin¬†is often within a range between 30% to 40% depending on the makeup of your¬†securities. In my case it’s about 35%. This means that at least 35% of my stock holdings have to be covered by my own money. In other words IB will lend me no more than 65% of the value of my portfolio.

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May 152014

I just sold my first covered call this morning ūüôā The proceed was deposited into my trading account and I am now $68.76 richer, yippee! I should do this more often (^_^)


What does it mean to sell (or write) a covered call option?

A “call option” is a contract between a buyer and a seller where the buyer has the option (but not the obligation) to purchase¬†stocks¬†from the¬†seller¬†at a set (strike) price, within a certain time period. If the option is “covered,” like in today’s example, then that means the seller already has the underlying stocks. Therefore, selling a covered call simply means¬†giving someone else the option to buy your stocks for an agreed upon price point. Since you are potentially giving away a part of the stock’s future gain the buyer has to pay you money ūüėÄ (called the premium)

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Apr 092012

If you’re not familiar with how margin accounts work, you can read this other post first. We’ve already seen how a margin account is similar to getting a mortgage or a home equity loan (HELOC.)¬†Today we’ll discuss margin loans and how to avoid a margin call.

A conventional mortgage requires a 20% down payment which means the bank is willing to give out 80% loans. Why 80% and not 60% or 100%? Because a 60% loan doesn’t make them as much money and 100% is simply too risky. It’s not practical for people to buy homes with 0% down. What if the home’s value drops and the buyer walks away? Margin accounts work in a similar way. Lending is based on the risk that banks are willing to take.¬†So how much money can we borrow in a margin account? ¬†The actual answer is it depends on what stocks we buy. Some stocks are relatively safe, but others are extremely risky. So banks have organized stocks into a few different lending groups. The safest, defensive group will have a 70% lending value. More risky companies will get a 50% or lower lending value, and for the really risky companies, 0%, (ie: we can’t use any margin money to buy them.) Stocks are always moving so sometimes a company’s lending value will change from one group another, but the bank will notify their clients if this happens. Each bank should have a list of stocks and their respective lending values.

If it’s risky for the banks to lend us money to speculate on stocks, then why do they even offer this service in the first place ŗ≤†_ŗ≤įŗ≥É ? The reason is the same for why banks give people mortgages. For us, a margin account is a way we can use leverage to increase our profits in the stock market. But for banks, a margin account is a debt instrument they use to earn recurring¬†interest. If we buy stocks using more money than what we deposited in our margin accounts we have to pay monthly interest to the bank on however much money we’ve borrowed. So banks want to make money, but they have to be careful not to take on too much risk. Just like a mortgage, banks don’t care if the price of our stocks (or homes) appreciate or not. They only make money on the interest from lending us money.

The amount of available margin money we can borrow fluctuates everyday because its based on the market value of the shares we hold. If we have¬†$100,000 worth of stocks today with a 70% lending value then our available margin is $70,000. But if the market value of our stocks dropped to $90,000, then the bank can’t lend us $70,000 anymore because $70,000 of a $90,000 asset is 78%. That’s higher than 70%, which means too much risk. So at $90,000 our margin amount changes to $63,000. So we should never max out our margin usage in case our portfolio losses value. As soon as the lending amount crosses over 70% we would get a call like the following “hello, this is your broker, could you please put more money into your account or sell some stocks to bring the lending amount back down to 70% or below.” If we ignore this¬†margin call and don’t take any action, then the broker will sell our stocks for us because if we leave the country and our stock goes to zero, then they are on the hook for that $70,000. Selling our stocks is how banks and brokerages protect themselves.

The way I like to use margin accounts is to buy stocks on margin but not borrow so much that I’ll risk getting a margin call. So if the maximum I can borrow is 70% of my holdings then I’ll only borrow up to 40% or 50% so I have some extra margin wiggle room. Later this week, I’ll walk through a recent transaction in my margin account¬†(„āú‚ąÄ„āú)


conventional mortgage¬†– a mortgage that isn’t more than 80% of the purchase price of a home.
lending value¬†– this is the “up to” amount. 70% means a maximum lending ratio of 70% but we can borrow less if we want to. Note: US and Canadian lending values are different due to separate regulatory bodies. A list of 70% lending value Canadian companies can be downloaded here (PDF.)
margin call РWhen the broker demands the investor deposit more cash into their account to cover possible losses. Investors can also sell their existing shares which will increase the cash amount in their accounts. Either way, the point is to decrease the lending value back to a safe amount.