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. 🙂
- How to Open an IB Account
- How to transfer funds between your bank and IB
- How margin accounts work with IB
- How to enter a stock trade
- 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. 🙂 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.