Interactive Brokers Review – Online Brokerage Platform

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. 🙂

1. How to Open an IB Account
2. How to transfer funds between TD and Interactive Brokers
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.  🙂 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.

Logging into my IB account, I can see the following basic information about my account. Let’s go through what some of these numbers mean.

Under “Balances (CAD)” my Equity is $80,744.01. This represents my net present value (total assets – total liabilities.) The Cash value of -$60,004.22 is negative and represents the money I’m currently borrowing from IB on margin. The difference of these two numbers is $140,748.23, which represents the total value of stocks I hold in my account.

Under “Current Margin Requirements (CAD)” the Maintenance is how much margin room I have remaining before getting a margin call. It is currently at $45,358.49. But this number will decrease when my stocks lose value, or increase when my stocks appreciate. When the maintenance margin drops all the way to zero then I would have to either deposit more money into my account, or IB will automatically start selling my stocks in order of the most recent stocks purchased.

Finally, under “Current Available for Trading (CAD)” the Available Funds line represents the Equity with Loan Value less the Initial Margin Requirement. This basically shows how much immediate cash I have to trade or withdraw from IB.

Since debt is fungible, margin accounts allow investors to do much more than simply buy stocks with borrowed money. For example, my current margin account shows I have $34,566.52 in Available Funds. This is the essentially the same as having an open line of credit at 1.9% interest rate. So if I run into a financial emergency I can withdraw $10,000 from IB. If I do this, then my Available Funds will drop to $24,566.52 and I will pay interest on the $10,000 borrowed. It’s nice to have this option in case I really need it. 🙂 Using too much of the Available Funds can be risky though so I have to be careful.

Determining margin call risk is simple. I take the total value of my long stock position ($141K) and subtract the maintenance margin requirement from it ($45K.) This means my portfolio will have to drop to $96K before I have to deposit more money into my account or risk system generated liquidations. In other words, my investments would have to fall by 32% for me to get a margin call. This is very unlikely to happen over the course of days or even weeks. So in the event of a stock market correction I should have enough time to react and deposit more money into my account so my maintenance margin doesn’t fall to $0.

To help traders avoid margin calls Interactive Brokers will send out a friendly reminder to take margin reducing action when someone’s maintenance margin requirement falls to just 5% above the minimum threshold.

For more information about the brokerage’s margin account, see IB’s video guides.

4) How to trade a stock

Buying and selling stocks with IB is similar to using other brokers.

I recently purchased 30 shares of Fortis Inc (FTS:TSE.) It’s a natural gas and electricity company operating across North America. I like this company because 92% of its earnings come from regulated utilities so it has really stable cash flow. Fortis also has a strong track record of dividend payment. It has increased dividends every year for the past 42 consecutive years, longer than any other Canadian public corporation. 🙂 We can use my recent purchase to demonstrate how to trade a stock with IB.

Simply choose the stock symbol. For example, FTS is the symbol for Fortis on the Toronto Stock Exchange. Select whether you want to buy or sell. Choose the quantity of stocks to trade.

In this example I’m using a buy limit order and setting a limit at $41.35. This means the order can only be executed at this price or lower. If the stock doesn’t fall below this limit price the entire day then the order will not be executed and expire. As with most brokerages you can set up an open order any time of the day, but no action will take place until the next trading session. After the trade has been successfully executed you can view the transaction history at any time by looking at the activity reports in IB’s account manager. Commissions are typically just $1 per trade. 😀

5) Summary and Review

Overall I like IB’s platform and give the brokerage 4 out of 5 freedom stars. 😀 It’s a lot more sophisticated and harder to learn than mainstream platforms such as TD Webbroker. But that’s because IB has more functionality.

The $1 commission is really nice and the account reports are very thorough. The 1.9% interest rate on margin can’t be beat. I’ve saved $100 a month since transferring over my margin account from TD to IB.

Unfortunately, there is a monthly fee if you don’t trade often. But as commentators mentioned in my previous post, if you have over $100,000 with IB then you don’t have to pay the $10/month inactivity fee. 🙂

I wouldn’t recommend Interactive Brokers to all investors. But if you’re an active trader, want access to global markets, trade options, or like the idea of using leverage with cheap margin rates, then consider taking a look at Interactive Brokers. 😉

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