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.
Ive been contemplating a move to IB for the past few months — just need to make up my mind whether I want to pull the trigger. Thanks for sharing.
No problem. I haven’t spent too much time with the platform yet but I like it so far. There’s a trading software that you download and install on your computer instead of using a browser to trade if you want that option.
I know for Questrade, they have 3 options. Trading software you can download, 2 platforms to trade within the browser. The Trading software you can download, allows you to do bracket orders ( which means placing the price you buy or sell initially, and then the stop loss order and sell or buy to finish the trade on one order entry). The trading software also shows profit and loss curves (i.e risk graphs ). The 2 web based platforms do not let you do both of these things.
I assuming Interactive Brokers does this as well.
Ugg, this pains me. I’m an active Questrade user. But unfortunately for me, I’m also a Mac user. Which means my only option is to use the web-based platform (stand-alone platform is Windows only). I’m contemplating getting a PC system JUST so I can have the bracket order option.
I’d be interested in finding out if IB has a Mac platform so I don’t need to invest in a PC.
I am with CIBC which charges $6.95 per trade.
Reading what IB charges it looks like some place between $25 – $30 per month if you are trading twice per month and getting billed for “inactivity”. And this is in US$ I would presume.so you get bonked for the echange rate. CIBC will give you a current stock value any time you want it at no charge
I run a > $100K non registered account. Made two trades so far this year, one sale – one purchase. SO for 9 months it has cost me $14 in fees. Even if I were to be more active and trade say three times a month I think I would still be better off at CIBC than at IB – IMHO
What about having to file US income tax reports seeing this is a US based account?
Seems like a bit too much of a hassle for me but I do not know it all.
It does give you better access to the world wide stock market so that is a plus.
What’s the purpose of real time quotes if you only make trades every now and then, are they really needed? Besides they can be seen for free elsewhere, so no need to pay. IB does not charge the monthly commission for accounts with net liquidation value > 100 k$, so being inactive does not cost you anything once you reach that point. In addition any commissions are deducted from the fee. I’ve been using IB for some years now and have been very happy with them.
Ricardo, I’m with you on this, in the same boat. While this is interesting and all, it would more make sense it seems for day traders or active traders than “us”.
Generally CIBC would cost less for investors like us who don’t trade very often. I agree with Ricardo that if I had a non registered cash account I would probably trade with CIBC or another Canadian broker. But since I use a lot of margin, the interest savings is worth the extra cost of inactivity fees in my situation. Luckily I don’t have to file US income tax or report any earnings to the IRS. 🙂 Even though I have a U.S. dollar account, it goes through the Canadian division of Interactive Brokers.
How do you transfer all of your holdings from TD to IB when you are using margin? Do you have to pay some sort of fees first?
I think I paid $135 to close the account at TD. I’ll have to double check this but I’ll update in a future post with more details.
Do the margin accounts get reported / affect credit score in Canada?
I’m pretty sure it doesn’t. In all the years I’ve had a margin account with TD, my margin borrowing activity has never appeared in my credit reports. Unlike traditional loans such as student debt, mortgages, etc, the amount of money investors can borrow in a margin account changes every day calculated using margin maintenance requirements.
I check my credit score at the beginning of each year. When I request my report again in a few months I’ll know for sure if IB reports my margin loan to the credit bureaus. I don’t think it will but I’ll update this comment thread if it does.
Welcome to the Dark Side 🙂 I now trade options and it’s so much cheaper at IB
Cool beans. That’s what I’ve been told by other option traders. 🙂
Welcome to IB. I’ll be hit with the non activity/data fee as I didn’t trade much this month at all. You should unsubscribe to US Value Bundle market fee especially if you don’t trade all that often, save yourself the extra $10. You should look into trading options 🙂 You can sell covered calls on your stocks if you have 1 or more lots.
Thanks for the tips. I look forward to writing covered calls to make some extra income. 🙂
Good move man, I am interested to to my margin account to IB. I also have over $50 000 margin balance with interest rate of 4.25%.
Could you please tell me the process and how long it took to move from TD to IB (a few days, or week or month)?
It took a few week for me because I messed up the instructions to transfer my securities a couple of times in the beginning. It also takes about 1 to 2 weeks to set up an IB account in the first place. I will write another post about the details soon.
I would love to hear more details of the process of switching from TD to IB. Considering doing the same myself!
It’s not a terribly difficult process but it took some trial and error for me complete the transition. I’ll write about my experience with the process in a future post so others won’t make the same mistakes I did lol.
I switched my margin account to IB from OptionXpress in April. The platform has more of a learning curve but once you set aside an evening or two it all comes together. The cost savings have been incredible since April. Since the switch I have done 71 option trades (sell puts) which has cost me about $66 in commissions. If that was with OX it would have likely been over $700.
The trading platforms I find very good. The TWS platform is a program you download to your computer to access your account. They also have a traditional java website called WebTrader – if you trade at work you might use this because your company like mine will not allow me to install non-work related software (TWS). The mobile app is pretty good as well making it easy to trade on the go.
Please note if you use margin account with them then you need to closely manage it. Not happened to me but they are apparently ruthless when it comes to margin calls.
Sounds like you’ve made the right move. 🙂 I like how they have soft edge margining which color codes the margin requirements to warn investors if they are close to a margin call.
IB won’t charge inactivity fee for accounts greater than 100,000.
With unbundled commission structure, commission can be as low as 35 cents per 100 shares.. Even loweer if you enter liquidity providing limit orders as IB pass on exchange rebate back to clients for unbundled commission structure.
Also, if you subscribe to the yield enhancement program, you can earn little more money by lending out your stock holdings. It is not much but in my case, earnings from yield enhancement program payed for all my IB commission + extra.
Great points. 🙂 I’ll include the new info in my update post.
[…] And finally, Liquid Independence made a smart move, switching his accounts to Interactive Brokers and saving at least $100 per month in interest and fees. And yet he still refuses to buy me dinner […]
Congrats on the switch to Interactive Brokers. It is the cheapest broker I could find, that also offers direct access and does not sell your order flow to HFT’s.
Actually, if you change your commissions, you may end up paying even less than $1/trade
I pay something like 35 cents per buy order with their tiered commission- as I usually buy less than 200 shares at a time, this is super cheap.
As others have mentioned, if you are a long-term investor, you do not really need real time quotes. And if you have over $100K in your account, you are not charged $10/month either.
[…] 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 […]
[…] or even triple our investment gains! Surely I can’t be the only one to see the advantage of borrowing money at 2% to buy and hold strong, reliable, blue-chip stocks like utilities and Canadian banks that have […]
I have been with TD forever, paid thousands of $$ in commissions, lost thousands too. I am thinking to switch over to IB for these reasons comparing with TD
– Low futures
– Low OPEX rates
– Higher margin rates
– Lower int rate as per this article.
– One act to do all vs diff acts
[…] on margin. I’ve explained in the past how anyone with at least $10,000 can open an account with Interactive Brokers, put in some money, and safely borrow modest amounts of money at just 2% interest rate, with […]
Guys, could anyone with IB tell me if their mobile platform allows option trading strategies (I mean buy/sell spreads of 2, 3 and 4 legs using only one trade?)
because I know Questrade mobile doesn’t work, but TD Thinkorswim does.
What about Interactibve brokers?
[…] for Enbridge is to buy 100 shares of ENB stock using borrowed money at 2.5% interest rate from my brokerage account. ENB currently pays a 5.2% annual dividend. So after interest expenses I will earn $127 of […]
Interactive Brokers 🙂
I heard that IB has lowered or no minimum deposit .Is there any hidden charge .Will appreciate if you can update this post.