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 TD and Interactive Brokers
- 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.
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. 😉
Random Useless Fact:
According to the National Retail Federation, the average American spends about $80 on Halloween candy, costumes and decorations each year.
were you able to transfer over the margin debt over?
Yes, I transferred over all my debt. Margin debt at TD isn’t disclosed to credit bureaus. I hope the same is true for IB. If potential creditors find out I have $60,000 more debt on top of my line of credits and mortgages then that could thwart my ability to borrow in the future.
have you ever tried to call them. I read on internet that their customer service is really bad and sometime it takes weeks or even months to get answers.
Not yet. I haven’t needed to contact them about anything from my end. Although they did call me once asking me to send a second set of instructions to TD so they can transfer both my US and Canadian margin accounts over. With Interactive Brokers both accounts are kind of combined so you have one margin balance. But at TD the US and CAD accounts are separate.
I’ve just started options trading, and my current non-registered/margin account is with Questrade, registered accounts are with CIBC. This site has been a great resource, answering a lot of questions. I am looking at opening an IB account, moving my Questrade, and just wanted to confirm a couple of things. I think I have the commissions down for the most part, but was wondering about the $10 minimum monthly fee that IB charges if your commissions don’t go over $10. Is that $10 in USD or CAD? Are you forced to subscribe to a quote/research service, since I can do all that through CIBC. I can live with just $10 in fees a month for low activity. Finally, wanted to confirm that for Canadian accounts the exercise/assignment fee is $0 as it is the US accounts? I lied, another question: should I open a tiered or fixed commission account? My current plan is to open an IB non-registered margin account and transfer most of my Questrade, leaving one position in Questrade since I sold a covered call on it ending in Jan 2017. Figure this way I get the funding I need for IB ($35k) while leaving the door open… Read more »
Update: I guess IB not for me for now for options, unless I inflate my net worth (can’t use principal residence, what?) and liquid net worth as they both have to be above $100k USD 🙁 Also, you have to do the options exam with them if you’ve been trading options less than 2 yrs. I did fairly well on it considering I don’t know much or care about US markets/indexes or more elaborate option strategies, sheesh, just want to sell some covered calls! Oh well, CIBC here I come. I figure for a typical covered call trade for me the difference will only be about $10 if excercised (CIBC vs IB). With Questrade I figure it would still be $20-25 more than CIBC. Biggest downfall I think will be the margin interest, 4.25% for CIBC from what I can see. Still better than 6.2% or so from Questrade. Oh well, next year maybe.
Started filling out the CIBC forms, same kind of questions for net worth, etc, so I decided to go back to IB and use the numbers that the CIBC form was spitting out at me. Let’s see how it goes with IB 🙂
I believe the inactivity fee for IB is in USD. For example if you spent $6 trading in November, then you will be charged $4 USD to make up the difference. And this is the case for each account you have open.
You are not forced to subscribe to any research. You can choose to unsubscribe to any material to save fees.
The IB website only states that it doesn’t charge commission on exercised US options, but doesn’t say anything for Canadian options. I haven’t bought or sold any options with IB yet so I’m not sure.
I prefer fixed commission account because it’s more predictable.
I don’t remember doing any options exam with IB. I think everyone’s application procedure may be slightly different.
Good luck 🙂
So far so good, couple minor hiccups but account was set up next day after answering the questions. Minor delay with funding as transfer of positions from Questrade was delayed due to incomplete account number (my fault really). Most places in Questrade show an 8 digit account number, you actually need the full 10, including the part after the hyphen. So with the delay in transfer/funding it still only took 5 or 6 business days, could have been quicker if funding with cash. Encountered another issue trying to do an options trade, turns out I was in pending approval for permissions for options. The range/bracket that I selected for net/liquid worth covered the requirement of USD $100k ($82k-186k), but this meant it showed you under the $100k USD for some reason. So once account is set up you go to account and change those numbers to the $100k-$249(?) bracket and supposedly that should make everything work. We shall see in a couple of days. Overall process was fairly quick and easy, much less painful than Questrade, where at least a couple of accounts took more than a month due to issues with paperwork. I also found out that IB waives… Read more »
Thanks for keeping us updated. 🙂
Thank you for the detailed information about IB. I am looking to move portion of my investing (along with margin loans) to IB in order to reduce margin interest rate.
Sounds like a good idea. 🙂
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Thank you, this is very useful. As a Canadian based investor, I understand in IB I need to do the FX to settle stocks in other currencies different than CAD. Could you please explain the FX and your experience with it in IB?
That’s correct. IB lists different stocks in their respective currencies. You can trade currencies back and forth easily by selling one and buying another. For example, you can create an order to sell $1,330 CAD and buy $1,000 USD (or whatever the market value is.) Now you have $1,000 USD as cash in your account. You can also buy USD denominated stocks directly without converting CAD to USD first. For example you create a buy order for 100 shares of Apple stock (AAPL) for $14,000 even if you have no USD in your account. Once the order successfully fills you will end up with 100 shares of AAPL, and -$14,000 USD in your account. The negative $14K cash amount is your margin debt. If you want to pay down this debt in the future, simply deposit money into your IB account and convert it to USD if necessary.
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