trading with Interactive Brokers. My investment amounts are approximately $1000/per investment, and most companies I invest in sell for more than $10/share. As a result, I pay 35 cents/investment. Initially, I went for the fixed commission at $1/trade, because I was afraid of the exchange fees I would have to pay. I decided to change it, because I like saving money. After reviewing my investments with tiered commissions, I have not paid much in other fees. If you are a heavier hitter than me however, your situation might be different.
On a side note, the $1/trade commission was what I originally used. Then a reader informed me that the tiered commission system would be even cheaper. Once I switched to it, I ended up paying something like 0.35 cents per share for stock trades, for a minimum of 35 cents/trade. Since I usually buy less than 100 shares at once, I end up paying something like 35 cents/trade, which is very cheap. Option trades are something like $0.70 per contract, with a minimum charge of $1/trade. The nice thing about Interactive Brokers is that they do not charge you fees when your options are exercised. When I have sold puts at places like Schwab or Tradeking, they charged me a commission to enter into the transaction, and then a commission when my options were exercised.
There is a $10 monthly fee for investors, whose account value is less than $100,000. This fee is waived for the first three months after opening the account. If your account balance is less than $100,000, the monthly fee is reduced by the amount of commissions you generate. While $10/month seems like a lot, it is not that much when compared to what other brokers charge for one or two monthly investments. The $10 monthly charge amount is reduced by amount of commissions you pay. For example, if you pay $2 in commissions for the month, you only have to pay $8 more to get the $10 minimum. Since I am a buy and hold investor, I use delayed quotes, which are free. However, if I wanted to get streaming real time quotes, I would have to pay $10/month for it. If you are a dividend investor who makes a few investments per month, chances are that you do not need streaming real time quotes.
In comparison, broker Tradeking charges $4.95/month – if you make two trades/month every single month, you are paying $10 whether you like it or not. With Scottrade, Merrill Edge or Fidelity, you pay $7/trade, while with Schwab you pay $8.95/trade. Fidelity charges $7.95/trade. You can see that an investor who has less than a $100,000 balance will do better at Interactive Brokers if they make at least two transactions per month there.
If you make 30 transactions/year, with Tradeking your cost will be $150. With Scottrade – $210/year. With Schwab – $268.50/year, while TD Ameritrade will cost $299.70. With Interactive Brokers, your total commission cost will be somewhere between $10.50 to $30/year. This assumes you do not buy more than 100 shares at a time, and you make approximately 30 investments. The range accounts for the difference between tiered commission and the fixed commission.
One of the biggest worries from some investors is the $10 monthly fee. As someone who likes to find solutions about things, I have provided ways to look at this proactively. Let me walk you through a few examples to show you why that worry is not warranted for most situations.
1) The first option to fund the account covers those who already have a brokerage account at an institution such as Fidelity, Vanguard, Tradeking that lets you transfer some of your existing shares over to another broker fee-free. An investor who has $100,000 in shares sitting in those other accounts can transfer them over to Interactive Brokers, and not have to pay any account transfer fee or the $10/monthly fee. And they will get to enjoy ridiculously low commissions forever. This includes my experience, as I had been building up my dividend portfolio for the preceding 6 – 7 years. I moved a large portion of my shares held at Tradeking over to Interactive Brokers last year.
2) Even if your shares are housed at another broker that charges you for outgoing transfers of stocks, you can still benefit. Let’s assume your broker charges you $5/trade and a $50 fee to move your stocks elsewhere. If I had $100,000 in securities from another brokerage, a $50 ACAT fee, and I make 30 transactions per year, it would make perfect sense to move to Interactive Brokers. This is because I would pay $65.50 in total ( $50 ACAT plus $0.35/trade for 30 trades). In the second year, I would only pay $10.50 for 30 more trades. If I stick to a higher priced broker, I would pay $150 in year one and $150 in year two. That is a lot of money to waste on brokers, for a basic commodity service. Switching brokers is a one time cost, and future trading doesn’t require any additional effort. Even a small amount saved regularly can compound into huge nest eggs over time.
3) If I only had $10,000 to open an account, I would only open it if I make more than 1 investment/month. For example, If I invest $2,000/month with another broker, I will be paying $10 – $20/month in commissions alone, if I made at least 2 trades/month. Therefore, it would make sense to open an account with Interactive Brokers, because within a few years, my brokerage cost will be very low, and my costs today will be similar to what other high cost brokers offer. This of course assumes that the investor keeps putting $2,000/month, reinvests dividends, and that capital also provided some compounding as well. Therefore, it could take approximately 3 – 4 years to get to low commissions. After that however, that investor will pay something like 70 cents/month in commissions forever. Since the average time to accumulate a nest egg is definitely longer than a decade, Interactive Brokers seems like the perfect vehicle for those investors.
4) If I didn’t have $10,000 and I were over the age of 25, I will not be able to open an account with Interactive Brokers. I will need to save that amount, before opening an account with IB. I would start an account with Loyal3, or Tradeking or another broker, and as I gain a sufficient amount of assets, I would transfer them out fully or partially to Interactive Brokers. Based on my interactions with readers, those that have never had a brokerage account find IB interface to be a little confusing. So based on that, I would not open an account with IB, if that is the first brokerage account ever. I personally do not find that interface to be incredibly complex. However, I have used different types of brokers of the years to know how to familiarize myself with different layouts.
5) I would not open a new IRA account with Interactive Brokers. While Interactive Brokers offers IRA accounts – Roth, SEP, Regular, it also has a $7.50/quarterly fee payable to the trustee. For