What you should know about Interactive Brokers before creating an account.
Interactive Brokers is considered to be one of the best brokerages to use in Europe. It is frequently recommended as an alternative for other brokers, such as Trading 212, on sites like Reddit. However unlike Trading 212, which is primarily geared towards beginners, Interactive Brokers can be more complex and overwhelming. This post takes a deeper look at Interactive Brokers and offers insights why it is more suitable for experienced investors rather than beginners.
Interactive Brokers is a US-based online brokerage with international offices in the USA, Switzerland, Canada, Hong Kong, United Kingdom, Australia, Hungary, Russia, Japan, India, China, Luxembourg, Singapore, Ireland and Estonia. It was founded in 1977 by Thomas Peterffy, who is also the largest shareholder. They have been one of the early innovators in computer-assisted trading.
The company mainly caters to professional traders and financial institutions but also offers attractive products for individual investors. Interactive Brokers also offers services to trading apps, such as Trading 212, which use their services in the background while building user-friendly applications on top of it.
Interactive Brokers offers their services in the following European countries as well as in other locations worldwide:
Interactive Brokers is generally considered a very safe brokerage. It is listed on NASDAQ and is being regulated by top regulators worldwide. These include the NYSE FINRA, UK Financial Conduct Authority, Central Bank of Hungary, Central Bank of Ireland and Commission de Surveillance du Secteur Financier (CSSF) of Luxembourg.
Customers are assigned to a branch of Interactive Brokers depending on their place of residence:
In the unlikely event that Interactive Brokers is going bankrupt investors receive compensation of up to 20,000€ for customers of Interactive Brokers Ireland and Interactive Brokers Luxembourg, up to 100,000€ for customer of Interactive Brokers Central Europe and up to $500,000 for customers of Interactive Brokers United Kingdom.
As Interactive Brokers is required to keep the customers assets in a segregated custodian account they are generally safe and protected if Interactive Brokers goes bankrupt. When the customer buys a security the purchase is stored in the custodian account and they are registered as the beneficiary owner. Therefore the ownership should be unaffected in the unlikely case of bankruptcy. However if this system fails the investors are eligible to the compensation schemes detailed above.
What makes Interactive Brokers stand out is the large number of available securities to trade. They offer securities from 135 exchanges in 33 countries and support 23 different currencies. Tradeable securities include regular company shares, exchange-traded funds (ETF), options, futures, spot currencies, metals and other commodities, bonds, mutual funds and hedge funds.
The amount of tradable securities is a great plus point for experienced investors. However for beginners it can easily be overwhelming and it is generally advisable to focus on regular stocks and ETF‘s.
Contrary to commission-free brokers like Trading 212 Interactive Brokers makes money using fees & commission. However their fees are amongst the lowest available across all asset classes. They also recently removed the 10€ inactivity fee which was charged on smaller accounts with a value of less than 100,000€ or accounts with irregular trading activity.
Interactive Brokers offers two pricing structures. The fixed plan allows its customers to trade for a fixed rate per-share fee. Contrary the tiered plan calculates the fees & commissions based on the value of the order. This means that the higher the volume of the order the lower the fees per share get. Regardless of the choosen plan fees & commissions vary based on the exchange at which the order is placed As well as the chosen asset class.
While their fixed plan is easier to understand the tiered plan usually offers better overall pricing. A good comparison between the plans can be found on the Merely Curious blog.
There are no fees for depositing or withdrawing money from an Interactive Brokers account.
Interactive Brokers offers multiple platforms to use their services. The client portal and IBKR Mobile app are probably the simplest options. Beginner investors should use them first to get started with Interactive Brokers. However even these platforms can be confusing and overwhelming due to their cramped layout, information density and extensive use of acronyms. Professional investors will most likely opt for Interactive Brokers Trader Workstation.
One notable feature which is offered by Interactive Brokers is the impact dashboard. On the dashboard investors can rate their own personal values which are then compared to the ratings for each individual investment. This results in a overall impact score for the entire portfolio which investors can use to ensure that their investments meet their own standards.
The option to buy fractional shares in a company is a great functionality especially for individual investors. For example if a share is worth 100€ fractional shares enable the customer to buy 0.5 shares for 50€ instead of a full share. The fractional share is then partially owned by multiple investors.
For Europeans there is a large number of brokers of varying quality and costs available to pick from. They usually can be divided into brokerage platforms provided by many banks, dedicated professional brokerages like Degiro and retail investor focused trading apps like Trading 212, eToro, Trade Republic, Free Trade or Scalable Capital.
Learn more about fundamental investing concepts in this recommended post.