Interactive Brokers

This guide introduces the types of brokerage accounts offered by Interactive Brokers and why they are an excellent choice for people moving between countries. We also discuss tax issues to consider and give some general advice on using Interactive Brokers.

General information

There are many services that allow the purchase of stocks. Deciding on a specific service requires a careful consideration of tax laws and legal conditions. For example, German banks are required to deduct a flat tax rate (Abgeltungssteuer) of ca. 25% on investment income (capital gains and dividends), such that a further tax filing is not necessary and thus reducing administrative work significantly.

However, for people who do not know where their long term tax residence will be, there appears to be a single natural choice of a broker. After intense research and comparison of different services, we believe that this choice is Interactive Brokers, which is a US financial service firm which caters to both professional traders and private customers. Let us mention the key advantages:

Advantages

  • International accessibility. Most brokers are based in a specific country and are tied to a specific currency. For example, a brokerage account in the US will typically only accept USD via the ACH network, while a brokerage account in the euro zone will typically only accept EUR via the IBAN network. Interactive Brokers is connected to a large number of currency networks, such that it can be funded in a large variety of different currencies using free local transfers (rather than expensive international wire transfers). Moreover, the funds are kept in their original currency and can be exchanged without markets for a small fee of 2 USD per exchange. In this way, Interactive Brokers makes you largely independent from the banking system of the country you are living in and allows easy access to stock and bond market worldwide. You can read about international transfers with Interactive Brokers here.

  • Reliability and stability. Interactive Brokers provides one of the most stable trading platforms on the markets. Even if there are large market fluctuations, the trading platform is usually very stable.

  • Pre-market/after-hours trading and access to most developed markets. Interactive Brokers allows you trade on most developed markets (US markets, European markets, Asian markets, Australia etc.) and you can typically trade pre-market and in the after hours.

  • Access to a wide range of financial products. Interactive Brokers gives access to many products ranging from stocks, units, bonds, warrants, options to futures and complex leveraged products. This is in particular attractive if you are interested in trading or want to invest into certain niches (such as SPACs, where units and warrants are common that may not be accessible in some other brokerage accounts). However, even if you are not interested in such more advanced products, you can turn them off (i.e., you do not need to request a trading permission for these products), but you can always change your mind later.

  • Low fees. For most stock trades (also including warrants and units) on US markets, you pay just 1 USD per trade. If you are opening an IBKR Lite account (only available to US residents), you can even trade most stocks and units for free. You can find a detailed overview over all commissions here.

  • Generous margins at low interests. If you know what you are doing, you can choose to open a margin account (rather than a "cash account"), which allows you to borrow money and buy stocks against what you already have in your account. This allows you to leverage, i.e., you can increase your rate of return (compared to the money you deposited) if your stocks perform well, but this can also be risky as you can lose a lot of money if your stocks go down leading to a margin call (read below under disadvantages). The interest charged is one of the lowest in the industry and currently ranges from 0.75-2.59% for borrowing USD. You can find more information here.

  • Seamless process of moving account between countries. If you happen to move to another country, you can usually just keep your account. In many situations, you do not even have to change your address if you still have a reference address. You only need to update your tax information. In some situations depending on the countries, you may be required to move your account to the respective Interactive Brokers subsidiary in the new country.

  • Professional trading platform and API access. If you want to trade professionally, you can use the IBKR Trading Workstation, which is a professional trading software that you can install for free and use to trade directly. This offers you to implement more complex trades based on various if-then-conditions. Moreover, you can even access Interactive Brokers via an API (application programming interface), so that you can write trading algorithms that are then executed on your behalf. Note that these features are not available in the IBKR Lite account (only relevant for US residents). If you are not interested in any of these features, you can still trade through the web interface.

  • Up to 1000 USD bonus for opening a new account. There is currently a promotion, where you can receive up to 1000 USD for opening a new account with Interactive Brokers. You can find more details below.

Disadvantages

Before you decide to open an Interactive Brokers account, you should also consider the following disadvantages and drawbacks.

  • You may need to deposit at least 10,000 USD. Officially, Interactive Brokers requires most investors to have at least 10,000 USD (or equivalent in other currencies) in their regular account to use it. There is no such requirement for Interactive Brokers Lite accounts. However, even for regular accounts this requirement is often not enforced. We should also note that depositing 10,000 USD does not mean that you need to purchase stocks for this amount - it is perfectly acceptable to just keep the cash in the account.

  • The account may cost up to 120 USD per year. Regular accounts with less than 100,000 USD account value (or equivalent in different currencies) require minimal monthly transaction fees of 10 USD. There is not such requirement for Interactive Brokers Lite accounts. If you transaction fees are less in a given month, you are charged the difference. For example, if you make seven stock purchases on US exchanges with transaction fees of 1 USD each (not the purchase value) in a given month, you would have paid 7 USD and would be charges an additional fee of 3 USD at the end of the month.
    Tip: This activity fee will not be charged in the first three months after opening. If you only want to use the account to transfer some large amount of cash from one country to another, you couldin principleopen the account, deposit the cash, exchange it at an excellent rate (2 USD fee), withdraw the cash in another currency and close the account again. Of course, we would recommend to keep the account.

  • Real-time market data may cost extra. Typically, your broker will show the current market price of stocks and other assets before you make a purchase. At Interactive Brokers, you will only see a delayed price, unless you pay extra or you use an Interactive Brokers Lite account. If you are not a daytrader, this typically does not matter, because you can Yahoo Finance or other services to know the current price and then submit a limit order at Interactive Brokers. Also, there is little to no risk if you submit a higher limit price, as you will still receive the current market price. For most long term investors, it is not necessary to spend money to buy real-time market data.

  • Tax declarations may be a bit more work. Interactive Brokers provides very detailed statements that are usually accepted as proof for declaring your taxes. In particular, Interactive Brokers provides everything you need for US taxes. For taxes in other countries, you will typically need to convert the value of your transactions (with the help of Interactive Brokers or Google Spreadsheets) into the currency of your country. In Germany for example, German brokerage accounts are directly taxed without the need to declare taxes, so that using Interactive Brokers will require German residents to declare their yearly investment income.

  • Interface and customer service. Interactive Brokers has the goal to provide a reliable trading platform for professionals. While its web interface has improved significantly over the past years, it is still not as customer friendly as many other brokerage accounts. However, if you only use it to purchase and sell stocks, bonds and exchange currency, you should be able to do everything you want. And if you would like to use anything more advanced (stop-loss orders, trailing stop orders etc.), Interactive Brokers will certainly have the functionality, but you will need to read up yourself on how to do it. Similarly, Interactive Brokers customer service is professional, but there is often a long wait time and the customer is expected to figure simple things out on their own.

  • Strict enforcing of margin requirements. We strongly advise against opening a margin account or trading advanced financial products (options, futures etc.), unless you know exactly what you are doing. If you use a margin account, you are essentially borrowing money from Interactive Brokers to make leveraged transactions, i.e., you could lose more than you paid for, for which your accounts assets (cash, stocks etc.) are provided as collateral. If the value of such leveraged financial instruments decreases, such that your collateral does not satisfy Interactive Brokers requirements anymore, they will liquidate some of your assets or instruments, even if this means a loss for you. Tip: You do not need to worry about any of this if you have a cash account and only purchase stocks, bonds and exchange currencies (forex).

  • Reduced deposit insurance in some countries (including European Union). In most countries, all deposits of Interactive Brokers are insured up to 500,000 USD through SIPC with the option of additional insurances, as explained here. While Interactive Brokers does segregate client accounts from their own money and investments, they are not legally separated as they would be in some other countries (e.g., "Sondervermögen" in Germany), so if Interactive Brokers went bankrupt, there is at least the theoretical possibility that customers lose money if their account value is larger than what is ensured. As of writing the deposit insurance within the European Union (IB Ireland) is only 20,000 EUR, as explained here (see also this discussion in German with a IB representative). This may be another reason why it might be advantageous to open an Interactive Brokers in the US if you have a permanent address there.

In summary, you should be aware of potential drawbacks, the exact requirements and the associated fees of using Interactive Brokers. We continue to believe that it is the best available product with very low fees, if you regularly move between different countries (such as postdocs or young professionals) and would like to invest into the stock market or exchange and transfer currency internationally.

Account types

Interactive Brokers offers the following account types for US residents (for everybody else, IBKR Pro is your only option):

  • Interactive Brokers Lite (IBKR Lite, requires US address). This account is only available to clients that open their account with a legal residence in the US. Technically, it is possible to later change the tax residency to another country (which may or may not need to agree with the legal residence), but Interactive Brokers may request that you then need to transfer your account to another country where IBKR Lite may not be available anymore. The main advantages of this account are as follows:
    - No minimal account balance
    - No trading fees on US markets
    - No minimal monthly fees
    - Free live market data on US market
    - Exchanging currency costs 2 USD (without additional markup)

  • Interactive Brokers Pro (IBKR Pro). This account is the standard product and available to clients from all over the world. Depending on the address of legal residence you provide, you will be assigned to different IB entities (IB US, IB Canada, IB UK for Europe, IB Australia etc.). For the most part, the entity does not matter, but there are some slight differences depending on local law. For example, you will not be able to trade certain US securities (including many Vanguard ETFs) in Europe due to the MiFID II regulation. Similarly, you may not be able to convert between all available currencies in an account with IB Australia. Finally, only an account with IB Canada will allow you to use free Canadian bank transfers. Apart from these local differences, all IBKR Pro accounts have the following formal requirements and conditions:
    - Minimal balance of 10,000 USD (not strictly enforced)
    - Minimal monthly fees of 10 USD, unless account value is at least 100,000 USD
    - Low trading fees starting at 1 USD per trade on US exchanges
    - Any live market data incurs additional fees
    - Exchanging currency costs 2 USD (without additional markup)

To decide which account you should open, you can just go through the following list:

  • IBKR Lite is best for people with US address with less than 100,000 USD in assets (full account value). You are lucky if you have a US address, because you have access to the completely free IBKR Lite account regardless of your assets. If you have at least 100,000 USD in assets, you could consider upgrading to IBKR Pro. In this case, you will pay slightly higher fees on US market and lose live market data (i.e., you would need to trade blindly or pay for a market data subscription), but get access to a few more professional tools.

  • IBKR Pro is the only option for most people. If you do not have a US address, there is only the IBKR Pro account. If you have less than 100,000 USD in assets, this requires minimal monthly fees of 10 USD per month. Considering the very low trading cost, this may often still be an excellent choice, but of course it would be even better if you would reach 100,000 USD in assets. If you are a tax resident of Germany, you should be aware that need to declare your capital gains manually as explained here, which can be a hassle compared to the usual automatic filing through your German bank.

In summary, IBKR Lite is best for people who can open their account based on their US address. For anybody else, IBKR Pro is the only option, which is particularly attractive if you have at least 100,000 USD in assets. If you have less, you need to carefully consider if the minimal monthly fee of 10 USD is worth it. If you are an international person who regularly moves country or if you want to trade advanced products (units, warrants, options) on international markets, this may still be the best option considering that Interactive Brokers will also save you on exchanging currency as explained here. Otherwise, we discuss other alternatives for different countries below.

Up to 1000 USD opening bonus

Currently, Interactive Brokers runs a promotion where you receive a bonus equal to 1% of the money that you deposit / stocks that you transfer and keep for one year (maximal bonus is 1000 USD). Please read the terms & conditions carefully: The bonus is paid out in the form of "award shares" of IBKR, i.e., you receive Interactive Brokers stock. If you withdraw money within the first year, the award shares are reduced. Most importantly, you cannot sell these shares for one year after you received them. In summary, you essentially get a bonus of 1% of the amount that you deposit.

Alternatives

In the following, we discuss alternatives for specific countries. Generally, it will be more difficult compare to Interactive Brokers if you want to transfer your assets between accounts and countries, as most of these accounts are not geared towards internationals. However, it may still be worth to open an additional account if you enjoy trading, want to try/compare different products and are interested in grabbing some opening bonuses.

United States

The following brokerage accounts require a US address and usually also a social security number. Moreover, as most of the identification / verification / know-your-customer is based on comparing your personal details (name, address, birthdate) with your credit report, opening your account works best once you have a credit record.

  • Robinhood. This is the famous platform (with an intuitive trading app) that introduced commission-free trading in the US. Every new account receives some free stocks that are typically valued 5-10 USD, but can also be a few hundred USD (it's like a lottery).

  • WeBull. This is essentially a Robinhood copycat that also offers free trading and gives you up to four free stocks (adding up to 20-100 USD based on a lottery) if you deposit at least 50 USD.

  • Ally Invest. This is another trading platform that offers free trading on US stock markets. They currently run a promotion where you can receive up to 3,500 USD.

Other accounts, such as TD Ameritrade, Charles Schwab, Fidelity etc. may also be worth a look (but in my opinion less attractive than Interactive Brokers).

Germany

  • TradeRepublic. You receive up to 15 EUR when you sign up for Trade Republic using the link. This is a low fee trading app, where you can trade stocks and ETFs. You often only pay 0 EUR if you trade over-the-counter (essentially executing the trade with directly a bank, such as Lang & Schwarz) or 1 EUR if you trade on public exchanges. Usually, it is cheapest to trade over-the-counter, but make sure that the respective exchange (Xetra, NYSE, NASDAQ etc.) is open, as this ensures that you get a fair current price (otherwise, the bank may take a risk premium).

  • Smartbroker. This is another excellent brokerage account in Germany that offers more products than TradeRepublic and a web interface, but has still very low fees.

Other accounts, such as Flatex, Degiro, Banx Broker, Captrader may also be worth a look (but in my opinion less attractive than Interactive Brokers).