00:00:00
hello what's going on folks my name is
00:00:02
Chris and in this video I'm going to
00:00:03
talk to you all about margin trading
00:00:06
specifically how margin trading Works in
00:00:08
an Interactive Broker trading account
00:00:10
and this video is going to be one of the
00:00:12
best on YouTube that explains it in the
00:00:13
most possible detail and at the end of
00:00:15
this video you are going to feel 25%
00:00:18
smarter so in this video we're going to
00:00:20
cover what is a margin requirement why
00:00:22
it's a benefit how it gives you more
00:00:24
flexibility as a Trader I'm going to
00:00:26
show how to view your margin requirement
00:00:28
for individual positions in Interactive
00:00:29
Brokers trading software we're going to
00:00:31
talk about how margin works for
00:00:33
different asset classes like Futures
00:00:35
stocks options bonds and then I'm going
00:00:38
to go over how I think you can reduce
00:00:40
the possibility of getting a position
00:00:42
liquidation or a margin call as other
00:00:45
Brokers would call it stay tuned for
00:00:47
this video I really think that you guys
00:00:49
are going to benefit from it especially
00:00:50
if you are in your first one to three
00:00:53
years of trading I've been trading since
00:00:55
2018 I've had a couple of margin calls
00:00:57
myself and especially those happen in
00:00:59
the first couple years when I was really
00:01:01
learning about trading so if you are
00:01:03
learning trading this video is going to
00:01:05
be very beneficial for you and because I
00:01:07
have a lot of experience making videos I
00:01:09
can make this video for you and
00:01:11
communicate to you the information in a
00:01:13
very precise and accurate way if you
00:01:15
appreciate my work let me know with a
00:01:17
comment down below and the easiest way
00:01:19
to support these videos is by clicking
00:01:20
on the first link down below and
00:01:21
checking out interactive brokers if you
00:01:23
do that really helps me out so thank you
00:01:25
very much more videos like this are
00:01:27
coming in the future what is margin
00:01:29
requirements and why is it a benefit why
00:01:32
is it even a thing in the United States
00:01:35
you have to understand that the stock
00:01:36
market and the Futures Market is
00:01:37
regulated by the US government and
00:01:39
there's different institutions that
00:01:40
regulate these markets for stocks it's
00:01:42
the SEC and for futures it's the cftc
00:01:45
and the NFA basically these institutions
00:01:48
require Brokers to follow a lot of
00:01:50
different rules one of them is regarding
00:01:52
rules for Capital requirement so for
00:01:54
interactive brokers you have the reg T
00:01:56
margin which means that when you're
00:01:58
trading stocks you can get anywhere up
00:02:00
to four times leverage on your money um
00:02:03
and then there's another type of margin
00:02:05
with interactive brokers called
00:02:06
portfolio margin which you can get
00:02:09
sometimes more margin or more leverage
00:02:11
other times they give you less leverage
00:02:13
because they use your portfolio as the
00:02:15
calculation for how much leverage you
00:02:16
get instead of um the margin being
00:02:19
calculated on an individual symbol basis
00:02:22
okay so guys in this video I'm giving
00:02:23
you tons of gold and tidbits about how
00:02:25
margin works with interactive brokers so
00:02:26
by the end of this video you guys are
00:02:28
going to know a lot more about how Mar
00:02:29
Marin Works instead of going through and
00:02:31
reading through all the Reddit forums
00:02:32
you don't know if any of that is
00:02:33
accurate so in simple terms the margin
00:02:35
requirement is the capital requirement
00:02:38
for a position depending on the asset
00:02:41
class it could be stocks Forex Futures
00:02:44
bonds crypto or options the margin
00:02:48
requirements are going to be different
00:02:50
so it is up to you as the investor as
00:02:51
the trader to determine what you are
00:02:54
going to do and how you're going to
00:02:55
manage based around those margin
00:02:57
requirements some Traders might decide
00:02:59
that interactive brokers has too high of
00:03:01
a margin for their particular trading
00:03:03
strategy some other Traders might
00:03:05
realize that that high margin is
00:03:07
actually a good thing once you look into
00:03:09
a bit of the fine print and I'll give
00:03:10
you a couple examples of that later if
00:03:12
you had to ask me what's the main
00:03:14
benefit of a margin account this is the
00:03:16
simplest answer for me it would be it
00:03:18
just allows the investor a lot more
00:03:20
flexibility with what they can do with
00:03:22
their trading account so with a regular
00:03:25
cash account which is a non-m margin
00:03:27
account you have to wait normally one to
00:03:30
two trading days before your trades have
00:03:33
settled often times interactive brokers
00:03:36
will let you trade with the unsettled
00:03:38
funds at least one other time let's say
00:03:40
you buy a stock then sell it and then
00:03:42
buy another stock with the money you
00:03:44
made from selling the first stock in
00:03:47
that short period of time before the
00:03:48
first stock trade has settled you've
00:03:51
traded the second stock using unsettled
00:03:54
funds you can run into a scenario where
00:03:56
the broker will not let you sell the
00:03:59
second stock because You' bought it
00:04:00
using unsettled funds if you have a
00:04:03
margin account you will not experience
00:04:05
this problem because with a margin
00:04:07
account it gives you the flexibility of
00:04:09
borrowing funds from the broker if
00:04:11
necessary and you're not going to be
00:04:13
subject to these rules where you have to
00:04:15
wait for funds to be settled the main
00:04:17
benefit of margin is it gives you less
00:04:19
Capital requirement for trading stocks
00:04:22
and the other benefit of it is that you
00:04:24
can use this margin benefit in a variety
00:04:27
of different ways as a investor as a
00:04:30
portfolio manager off the top of my head
00:04:32
here is one of them I'll just throw it
00:04:33
at you right now let's say you have a
00:04:35
portfolio of $50,000 like in this case
00:04:38
right here what you could do is you
00:04:40
could buy us treasury bills you can buy
00:04:42
50,000 worth of us treasury bills and
00:04:45
your margin requirement for those
00:04:46
treasury bills is not going to be 50,000
00:04:48
it's going to be something like maybe 1
00:04:50
or two or 3,000 and I can even show you
00:04:53
that right now so I'll go into my Quil
00:04:55
board here and I have these us treasury
00:04:57
bills here and I'm actually going to go
00:04:59
ahead and just purchase let's purchase
00:05:02
50k worth of Treasury bonds okay so I've
00:05:04
purchased 50,000 worth of us treasury
00:05:06
bills here in this demo account and you
00:05:09
can see there's the position in the
00:05:10
account and if you look at the
00:05:12
maintenance margin you can see the
00:05:13
maintenance is 677 I'm going to tell you
00:05:16
exactly what these fields are but in
00:05:17
short right now maintenance is basically
00:05:19
how much Capital required for the
00:05:22
positions in your account that are open
00:05:24
so I now have an open position of 50,000
00:05:26
worth of us treasury bills the Brokers
00:05:29
only requ requ iring me 677 CAD for this
00:05:32
position the reason it's saying CAD is
00:05:33
because that's the base currency of this
00:05:35
account it's always going to show it in
00:05:36
that currency here's an example of how
00:05:38
this position could assist me as a
00:05:40
Trader let's say I'm an active Futures
00:05:43
day trader and I'm trading the S&P 500
00:05:46
futures or you know maybe some treasury
00:05:48
bond futures or whatever it is so let's
00:05:49
say I'm trading the es Futures what is
00:05:52
interesting about Futures is that you
00:05:54
don't actually pay any money to enter
00:05:56
and exit a Futures position so if I buy
00:05:59
buy the S&P 500 futures and then I sell
00:06:01
it for a win or for a loss that money is
00:06:04
directly deposited into my account
00:06:06
immediately but in order to initiate
00:06:08
that position I did not use any money
00:06:10
what I used was margin the broker is
00:06:13
obligated to take a capital requirement
00:06:16
out of my account in order to have
00:06:18
positions in Futures so what this would
00:06:20
do for me as a Trader is I have this
00:06:23
position of treasury bills and this
00:06:25
position is actually earning me Interest
00:06:27
I purchased these treasury bills at a
00:06:29
discount so the way treasury bills work
00:06:32
is you purchase them at a discount from
00:06:34
their face value and upon the maturity
00:06:36
date they pay you the full value of the
00:06:38
bill how this can benefit me is because
00:06:41
over time I'm trading this Futures
00:06:43
Contract right so I'm going into the
00:06:44
market and I'm trading es and I'm
00:06:46
generating trade commissions on that the
00:06:48
bond here is generating me a small
00:06:51
return in the backround while I'm doing
00:06:52
my active trading therefore it is acting
00:06:54
as a hedge against my active trading
00:06:56
activities it's acting as a hedge
00:06:58
against my Trading commission fees so
00:07:00
let me just show you what happens when
00:07:02
you initiate a position in es Futures so
00:07:05
I'm going to just place an order here
00:07:06
for one contract on this es Futures
00:07:10
Contract and when I place the order
00:07:12
you'll see the order confirmation window
00:07:14
on the left side of the order
00:07:15
confirmation window this is the notional
00:07:17
value of the Futures Contract this is
00:07:20
the actual value like what it's really
00:07:22
worth in dollars but you don't have to
00:07:25
pay this amount of money to enter this
00:07:28
position that's the point of a margin
00:07:30
account with Futures especially because
00:07:32
Futures are already leveraged products
00:07:34
so this Market trades on the Chicago
00:07:36
merkal Exchange right away from the
00:07:38
exchange they're already leveraged
00:07:40
products because the margin from the
00:07:41
exchange it might be anywhere between 5
00:07:44
to 20% of the notional value of the
00:07:47
Futures Contract you're not really going
00:07:49
to have to put up more Capital than that
00:07:52
so as an example here look on the right
00:07:54
side this is where you see your margin
00:07:56
impact for the position that you were
00:07:58
about to put on I'm going to show you
00:07:59
some more examples of this as the video
00:08:01
goes on but what they're telling us here
00:08:03
is that to buy one es contract the
00:08:05
initial margin is
00:08:07
11,086 and the maintenance margin is
00:08:10
10,732 what this means is that when I
00:08:12
put on this position my maintenance
00:08:14
margin is going to jump from
00:08:17
677 and get increased by
00:08:20
10,732 my new maintenance margin is
00:08:22
going to be 11,410 what this means is
00:08:25
that I now have to maintain a minimum of
00:08:27
that number 11410 in the account to
00:08:30
avoid being liquidated or margin called
00:08:33
now let's go ahead and transmit this
00:08:34
trade and let's just get filled on the
00:08:36
order here so now I'm in this position
00:08:38
and if you look at my account you can
00:08:40
see the maintenance margin has changed
00:08:42
to the amount that I just told you about
00:08:44
but if you look at the cash the cash did
00:08:46
not change remember I spent 50,000 on
00:08:49
bonds so what you're seeing here is that
00:08:51
I've entered into this futurus position
00:08:53
but I did not use any cash so when you
00:08:55
trade Futures you're not using any
00:08:58
upfront cash in your account to initiate
00:09:00
these positions so that's something to
00:09:02
know that's very unique to how Futures
00:09:04
work it's not the same with stocks so
00:09:07
this was an example of how you can use
00:09:09
us treasury bills to act as a hedge
00:09:12
against your active Futures Trading or
00:09:16
even potentially swing trading depending
00:09:17
on how often you trade if you trade even
00:09:19
10 times per month the income that you
00:09:22
earn from investing your cash in a
00:09:24
treasury bill is going to hedge against
00:09:27
some of your trading commission Fe
00:09:29
which at the end of the year is going to
00:09:31
make a difference I'm going to keep this
00:09:32
t- bill position here just to show you
00:09:35
that well you know I'm invested 50,000
00:09:37
into US bonds I have an extremely low
00:09:39
Capital requirement for this position
00:09:41
but keep in mind I also have a negative
00:09:42
balance of
00:09:43
$50,000 do not be alarmed when you have
00:09:46
a negative balance in a margin account
00:09:48
I'm going to explain to you what this
00:09:50
means and how this impacts you in a
00:09:52
second but for now for the purpose of
00:09:54
this example to make things simple I'm
00:09:56
going to take that Canadian cash and
00:09:57
convert it into US doll
00:10:00
just because I do not want to be short
00:10:03
the US dollar right now I'm short the US
00:10:05
dollar if I'm expecting the US dollar to
00:10:07
depreciate against the Canadian dollar
00:10:10
then that might be a justifiable reason
00:10:12
to stay short the US dollar but if I am
00:10:14
currency neutral and I do not have any
00:10:17
underlying bias about what the exchange
00:10:20
rate is doing between these two
00:10:21
currencies then most probably I don't
00:10:24
want to be maintaining this negative
00:10:26
balance because that balance is going to
00:10:27
be costing me some money every month
00:10:29
okay so for now what I'll do is cover
00:10:31
the negative balance because I want to
00:10:32
show you some examples of trading US
00:10:34
Stocks so I'm going to buy 50,000
00:10:37
us so let's just assume for this account
00:10:40
we bought 50,000 worth of bonds and we
00:10:42
have 154 now left in US Dollar Cash just
00:10:46
ignore the 17,000 here in Canadian just
00:10:48
pretend it's not there so we'll do an
00:10:50
example with a US Stock so regarding
00:10:52
trading stocks with interactive brokers
00:10:54
this is very important to know each
00:10:56
stock has its own margin requirement M
00:10:59
which is set by the broker and they set
00:11:02
this depending on whatever their systems
00:11:05
think the margin requirement should be
00:11:07
obviously they probably have a very
00:11:08
sophisticated mechanism for how this
00:11:10
works you need to understand that every
00:11:12
stock is different and some stocks don't
00:11:14
even have margin at all some stocks
00:11:16
actually require you to pay more than
00:11:18
the notional value of the stock you're
00:11:19
buying and I'll show you that here in a
00:11:21
second so when I go over to the stock
00:11:23
AAPL Apple Inc I have an iPhone but it's
00:11:25
I think it's going to be my last iPhone
00:11:27
ever doesn't matter I'm going to place
00:11:29
in order to buy 30 shares of this stock
00:11:31
here and I'm going to transmit that so
00:11:33
we can see the estimated margin impact
00:11:37
so the notional value of these 30 shares
00:11:39
is
00:11:42
$582 so go ahead and look at the right
00:11:44
side columns and we will see that the
00:11:45
initial margin which is how much the
00:11:47
broker is actually requiring us right
00:11:49
now to initialize a position on this
00:11:51
stock is
00:11:53
2,613 so just by a rough estimate it's
00:11:56
about 50% so the total value of the
00:11:58
stock is let's say it's 6,000 the
00:12:00
initial margin is 2600 you're looking at
00:12:03
about a 50% Capital requirement for this
00:12:07
particular stock so I can go ahead and
00:12:10
buy this stock it would not be a problem
00:12:12
and what you would see is that when I
00:12:13
buy the stock my maintenance margin is
00:12:15
going to increase to
00:12:18
3,52 from its current level of
00:12:22
1,127 and that would be absolutely fine
00:12:24
because our bond position is not
00:12:25
requiring us much Capital now the last
00:12:27
thing I want to say before I place this
00:12:28
order which is extremely extremely
00:12:30
important to understand is how the
00:12:32
margin loan works with stocks and it's
00:12:36
basically this if you have enough cash
00:12:39
to pay for the full notional value of
00:12:41
the stock then your cash balance is
00:12:44
going to be used to pay for the stock so
00:12:47
if I had
00:12:49
$582 in cash in this account right here
00:12:52
which I don't it's
00:12:53
154 it would use that cash balance to
00:12:56
purchase these 30 shares you will only
00:12:59
be using your margin capabilities once
00:13:02
your cash balance is going below zero
00:13:05
and that's why I said do not be alarmed
00:13:07
when your cash balance is negative it
00:13:09
could actually be a very good thing
00:13:11
depending on your trading strategy
00:13:13
depending on the circumstances and your
00:13:15
investment strategy margin investing
00:13:17
margin trading is not for beginner
00:13:20
investors that's why you need to watch
00:13:21
this video Until the End so that you can
00:13:23
fully understand it to a greater degree
00:13:26
if you do not have the cash balance to
00:13:28
pay for the shares then you are using
00:13:30
the margin capabilities in your account
00:13:33
and you will incur interest on the
00:13:35
negative cash balances again I'm going
00:13:37
to talk more about that later now let's
00:13:39
go on and look at a different stock here
00:13:41
so this is a different stock it's a
00:13:43
small cap or you know lower market
00:13:46
capitalization stock here and I'm going
00:13:49
to place an order on this stock and then
00:13:51
look at the margin requirement here as
00:13:53
you can see the price of the stock is
00:13:54
about
00:13:55
$13.49 and I'm going to transmit this
00:13:58
order and if we look at the notional
00:14:00
value of the shares that I'm trying to
00:14:02
purchase here it is
00:14:09
$44.75 51 that's a little bit weird
00:14:12
isn't it because this 551 is actually
00:14:14
higher than 404 this is a prime example
00:14:17
of a stock with a higher margin
00:14:21
requirement than its actual value so
00:14:24
you're actually paying more than 100%
00:14:26
Capital requirement to trade this stock
00:14:29
in a margin account you would actually
00:14:32
be better off trading this stock in a
00:14:34
cash account if your only concern was
00:14:38
Capital requirement because for whatever
00:14:40
reason interactive brokers's systems has
00:14:43
identified that this stock for whatever
00:14:45
reason is higher risk and they are
00:14:47
actually requiring more than 100% of the
00:14:50
notional value of your trade for this to
00:14:53
go through here if I buy $44 worth of
00:14:57
this stock my maintenance margin is
00:14:58
going to increase by
00:15:01
$500 which is odd because I'm only
00:15:03
buying $ 400 okay so there's an example
00:15:05
of that so the other thing I wanted to
00:15:07
show you is that when you do go ahead
00:15:08
and buy the stock I'm going to buy it at
00:15:10
a price that's probably not even the
00:15:11
real price you'll see that it uses your
00:15:15
cash balance you can see now my USD cash
00:15:16
balance is minus 252 as opposed to
00:15:19
trading the Futures where it does not
00:15:21
use the cash balance how to view your
00:15:23
margin requirement for individual
00:15:25
positions in your account it's very easy
00:15:28
the simple way would be to go into your
00:15:30
portfolio window if you do not have your
00:15:31
portfolio here go to new window and then
00:15:33
select Portfolio and then in your
00:15:35
portfolio window you can just rightclick
00:15:38
on the symbol and then go to financial
00:15:40
instrument info and then select show
00:15:43
margin impact this window will show the
00:15:45
margin impact of that individual
00:15:47
position and the impact that it will
00:15:49
also have if you decide to close that
00:15:51
position if you select new window at the
00:15:54
top left and then go to portfolio tools
00:15:56
if you go to their risk Navigator that's
00:15:58
another tool you can use to see your
00:16:00
margin requirements for individual
00:16:01
positions okay so with interactive
00:16:04
brokers they offer you two different
00:16:05
type of margin accounts one of them is
00:16:07
regt which is the standard margin
00:16:09
account this is the default margin
00:16:11
account that you have when you use a
00:16:12
margin account and then they have the
00:16:14
more advanced one which is called
00:16:16
portfolio margin what I know about the
00:16:18
portfolio margin is that number one it's
00:16:20
only available for US citizens they
00:16:22
might have changed this by the time I'm
00:16:23
saying this but last I checked that was
00:16:25
the case the second thing is it requires
00:16:28
a minimum net liquidity of 100,000 USD
00:16:32
and then you have to apply for the
00:16:33
portfolio margin account and what the
00:16:36
portfolio margin account is in short
00:16:38
guys it's a different model that
00:16:39
interactive brokers uses for calculating
00:16:42
how much capital is required in your
00:16:43
account they mention that in some
00:16:45
circumstances some individual positions
00:16:48
can actually have higher Capital
00:16:49
requirements than the regular reg te
00:16:51
model however if you have a portfolio of
00:16:55
options stocks Futures bonds Etc it's
00:16:58
Poss possible that when all of those are
00:17:00
combined and you have a portfolio margin
00:17:01
account that your margin can be
00:17:04
substantially lower because it's using
00:17:06
your entire portfolio as the calculation
00:17:08
rather than on a symbol to symbol basis
00:17:11
so if you are a portfolio manager you
00:17:13
may want to consider the portfolio
00:17:14
margin account with interactive brokers
00:17:16
so let's talk a little bit more about
00:17:18
how these margin loans work for stocks
00:17:20
trading so like I mentioned earlier when
00:17:23
you buy a stock with interactive brokers
00:17:25
you're using cash all the time you don't
00:17:28
have to have the full cash balance as
00:17:30
you can see here your cash can go
00:17:32
negative the more negative your cash
00:17:35
balance is relative to your net
00:17:37
liquidity the more of your margin
00:17:39
capability of your account you're
00:17:41
actually using so in this case I'm not
00:17:44
using much of my margin capability so
00:17:46
now would be a good time to explain net
00:17:48
liquidity excess liquidity and
00:17:49
maintenance margin it's not very complex
00:17:51
it's actually quite simple once you have
00:17:53
someone really explain it to you so your
00:17:55
net liquidity is the value of all of
00:17:57
your assets in your account combined
00:18:00
Mark to the market price right now you
00:18:02
can see here in my account I have
00:18:03
different positions in my account now
00:18:05
notice the Forex trade I did is showing
00:18:07
up as a position you can actually turn
00:18:09
that off and I'm going to do that by
00:18:11
going to account and then account window
00:18:13
I'll drag this over I will scroll down
00:18:16
using the scroll bar and then I will
00:18:18
just click on this Arrow here where it
00:18:19
says FX portfolio virtual FX position I
00:18:22
will turn that off and now you can see
00:18:24
the Forex position is not being shown in
00:18:26
our daily open profit and loss
00:18:29
however the Forex trade we did did incur
00:18:32
us a negative Canadian balance of
00:18:34
177,000 and that is having an impact on
00:18:37
our maintenance margin so just keep in
00:18:38
mind that your Forex positions may or
00:18:40
may not have an impact on your account
00:18:43
maintenance margin requirement okay so
00:18:45
your net liquidity is the total value of
00:18:48
your account with all of the assets
00:18:49
combined if the value of the stocks or
00:18:51
positions in my account are increasing
00:18:54
then my net liquidity is going to be
00:18:56
increasing if the stocks are positions
00:18:58
in my account are going to be going down
00:19:00
then my net liquidity is going to be
00:19:02
slowly decreasing because the value of
00:19:04
my account is now less the excess
00:19:06
liquidity as well as the maintenance
00:19:08
margin they will not change unless the
00:19:11
following occurs when you initiate a
00:19:15
position a new position and you buy a
00:19:16
stock you buy a Futures Contract or you
00:19:18
initiate some sort of a position you buy
00:19:20
something in your account your
00:19:22
maintenance margin level will increase
00:19:24
because now the broker is requiring you
00:19:25
more Capital to maintain the new
00:19:28
position so I can buy more shares of the
00:19:30
stock if I want and my maintenance
00:19:32
margin is going to increase accordingly
00:19:35
your excess liquidity is a reference
00:19:36
number and it's informing you roughly
00:19:39
how much you have left to initiate new
00:19:42
positions every different Market you
00:19:44
trade has a different maintenance margin
00:19:48
impact on your account like for example
00:19:50
the bond position is barely impacting my
00:19:51
maintenance margin whereas the stock
00:19:53
position and the Forex trade I did are
00:19:55
actually what's impacting most of that
00:19:57
maintenance level right there let's talk
00:19:59
about the negative cash balance so like
00:20:02
I mentioned earlier when you have a
00:20:05
negative cash balance you're obligated
00:20:07
to pay interest on that currency that's
00:20:10
how it works what I'm talking about here
00:20:12
will apply to buying stocks and buying
00:20:14
various different types of Investments
00:20:16
shorting stocks is a different thing it
00:20:18
has its own set of rules for it so I'll
00:20:20
talk about that later in the video Let's
00:20:22
assume we're buying stocks when we have
00:20:24
negative cash balance you're essentially
00:20:27
short the currency when you're short a
00:20:30
currency you are obligated to pay
00:20:32
interest to somebody in this case you
00:20:34
have to pay to your broker interest they
00:20:36
tell you how much interest you will
00:20:38
incur so let's say I have negative
00:20:41
177,000 let's say it's $18,000 Canadian
00:20:44
which would be you can go on to their
00:20:45
website and just go on the internet and
00:20:47
search for interactive brokers margin
00:20:49
and you'll find this page right here
00:20:51
margin rates and financing and you
00:20:53
scroll down and then you can enter a
00:20:55
balance in the currency that you have as
00:20:57
a negative balance and they will tell
00:20:58
you what the interest rate is on that
00:21:00
currency so I'm going to scroll down and
00:21:01
then I will enter my balance and then
00:21:04
change the currency to Canadian because
00:21:06
that's what it is and then I'll click on
00:21:08
calculate Blended rate and you scroll
00:21:10
down here and it'll give you the Blended
00:21:12
rate for your currency and then if you
00:21:14
really want to see the specifics you
00:21:15
just have to scroll a little further and
00:21:17
it'll tell you that basically from 0 to
00:21:19
130,000 Canadian this is a negative
00:21:22
balance so what this means is that from
00:21:24
0 toga
00:21:27
$130,000 Canadian this is how much
00:21:30
interest the broker will charge you in
00:21:32
this case 6.5% and then this tool up
00:21:35
here is going to be helpful for
00:21:37
calculating the interest if you have
00:21:38
larger balances because in this case if
00:21:40
you have more than
00:21:41
130,000 then you get a lower rate so
00:21:44
anything above 130,000 in negative cash
00:21:47
you're paying 6% on and that will give
00:21:49
you a different Blended rate on the
00:21:50
total amount so if I put in let's say I
00:21:52
just put in another 0 180,000 right
00:21:55
calculate the Blended rate my Blended
00:21:57
rate would be 6 .4% because I'm paying
00:22:00
6.5 on 130,000 and then I'm paying 6% on
00:22:04
the extra 50,000 okay so just keep in
00:22:06
mind that when you have negative cash
00:22:08
balances you're going to be incurring
00:22:10
interest and they will subtract this
00:22:12
interest from your account normally one
00:22:14
time per month and it happens to be
00:22:15
normally around the beginning of the
00:22:16
month the same thing goes for when
00:22:18
you're paid interest in your account if
00:22:20
you're paid interest for positive cash
00:22:21
balances or any other thing that they
00:22:23
pay interest on you're going to receive
00:22:25
it probably around the same time which
00:22:26
is normally at the beginning of month
00:22:28
and there is a video explaining how
00:22:29
interactive brokers pays interest on
00:22:31
idle cash you can go check it out right
00:22:32
there in the corner however stick around
00:22:35
here because this video is
00:22:36
better it's going to be very hard to
00:22:38
answer all kinds of questions regarding
00:22:39
this but new investors they might ask a
00:22:42
question like well why would I have a
00:22:44
negative cash balance in a currency if
00:22:45
I'm just going to be paying interest on
00:22:46
it as I may have mentioned earlier in
00:22:48
the video the investor might have a
00:22:50
specific reason for maintaining a
00:22:52
negative cash balance either potentially
00:22:54
they're bearish on the currency exchange
00:22:56
rate so potentially it's a a business or
00:22:58
an institution that does business in the
00:23:00
US dollar as well as the Canadian dollar
00:23:03
they have decided that for them going
00:23:05
short on one of the currencies is uh a
00:23:08
trade that they're willing to accept so
00:23:10
they might be willing to pay interest on
00:23:12
one currency to incur interest on
00:23:15
another currency this would be described
00:23:16
as something like a currency Arbitrage
00:23:18
trade I'm sure banks have been doing
00:23:20
this for thousands of years um that
00:23:22
would be one reason the other reason
00:23:24
would be maybe they're using their cash
00:23:26
to be in a leveraged stock position
00:23:30
right maybe they're really bullish or
00:23:31
really bearish on a stock and maybe
00:23:33
they're very experienced in managing
00:23:35
their trades that could be another
00:23:37
reason why they're comfortable with a
00:23:40
high amount of a negative cash balance
00:23:42
so I just want you to understand that
00:23:44
it's not really a black and white thing
00:23:46
having a margin account there's multiple
00:23:47
ways that you can use the flexibility
00:23:49
that a margin account offers you so just
00:23:50
keep that in mind you're going to have
00:23:52
to do some more studying so some of you
00:23:54
guys coming from potentially these Forex
00:23:56
Brokers or Futures brokers ERS discount
00:23:59
brokers often they offer something
00:24:01
called an intraday margin this might be
00:24:03
one of your questions you might say well
00:24:04
does interactive brokers offer a lower
00:24:06
margin when you're trading stocks
00:24:08
intraday which means during realtime
00:24:10
hours the answer to that question
00:24:12
unfortunately is no interactive brokers
00:24:14
does not have intraday margins for
00:24:16
futures or for stocks it's pretty much
00:24:18
the same overnight or intraday so for
00:24:21
some Traders this might be a
00:24:22
disadvantage because you might have
00:24:24
potentially a strategy that you develop
00:24:26
that uses higher positions size but
00:24:28
you're using a lower amount of risk per
00:24:30
trade like sort of a day trading or a
00:24:32
scalping strategy if you're doing that
00:24:34
type of trading you might prefer a
00:24:35
discount broker now what you also need
00:24:37
to understand about day trade margins is
00:24:39
that a lot of the times those day trade
00:24:41
margins are giving you leverage that is
00:24:43
really really out of the ballpark so
00:24:45
what I can tell you about interactive
00:24:47
brokers's margins is that these margins
00:24:50
that they offer are typically in line
00:24:54
with what the appropriate margin should
00:24:56
be in a well balanced portfolio so if
00:25:00
you invest in stocks or something like
00:25:02
that and you trade Futures as a hedge so
00:25:04
let's say you're along a bunch of
00:25:06
technology stocks and you short the
00:25:08
NASDAQ futures as a hedge the margin
00:25:10
requirement for the Futures position is
00:25:12
going to be substantially lower relative
00:25:15
to your net liquidity assuming that
00:25:17
you're running a portfolio of tech
00:25:19
stocks that's like you know 100 US
00:25:21
100,000 USD or more you understand what
00:25:23
I'm saying the next thing that's really
00:25:24
really important to understand regarding
00:25:26
margin trading is that margin
00:25:27
requirements are subject to change so
00:25:30
when you look at your maintenance margin
00:25:31
currently you have to understand that
00:25:33
this is what the broker is currently
00:25:34
requiring you to maintain in your
00:25:36
account this amount is subject to change
00:25:40
based on how volatile the market is
00:25:44
during March 2020 margin requirements
00:25:47
were significantly higher for futures I
00:25:49
remember that and for stocks as well so
00:25:51
the broker may have been requiring maybe
00:25:54
100% or even more of the capital for us
00:25:57
stock for futures it would have been you
00:25:59
know a lot higher than where it is now
00:26:02
so you have to keep that in mind if the
00:26:03
market is experiencing volatility or if
00:26:05
we're having some sort of a macro global
00:26:07
economic scenario where there's a lot
00:26:09
more Market volatility the Brokers are
00:26:12
going to increase their margin
00:26:13
requirements which is going to increase
00:26:14
your maintenance margin if the broker
00:26:16
raised up your maintenance margin and it
00:26:19
is now too close to your net liquidity
00:26:21
they're going to give you a liquidation
00:26:23
warning and you're going to have to
00:26:25
deposit more cash in your account to
00:26:28
handle the new maintenance margin for
00:26:30
the higher volatility conditions
00:26:32
obviously this is not going to happen
00:26:33
every single day every single week every
00:26:34
single month you can have long periods
00:26:36
like for example the last year margins
00:26:39
have stayed very steady and pretty much
00:26:41
low compared to where they were in March
00:26:43
2020 or in the year 2020 because that
00:26:46
year was an exception since I'm on that
00:26:48
topic we can talk more about how to
00:26:49
avoid a position liquidation as you know
00:26:52
if your net liquidity is approaching
00:26:54
your maintenance margin if your excess
00:26:56
liquidity is negative it means that your
00:26:59
net liquidity is no longer enough to
00:27:02
handle your maintenance Capital required
00:27:05
so that is when the broker is going to
00:27:07
start liquidating your positions
00:27:09
automatically in your account and they
00:27:10
are going to inform you well before that
00:27:13
if your net liquidity is approximately
00:27:16
10% away from your maintenance margin
00:27:18
level they're going to send you a
00:27:20
message that looks something like this
00:27:22
on the screen and they're going to say
00:27:24
um hello your net liquidity is 10%
00:27:27
approaching your maintenance level and
00:27:29
number one if margins change your
00:27:31
account could be subject to immediate
00:27:33
position liquidation or number two is if
00:27:35
your net liquidity drops below that
00:27:37
point meaning that your positions went
00:27:38
against you you could also be subject to
00:27:42
the position liquidation now obviously
00:27:43
number two is the more likely scenario
00:27:46
which is you're trading a bunch of
00:27:47
stocks or a bunch of options leveraged
00:27:50
and then they're going against you and
00:27:52
you don't know what to do you're just
00:27:53
sitting there like a freaking sack of
00:27:54
potatoes which is pretty common
00:27:55
especially in your first couple of years
00:27:57
you freeze if you're not used to what
00:27:58
this game is all about and then they end
00:28:01
up liquidating you it happen to me in
00:28:02
2021 on Nasdaq futures so let's say I go
00:28:05
crazy and I want to buy a lot of stock
00:28:06
here so I put it in order to buy 150
00:28:08
shares of apple and you can see that the
00:28:10
um the new maintenance after I
00:28:13
initialized this position is going to be
00:28:14
around let's say it's around 135,000 so
00:28:18
let's start by initializing this and
00:28:20
I'll just buy it at the ask you can see
00:28:22
now we have negative cash and USD which
00:28:24
is fine because we're trading on
00:28:25
Leverage maybe we plan on selling this
00:28:27
trade with in the same day we're day
00:28:28
trading you know for day trading margin
00:28:30
is pretty much you know essential so you
00:28:32
can see now we have a maintenance margin
00:28:33
level of
00:28:34
13,500 I would consider this based on
00:28:37
the current risk profile of this account
00:28:39
we're trading a couple of stocks here
00:28:40
this is a relatively safe level right
00:28:44
here the only way that this would become
00:28:45
unsafe is if this stock position these
00:28:48
two stock positions started aggressively
00:28:51
dropping against our positions and given
00:28:54
the current market circumstances the
00:28:56
current market environment the current
00:28:57
volatility and all that it seems to be
00:29:00
less likely of course this can change
00:29:02
overnight so just be aware of that so
00:29:04
I've established the fact that this is a
00:29:06
relatively safe level of Maintenance
00:29:07
margin the next thing you need to be
00:29:09
aware of to avoid a position liquidation
00:29:11
of course is how much you are going to
00:29:14
be making or losing if the positions in
00:29:16
your account drop or go in your favor as
00:29:19
an experienced Trader this might sound
00:29:21
super silly like wait a minute I know
00:29:23
how much I'm making or losing if I go
00:29:25
into the trade but some of you beginners
00:29:26
don't you might just go ahead and buy
00:29:28
100 shares of a stock and you're just
00:29:29
looking at your p&l go up and down and
00:29:31
you don't actually know that you're now
00:29:33
trading for $5 a cent in the stock
00:29:36
meaning that every cent the stock goes
00:29:38
up or down you're making or losing five
00:29:40
USD you need to be very well aware of
00:29:43
how much you are willing to lose number
00:29:46
one and how much you're actually making
00:29:47
or losing depending on how much the
00:29:50
stock is moving in your favor or against
00:29:52
you if you're really on top of your game
00:29:54
with that you're going to decrease your
00:29:56
probability of a position liquidation
00:29:58
okay and some people I've seen traders
00:30:01
that kind of neglect this like they
00:30:03
trade options and different types of
00:30:04
complex positions and they're not
00:30:06
necessarily considering at all times how
00:30:10
much their net liquidity is going to be
00:30:12
impacted if the stock were to drop by $2
00:30:15
or if it were to go up by $3 in their
00:30:17
short calls or something you understand
00:30:19
what I'm talking about you have to be
00:30:21
very well aware of how much you're going
00:30:22
to be making or losing based on how much
00:30:24
these stocks are moving and your
00:30:27
position size in those stocks okay so
00:30:29
right here guys is a special case
00:30:30
example I wanted to demonstrate to you
00:30:32
guys um because this is an example of a
00:30:34
trading account where the excess
00:30:36
liquidity is quite low and actually
00:30:38
under some
00:30:40
circumstances this would actually be a
00:30:42
highrisk scenario to get liquidated but
00:30:45
because of the positions in this account
00:30:47
and the kind of positions that they are
00:30:48
it's actually a low risk to be
00:30:49
liquidated so what I've done in this
00:30:51
account is I'm invested in treasury
00:30:54
bills Canadian and USD um one of them is
00:30:57
an ETF for Canadian treasury bills the
00:30:59
other ones are actually um us treasury
00:31:01
bills I bought on the secondary Market
00:31:03
with IB so you can see there's a
00:31:05
negative cash balance of 12,000 Canadian
00:31:08
and the reason for that is because it
00:31:09
actually pulled that money out as a
00:31:11
withdrawal they'll allow you to pull
00:31:13
cash out of your account up until your
00:31:15
excess liquidity approaches zero so what
00:31:18
I did as an experiment here is because
00:31:20
these are lowrisk positions and they
00:31:21
don't depreciate or at least they're not
00:31:22
supposed to I pulled out as much cash as
00:31:25
I possibly could out of the account and
00:31:27
then take a look at how that's going to
00:31:29
impact the maintenance and excess
00:31:31
liquidity the first thing is is that
00:31:32
they did send me a message about the
00:31:34
cash balance being negative and then
00:31:36
they did send me that message about when
00:31:37
the excess liquidity is 10% um away from
00:31:41
where it would be to start getting
00:31:42
position liquidated okay and that's
00:31:44
normal because I pretty much made my
00:31:46
account go close to my maintenance level
00:31:49
so this is an example where you can see
00:31:51
the net liquidity is
00:31:52
25,000 and the maintenance level is
00:31:55
2.3k and what the the broker is
00:31:57
essentially telling us here is that if
00:31:59
the value of our account were to drop by
00:32:02
$184 we would be subject to automatic
00:32:05
position liquidation now this right here
00:32:08
is a lowrisk profile for this account
00:32:10
because it's invested in t- bills that
00:32:12
only give me a profit however if this
00:32:15
was a stock portfolio this would be an
00:32:17
extremely high-risk situation where
00:32:20
depending on how long or short you are
00:32:22
in the stock it could potentially take a
00:32:25
very small movement of price in that
00:32:26
stock and the broker would immediately
00:32:28
start liquidating your your position the
00:32:30
one that's going against you keep that
00:32:32
in mind this is an extreme example I
00:32:33
wanted to present to you because
00:32:35
depending on the kind of assets you're
00:32:36
invested in this is a high risk scenario
00:32:39
or potentially a lower medium risk
00:32:41
scenario that's why it's important to
00:32:43
understand that margin investing is for
00:32:44
experienced investors only you have to
00:32:47
understand exactly what is likely to
00:32:49
happen if X Y and Z occurs and you have
00:32:51
to be ready for certain things to happen
00:32:54
okay now the last thing is we're going
00:32:55
to finish off with how does shorting
00:32:56
work with interactive brokers so
00:32:58
shorting has its own set of rules so
00:33:00
when you short a stock guys you're
00:33:02
basically borrowing the shares from the
00:33:04
broker you're borrowing them from
00:33:05
someone the broker has to find those
00:33:07
shares and then you go into the market
00:33:09
and you sell those shares to some other
00:33:11
Trader when you sell those shares you
00:33:13
get cash right because you're selling
00:33:14
the shares you get cash in your account
00:33:16
so you might have a positive cash
00:33:17
balance when you short a stock you're
00:33:20
going to be short the stock but you're
00:33:22
going to be positive in cash normally
00:33:24
and the fee structure for shorting a
00:33:25
stock is different when you short stock
00:33:27
there's something called a fee rate
00:33:29
which is basically the interest rate of
00:33:31
the stock so if you want to see what
00:33:33
that fee rate is depending on whatever
00:33:34
watch list you use I'm going to right
00:33:36
click on one of these columns go to
00:33:38
customize layout then go to Short
00:33:40
Selling on the available columns I'm
00:33:42
going to find short selling and then I
00:33:44
will add in the fee rate there I'll
00:33:46
apply it and the fee rate is basically
00:33:49
how much it costs per year to go short
00:33:51
this stock so you can see for example
00:33:52
this penny stock here GCT which is not
00:33:54
really penny stock anymore it has a 9 %
00:33:57
fee rate it's going to cost you 99.3%
00:34:00
per year to be short on this stock so if
00:34:04
you shorted 100,000 worth of this stock
00:34:07
you're going to pay about
00:34:08
$9,000 per year to remain in that short
00:34:12
position and the interest will be acred
00:34:16
every day that you remain short the
00:34:18
stock everything regarding margin
00:34:20
trading that I described to you in the
00:34:22
acre of interest it's always when
00:34:24
negative cash balances and short
00:34:25
positions are held over night if you
00:34:27
have a negative cash balance since your
00:34:29
day and then you cover it by the end of
00:34:30
the day you're not going to acrew any
00:34:32
interest on that so when you're short of
00:34:34
stock you pay the fee rate so that's one
00:34:37
fee that you have to pay however when
00:34:39
you're short the stock you also get cash
00:34:42
from it and the cash that you get from
00:34:44
the short position you can actually
00:34:46
accumulate some interest on that so you
00:34:48
go to this page at
00:34:49
interactivebrokers.com pricing
00:34:52
slsh sale- cost short sale cost and then
00:34:57
you scroll down and then you can
00:34:59
basically see the interest rates so
00:35:01
these are the interest rates that
00:35:03
explicitly apply to cash that you
00:35:06
receive from shorting a stock so if you
00:35:09
short a stock and you get
00:35:12
$100,000 from it they actually pay you
00:35:15
nothing on
00:35:16
that and more than 100,000 from 100,000
00:35:20
to a million then they'll pay you 4% on
00:35:22
the cash that you got from shorting the
00:35:24
stock so what this can do is if you're a
00:35:27
really big short Trader this can offset
00:35:29
the fee rate for the stock and if the
00:35:32
stock doesn't have a high fee rate
00:35:33
potentially this could even be earning
00:35:34
you a positive return on the cash that
00:35:37
you generated from shorting the stock so
00:35:39
that's something to keep in mind all
00:35:41
right guys I think we covered a lot of
00:35:43
stuff in this video if you have any
00:35:44
questions regarding margin trading with
00:35:46
interactive brokers leave them down
00:35:48
below I will try to answer them as soon
00:35:50
as possible obviously just allow me some
00:35:52
time because I get a lot of questions
00:35:53
here on this channel all right guys I
00:35:54
really appreciate you watching this
00:35:56
video I hope you learned something I
00:35:57
hope you feel 25% smarter check out this
00:35:59
video right here if you want to learn
00:36:00
how to set up an advanced scanner in
00:36:03
twws that replicates something like a
00:36:05
finis scanner or a trading view stock
00:36:08
screener cheers see you in the next one
00:36:10
love you bye
