Brokers With Lowest Margin Rates

Brokers with lowest margin rates are highly sought after by traders with a large risk appetite and designs to make serious money from their investment accounts. Such brokers are also popular amongst cost-conscious retail investors, especially during periods of market volatility. This article delves into the world of low margin rate brokers, explaining the underlying concepts behind margin trading, and detailing the benefits for traders that open accounts with brokers offering the lowest margin rates.

Brokers With Lowest Margin Rates

IB Boast a huge market share of global trading. With a minimum deposit of $10,000 however, they remain an option for larger traders only.
Margin Rate: 1.55 - 2.59%
M1 Finance offers customizable and automated trading services for US investors.
Margin Rate: 2 - 3.5%

What Is A Margin Trading Account?

A margin account is a powerful tool for investors that allows trades or investments to be made that are worth more capital than what is being put down. Margin refers to the fraction of the full trading amount that the investor provides to open a position; a margin rate is a form of commission charged on the trade, often provided as a percentage. This is why margin traders look for brokers with the lowest margin rates. Most brokers will require a minimum invested account balance to access margin.

In traditional markets, the borrowed funds used to open a position are usually provided by an investment broker. However, in cryptocurrency trading, funds may be fronted by other traders who earn interest based on market demand for margin funds. In other cases, the cryptocurrency exchange itself may provide margin account funds to its customers.

Read on for details on the brokers with lowest margin rates below.Margin Trading Brokers With Lowest Rates

More information on margin trading can be found here.

Margin Rate

With trading on margin being much like taking out a bank loan, traders must also pay a fee, or interest, on the loan. These are referred to as margin rates, and they vary between brokers and accounts. Margin rates are often a few percent and are charged on the leveraged capital, not the margin fronted by the trader. Brokers with lowest margin rates offer particularly competitive account conditions.

Much like loan interest, the best scenario for an investor is the lowest broker margin rate, as this minimises the cost of the overall trade.

Depending on the margin account rate that the broker offers, you may also have to pay periodic interest payments in the same way you would pay interest on a bank loan. Most brokerages will also offer their best margin rates for those traders with higher levels of investment capital in their accounts. It is important to fully understand the fee structure of a broker’s margin investing options to optimise the use of margin and maximise profits.

Margin Example

Now let’s look at an example that shows the benefits of brokers with lowest margin rates. If a trader were to invest $25,000 cash into an unleveraged account for a period that produces a 10% yield, they would walk away with a profit of $2,500 and a new total capital of $27,500.

However, if they were to invest $25,000 and also take on a margin debt of $25,000, the total investment capital would be $50,000. For the same account yield of 10% and the same timeframe, an initial return of $5,000 would be produced. However, the margin cost must be determined from the margin rate and deducted from this value. For example, if the margin rate is 5%, then $1,250 (5% of $25,000) must be paid back to the broker, resulting in a net profit of $3,750 and a new capital of $28,750.

Consider now the same investment but with a lower margin rate of 1%. In this case, the margin cost would be $250 (1% of $25,000) and the net return would equal $4,750. Clearly then, maximum profit exposure is created by the broker with the lowest margin rate, as they take the least from the trade’s returns. In the example above, the 1% margin rate afforded the trader an extra $1,000 profit.

Margin Trading Online Calculator

Risks

While using margin trading accounts may seem a no-brainer, especially through online brokers with the lowest margin rates, it is deceptively dangerous. Consider again the above example, only this time the investment backfires and the portfolio yield is -10%. In an unleveraged scenario, the investor would lose $2,500 and walk away with $22,500. In the leveraged case with a 5% margin rate, the investor not only loses the $2,500 from their own investment and pays the same $1,250 margin cost, but they must also front the losses on the margin debt (another $2,500), totalling a net $6,250 loss.

Additionally, traders must be careful about using margin for small trades, as the returns from the investment need to be larger than the margin cost. If not, the margin cost would have to be paid by the trade profit and some of the investment capital, resulting in a net loss for the investor despite the trade being profitable at face value.

Pros Of Brokers With Lowest Margin Rates

The benefits of using brokerages with the lowest margin rates are:

  • Less interest to accrue
  • Amplification of return rates due to more affordable account borrowing

Cons Of Brokers With Lowest Margin Rates

Opting for brokers with lowest margin rates can also be disadvantageous:

  • Interest costs apply until fully repaid
  • Only beneficial if a trade is successful
  • Rapid profit generation can be difficult
  • Margin trading is a debt that must be repaid
  • A larger account deposit is often required than for higher rates

Best Brokers With Lowest Margin Rates

Interactive Brokers (1.55-2.59%)

Interactive Brokers (IBKR) doesn’t have the most accessible margin account requirements, with a minimum invested balance to access margin of $10,000.

However, IBKR offers competitive 2.6% margin rates for US traders on all loan sizes in the lower level of Interactive Brokers’ account types. For IBKR Pro account holders, margin rates begin at 1.6% before dropping incrementally to a low rate of 0.75% for loans over $1 million. Percentages also vary with base currency, with Interactive Brokers’ lowest margin rate sitting at 0.5% for IBKR Pro account holders using many of the major currencies. Full details of the margin rate variations are explained on the  Interactive Brokers website, including some securities with special margin requirements.

IBKR is a high-end margin broker best suited to high-net-worth individuals and institutional traders. One major stipulation is that traders must have over two years of experience as customers before margin loans can be acquired. These factors allow Interactive Brokers to offer their account holders some of the best margin fees, leverage options and buying power around.

Traders can open Interactive Brokers accounts from Europe, the UK, Australia, Canada and other countries in the EMEA, Asia-Pacific and Americas.

M1 Finance (2-3.5%)

M1 Finance is one of the brokers with lowest margin rates. In fact, the platform is currently offering a 0% interest promotion on the first $5,000 borrowed. This $5,000 is M1’s minimum invested balance to access margin through M1 Borrow.

M1 Finance offers a 3.5% margin rate for all users and 2% for those who subscribe to M1 Plus, their $125 pa membership. M1’s ultra-cheap margin is one of its most attractive features. With M1 Borrow, you can borrow up to 35% of your total invested balance. That means traders can borrow up to $3,500 for a $10,000 portfolio, resulting in a leverage ratio of 1:35.

M1 Finance is not available to investors outside of the US, so UK-based investors will need to find a suitable alternative.

Robinhood (2.5%)

Robinhood has recently dropped its already competitive margin rates down to 2.5%, one of the best around. Access to margin trading accounts is restricted to users who subscribe to their premium service for $5 pcm. However, the first $1,000 of margin requested is included in this fee, meaning traders only pay 2.5% on any margin above this value.

While the margin rates may be competitive, Robinhood has recently experienced technical issues resulting in outages, causing a class-action lawsuit from its users, and have been fined by the SEC in the past for dishonesty regarding their order flow. As such, we do not recommend trading with them.

Final Word On Brokers With Lowest Margin Rates

Margin trading is an opportunity for investors to magnify their gains, though it can add complexities and risks not otherwise required. Thorough research should be carried out into the brokers offering the lowest margin rates, which should be combined with other considerations before selecting a broker to open an account with. If margin trading is for you, brokers offering low rates will facilitate larger profits for the same risk exposure.

FAQs

What Does It Mean To Trade On Margin?

Trading on margin entails borrowing money from a broker to carry out trades. Traders deposit cash that serves as collateral for the loan, then pay ongoing interest on the borrowed money. This loan allows investors to buy a larger quantity of securities which automatically serve as collateral for the loan.

What Are The Benefits Of Brokers With Lowest Margin Rates?

Margin accounts becomes advantageous when your rate of return is higher than the interest on the loan. Brokers offering the lowest margin rates will eat into your profits less.

Which Broker Has The Best Margin Rates?

Most traditional brokers have margin rates of around 8%. Interactive Brokers and M1 Finance offer competitive margin rates of around two or three percent, depending on the base currency and investment capital size.

Which Forex Brokers Have The Cheapest Margin Rates?

Interactive Brokers has an entire platform dedicated to forex trading that supports 23 different currencies. Its margin rates range from 0.5% on large loans for premium account holders to 9% for lite members.

Can You Negotiate Margin Account Rates?

Margin rates are not always fixed at those published on the broker websites. Given a large amount of capital often involved, brokers can sometimes be negotiated with the get better margin rates. If you are with an existing broker and want a lower margin rate, it may be worth contacting them first.