How to use IG

IG Group Holdings is a global online trading company that enables clients to trade in shares, indices, commodities and binaries (don’t ask but they don’t matter to us) to a retail and institutional client base. It has been in existence for many years and is itself a quoted company on the London Stock Exchange, with a market value well over £2bn.

Many of the customers who use IG are short-term traders; that is emphatically not what we do at Quentinvest, where the whole emphasis is on the long-term, by which I mean years.

Below, I will describe to you how I use IG to implement the Quentinvest long-term investment strategy, which is entirely based on shares. Quentinvest for Shares is about building a portfolio of individual shares. Quentinvest for ETFs is about building an ETF portfolio but ETFs are themselves shares, which can be bought and sold on equity markets just like any other kind of share.

I have three IG accounts – a share account, a CFD account and a spread betting account.

This may sound like gambling, particularly in the case of spread betting accounts but in my case it is not unless you regard any kind of investment in shares as gambling. Whether I am buying a share through the mechanism of spread betting, CFDs (contracts for differences) or buying the shares directly my strategy is the same in every case, to hold for the long-term.

The simplest account for most people to understand will be the share account. This works exactly like any stockbroker in the past as an agent, through whom you buy and sell shares paying commission. Minimum commission is £5 but this only applies if you have made 10 or more trades in the previous month. Otherwise it will be £8. On a £1000 trade this works out at 0.8pc, which is reasonable and becomes very reasonable on larger trades.

Shares purchased in a shares account have to be paid for in full, as there is no margin facility available. If IG treats you as an inexperienced investor (see more on this below) you may find that the only account they will allow you to open is a share account. This is not a problem because you can use the account to learn about equity investing. All the shares and ETFs featured in Quentinvest can be bought in a share account.

If you want to open a CFD or spread betting account, with IG you will have to answer a number of questions that help them to determine the depth of your resources and how much you know about investing with shares and derivatives. CFDs are a derivative. Their value is derived from the underlying share.

It is understandable that IG wants to do this. First, for your own benefit they want to be sure that you know what you are doing. Secondly, if you do invest on margin that means you are buying shares worth more than the money you put into your account. The difference has to come from somewhere and it comes in the form of a loan from IG. This means, just like any bank, they need to make sure you are a good credit risk.

An example may help to make this clearer. You put £250 into your CFD account and buy CFDs worth £1000. The balance of the cost, £750, comes from IG. As it happens they charge interest not just on the £750 but also on the whole position. So the interest is charged on £1,000, not £750.

This is a secured loan, against the shares you have bought and IG wants your business so the rate is very reasonable. On shares it is 2.5pc over Libor so the charge on the day I checked was approximately 2.8pc. This is an annual charge so over a year we are talking about £28 on a £1,000 position, higher if the share climbs making your investment worth more than £1,000, lower if it falls in value.

If your shares rise in value your equity will grow more than proportionately so the fact that you are paying interest on your equity position as well as the amount you are borrowing starts to become more onerous. On Quentinvest we have strategies for dealing with this problem by shifting equity into your share account, where no interest is charged but for the moment that is an issue for another day. It only becomes a problem if your shares rise substantially in value so you could say it is a good problem to have.

In almost all respects CFDs are identical to shares. They rise and fall in a way, which exactly mirrors movements in the underlying shares. They qualify for dividends, share splits, special payments and anything else that happens affecting shareholders.

The two advantages of CFDs are that you avoid the 0.5 per cent stamp duty payable, when you buy shares and you can buy CFDs on margin. The latter is a huge advantage as far as Quentinvest is concerned because it means you can buy more shares and build a larger, diversified portfolio more quickly than if you were restricted to just buying shares.

It also adds an extra degree of risk by magnifying your gains and losses. This is good news if you are a long-term investor holding a well-chosen portfolio that rises in value over the years. Your profit will be greater than it would have been with just an unleveraged share portfolio.

The flip side is that any losses are magnified in exactly the same way. You need to be mindful of this for two reasons. First, you may experience a bumpy ride, especially in the early days as you are building your portfolio and before there has been much time for profits to develop. Shares can be very volatile.

Secondly, you must be very careful about how much leverage you have. If your equity falls below IG’s required margin you will either have to put more money into your account or you will have to sell your shares. If you don’t react quickly enough or are not paying attention they may even sell your shares for you, without telling you. It is important that this doesn’t happen so you must not borrow too much.

In a worst-case scenario you could lose more than your deposit. There is a more detailed discussion of risk elsewhere on the web site (see ‘risk’ heading on the home page). You need to be mindful of what you are doing but don’t get too frightened. There are opportunities as well as risks, especially for long-term investors. You will be investing alongside me and I don’t want to lose money any more than you do.

There is another point to remember regarding risk. IG’s rules will let you borrow an incredible amount, especially on highly liquid shares like Apple or Reckitt Benckiser. You could put up just $50 or £50 and buy $1000 of Apple or £1000 of Reckitt Benckiser. I don’t think this works even for short-term investors but it would be insane for long-term investors using the Quentinvest strategy.

My suggestion as a guiding rule is that you never allow your portfolio to exceed three times the value of your equity and even that could be too much in a stock market crash so it is best to also have some funds in reserve. This means, in the example above, that to buy $1000 of Apple you should put not the minimum $50 required under IG’s rules but at least $333 into your account and ideally have additional funds available for exceptional circumstances.

The key to Quentinvest is that you never sell so you need to make sure you never have to, which means being sensible, just as I am sure you were when you bought your house, if you own one.

One way that I use to keep my level of leverage at a sensible level is to purchase all or most of those shares, where IG has set a 25pc margin requirement, in my share account. So I buy these with no leverage at all. Then I link my share account to my CFD account and use the shares as collateral to buy CFDs. The combination is very effective at keeping me sensible.

At this stage most of you will not need to bother with spread betting accounts. The advantage of spread bets is that all gains are tax-free. However the capital gains tax allowance, the profits you can make in a year without paying tax, is £11,300 so that should keep most of us going for a while.

The biggest disadvantage of spread bets is that there is less flexibility in the amount you invest. On some high priced shares, like say Amazon or Alphabet (the holding company for Google), the minimum investment can be as high as $24,000. This is too much for most of us in the Quentinvest system, where we are trying to build a diversified portfolio, while investing the same amount in each share.

As time passes and if the need seems to arise I will explain more about how to use spread betting accounts. Despite the name they don’t have to be a gamble and can work for long-term investors very well, just like CFDs. For the moment though I suspect most investors will not need a spread betting account.

I do have one myself and spread my investments between all three accounts – shares, CFDs and spread bets. I use the spread bets where I can make smaller investments, and buy higher priced shares like Alphabet in my CFD account.

There is also a case for buying more UK shares in the share account and overseas and American shares in the CFD account because of a small commission advantage.

There is another feature of the CFD account, which comes into play if, as a result of your answers to their questionnaire, IG judges you to be an inexperienced investor. They may only allow you to have what they call a limited risk account. This is not a big problem for Quentinvest investors because we only want you to take limited risks.

There are two principal practical effects of a limited risk account. First, you will have to set a guaranteed stop loss for every purchase. My advice is to set the stop loss price further below your purchase price than IG requires because you don’t want to sell. I would set it at 25 per cent below even if they only ask for 10 per cent. This margin will determine how much equity you need in your account but again that is not a problem.

The second issue is that for shares, without great liquidity, limited risk account holders may not be able to buy them at all in their CFD accounts. Again this is not a problem because I would prefer you to buy these shares in your share account anyhow.

I hope this helps give you an idea of how to use IG accounts for the Quentinvest strategy. Any questions let us know, especially where they relate to Quentinvest strategy. Otherwise, for more IG-specific questions, visit the IG web site and direct the questions at IG staff, who are very helpful and knowledgeable.