“But ‘how are you going to make money long-term?’ has been a question mark” Bhatt says. Gold has answered that question.” A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage
Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?
Even if you are a professional trader you'll take a bath on margin over the long run. They are incentivizing what is effectively borrowing for gambling and that is their long term revenue strategy? Might be a great money maker but it certainly is playing with some really big barrels of fire.
"Three things ruin people: drugs, liquor, and leverage - Charlie Munger"
edit: The point here is not that Margin is a new service, yes every brokerage has it, it's that it is irresponsible to use Margin if you are not a sophisticated investor. Its even more irresponsible to push leverage onto unsophisticated investors.
Not everyone is going to understand the risks of leverage and if Robinhood makes it as easy as candy crush to trade on leverage, enough gamified users are "playing" stock market with real money and a margin call happens during a huge downturn, it will be exceptionally nasty.
Depends what you want to do, I'm about 98% in plain old, boring index-tracking ETFs.
But sometimes I want to take a bit of money to make some stupid bet. Yes, to gamble. And for that purpose, often having the leverage is a good thing.
The way I see it, the bets are much more entertaining than those at casinos and with better odds. Maybe it's just me, but I find casinos incredibly boring, but gambling on the market can be quite interesting.
I think the bigger problem is the erosion of the distinction between "investor" and "speculator", which is often unclear for novices entering the market (for whom Robinhood is significantly lowering the barrier for). Robinhood provides the firing range and a gun but no safety instructions.
So I'm willing to bet you view this app very differently than someone who finds it on the App Store in a spur of the moment enticed-by-Wall-Street feeling, where it can be mistakenly thought as a get-rich-quick scheme. There's no education component to Robinhood
(This conflation between speculator/investor has been happening for a while, see "The Intelligent Investor" by Benjamin Graham.)
But even if you pay the $9-$15 for their Gold account, you still can only get on margin the amount of capital you have in the account max ie: if you deposit $5 and have $5 of cash on hand in your robinhood, but own ~$1200 of stocks, you can use < $1200 of "Gold" which is what they call margin money. It is explained quite well here:
Note that I am a robinhood user and do not use gold or any margin investing. I use it for speculation for long term stuff and have the rest in boring index ETFs / funds primarily. I think the entire idea of investing on margin as playing with fire when you lack fireproof gloves.
Investing or trading on margin is intended to allow you to trade while you are waiting for previous trades to settle. It's not meant to be a loan, but it is exploited that way by both banks and traders at their own risk. It's simple enough to fix, only allow margin to cover the amount of money waiting to be settled. In other words if a trade hasn't settled then the funds are not available for trading.
Margin can be powerful as a wealth building strategy, when interest rates are low. Risky? Yes. Profitable? Sometimes, if you've done your homework.
I don't think you can be a consistent good stock picker, HOWEVER, there are certain companies you just know will do well because they're closely aligned to the industry you work in, for example. "Doubling down" using margin (borrowed at 1-2% per year, not 8-10%) can (maybe, sometimes, not always) be a good strategy.
As the old saying goes, in the morning two kind of people enter the market. One with money, the other with experience. By evening they exchange positions.
> John C. (Jack) Bogle, after whom the Bogleheads® are named, is founder of the Vanguard Group and creator of the world's first retail index mutual fund.
It's worse than that. Over any period of time index funds beat the average actively invested money because they have the exact same returns and less fees:
Wouldn't want to enable people to make their own decisions with their money, would we? The fact that you have to make a paid account to use leverage (whereas you can trade indefinitely for free) is deterrent enough for most people who do not already actively manage their investments.
I think Robinhood is doing a great service -- I just wish they would expose a better API.
Unless I misunderstood him, he's not complaining that people can make their own decisions with their money, aka that anyone can use this service even if they're not well versed in that field, he's complaining that Robinhood entire business model is based on pushing the very users who don't know how to use it in a sane way, to do it anyway. That will be the company's lifeline, as its way to make money.
I can see the benefit in making it easier for people to get access to things that are often hidden behind layer of complexity and "need an in", but I can also see the perversity of building a business where your money making system is "put debt on people who don't quite know what they're getting into". The point is not that they allow it, it's that they have a direct incentive to make it happen as much as possible.
However, they still sell their client order flow to the bank that pays them the most to execute their trades. This isn't illegal and was a HUGE point of Michael Lewis's hack-n-slash book on electronic trading "Flash Boys".
If my Robinhood trades of 100 lots or more execute at a few pennies higher than the price when I place the order, I think that is entirely fine. Why? Because it costs 5-10 to trade from Etrade or most other normal brokerage accounts. From what I've seen thusfar (I've got maybe 20k invested with RH), all of the trades have executed at the price I expected them to, or 1 cent higher on very volatile stocks (TSLA in specific). I'm still paying massively less than if I used a traditional broker and RH is making a bit of money by selling my order flow.
If my Robinhood trades of 100 lots of more execute at a few pennies higher than the price when I place the order
They're not really allowed to do that and I don't think they are doing that. Robinhood (or whatever wholesaler they route your order too) is required to execute your order within the nbbo. They can't just e.g. fill your buy orders a few cents above the national best offer because they want to make some extra money. The regulations don't work that way...
I'm familar with NBBO, my previous employer (Virtu Financial) and current employer (another large electronic trading firm) are very well known HFT firms but I'm in tech, not the trading side. That doesn't mean the NBBO doesn't change before your order can fully execute? Is it fair to assume you've never heard of RBC's Thor[1] and aren't super familar with maker-taker rebates and the scandal behind them? The NBBO and the proliferation of trading exchanges is in fact what allows this to be possible legally. Like many regulations, it became a tool to perform the types of things it was designed to prevent. This article[2] has an interesting take on the NBBO wrt the SIP that is used. Many firms can calculate their own information faster than the NBBO updates. Note that this isn't the kind of trading (speed only) that my current employer does at all, which is why I sleep well at night.
What are your thoughts on RH being mobile only and how that affects your ability to manage this amount of money. Isn't it hard to keep track of your positions, performance, etc with all those taps and lack of ability to export or read on a real device?
It bugs the crap out of me that they don't integrate with other services like Mint. Right now I do a few things. I manually track my position using personal capital (I can't recommend this service / app enough for tracking ALL of your investments and planning for your future). It is kind of like mint, but exclusively for your investments (https://www.personalcapital.com/)
I've written a fair bit of code (python) to parse my statements and make sure things true up with what personal capital says. The app thing is annoying, but RH just closed 110M and they'll get more functionality in the future. You're not the first person to ask that and I figure eventually they'll have to open things up or they'll lose customers (like me). Right now, I'm ok with using it for a year or two provided they allow me to continue no-fee trades.
I've been retargeted by Personal Capital on FB for several months now. Are you recommending the "free financial tools" from Personal Capital? I sort of assumed the "free" was just there to entice you into paying for their wealth management services which look like every other robo but with higher fees.
Are the tools actually good? Several low-cost robos (Wealthfront and Betterment) now have fairly good retirement planning interfaces which take your outside accounts into consideration and Mint has investment tracking now as well.
They very politely try to upsell you on their wealth management "call and speak with our professional advisers today!" services, which I simply decline. Their ability to track investments seems superior to mint for the things I want to do, but to each their own. If you just use the free tier, it is great. I simply use it to make sure I don't need to do much rebalancing of my investments every year based on my investment goals and risk tolerance. Having been a mint user since early 2007, I actually prefer PC for the investment only advice, and mint for everything else.
100% agree that depending on people going into margin for monetization is a poor alignment of incentives. The humorous thing to me, is that being aligned with forcing people into leverage is an apt description of the economy at large.
Believe it or not, buying a very expensive home with poor understanding of the market and finance mostly through debt can be seen as analogous to un-collateralized leveraged investing....
> Wouldn't want to enable people to make their own decisions with their money, would we?
As a blanket statement? No, we don't. Two reasons why:
1. "Make their own decision" is an extremely inaccurate phrasing. Unsophisticated investors do not have enough information to properly evaluate a decision, and are therefore unduly influenced by companies wanting to take advantage of them.
2. There's a cost to society from people who take risks that have negative expected value and then expect society to help them. Of course, society could just refuse to help them, but find that society works better when certain support structures (e.g., the ability to discharge debts in bankruptcy) exist, and it's very hard to distinguish people who "really" need the support structure and those whose petard is their own. If social pressure or regulation can deter people from taking these risks, that's slightly unfortunate for the person who would have won the gamble, but very advantageous to the health of society as a whole.
Both reasons are also why outright gambling is regulated, why publicly-traded companies are subject to financial regulation, why we don't let people "make their own decisions" about raw milk, untested drugs, aircraft, etc. - there are strong incentives for the people selling you that product to lie to you by omission in the hope of influencing your decision to be profitable to them.
"Make your own decisions" and "choose what is right for you" are often euphemisms for "get thrown to the sharks" but give the illusion that you are really being given control over your own destiny by those who will likely take advantage of you.
> Wouldn't want to enable people to make their own decisions with their money, would we
I think you're missing what the criticism here is.
Let's say you, right now, have $10,000. I say "Hey, lend me that money so I can play the stock market with it." Would you give me the money? You know literally nothing about me. You don't know if I've ever traded a stock before. You don't know if I can ever pay you back. There's a higher than normal probability that I will never pay you that money back.
Robinhood is taking on a lot of risk and using that as proof that they're a profitable company.
Margin loans are lower risk than you may think, as they're secured by highly liquid assets that are held in custody at the broker that's lending the money. That's not to say the broker can't take a loss, but it's not as risky for the broker as you might think.
> Robinhood is taking on a lot of risk and using that as proof that they're a profitable company.
Margin positions are typically liquidated when they go negative. At worst, the customer owes Robinhood some leftover slippage after their margin gets called. And typically, margins are called before your account goes negative.
If your trade starts going bad they'll be aggressively unwound. They're a very well-understood model offered by tons of (profitable) brokerages out there. Robinhood is not doing anything new by offering them.
That's not how margin trading works. It is a loan, but it's collateralized against your existing holdings. Most institutions will only loan you a percentage of your existing holdings (somewhere between 30% and 50%). Additionally, if the market value of your existing holdings dips such that the total loan amount is greater than the maximum percentage loan, those assets can (in most cases) be immediately sold to pay back the loan. This is called a "margin call".
To use your example, if you were using margin from an institution that allows for a 50% rate, in order to get that $10k loan, you'd have to already have $20k available in a relatively liquid assets (stocks, bonds, ETFs, mutual funds). If the value of your holdings ever dipped such that you held less than $20k, thus making your loan greater than the institutions 50% limit, some of those assets would be sold to pay down the loan.
There are additional safety measures built into margin accounts by brokers that offer them such as ensuring that the collateral assets aren't 100% allocated a single risk prone stock for example. Margin is a very well understood and safe business model for many brokers.
My understanding of the criticism of the GGP is not that Robinhood's business model is unsafe for Robinhood, it's that it's unsafe for their target market (casual stock traders). The idea is that casual trading is, for most of the population, gambling. Depending on your moral stance on gambling, using "free trades" as a marketing funnel for loans designed to be used for gambling falls somewhere between grey and repugnant.
As a small investor, borrowing money to invest is almost invariably a terrible, terrible idea, because any return you make on the investment will likely be cancelled out by the interest paid to borrow the money.
I just looked up margin interest rates, for loans of 10 000 or less (which is what we are likely talking about with robin hood) the interest rate is Base Rate + 1.25% which is 8.50% interest. I don't know many stocks you can buy even in the best of circumstances that will get you a guaranteed return of more than 8.5%. Moral of the story - robin hoods retail investors should not engage in margin trading.
Where are you getting these numbers? Their rates appear to go from ~4.8-7.2%[1]
Also, it should be noted that Gold is a flat fee based on account value brackets and margin brackets not a percent fee of your margin like every other brokerage. That means your effective margin rate can be much higher. e.g. if you borrow $100 for a $2000 account, you're looking at an effective margin rate of 72%.
> I just looked up margin interest rates, for loans of 10 000 or less (which is what we are likely talking about with robin hood) the interest rate is Base Rate + 1.25% which is 8.50% interest.
Is that from Robin Hood? If so it's a travesty specific to them. You can borrow from Interactive Brokers for 2.4%, which is a lot easier to overcome even with straight broad-market ETFs. [0]
No it wasn't robin hood, it was just basic rates charged by another firm. I figured robin hood is going to charge the industry standard. But that 2.4 % interest rate is being charged daily on those loans so that's even scarier.
>IB accrues interest on a daily basis and posts actual interest monthly on the third business day of the following month.
from investopedia
>Interest accrues on loans, such as a mortgage, or on savings accounts and investments. Daily accrual means interest amounts are added to the account balance every day. Interest can accrue on any time schedule; common periods include daily, monthly and annually
it would be different if the rates were annual percentage rates, but your site doesn't specify that.
no I don't know anything about finance but I got google.
You found the right terms but totally missed the meaning. Daily accrual means that your interest for that day is calculated daily. It doesn't mean the interest rate is 2.4% a day.
Did you even think about this logically? 2.4% a day would be 876% a year. That's obviously insane.
Interest rates are almost always annualized and cited in terms of APR or Annual Percentage Rate. If the APR is not cited, then it is implied.
This makes it easier to compare loans even if they have different terms. The fine print will usually provide the daily interest rate, for example 2.00% APR is 2/365 = 0.005479% per day interest.
Often interest is compounded continuously in which case calculus can be used to compute the exact interest, but it ends up as a famous formula in investing, FV = PV * e^(R*T). In practice, it ends up being very close to daily compounding, but it allows banks to advertise an ever-so-slightly higher APY (annual percentage yield) which is why everybody does it this way for interest paid on deposit accounts.
Except it's credit, not their own money, so your naiive "how people spend their money has no consequences" attitude, doesn't hold water. That's the whole point.
Sure. It's Robinhood's money, which they're choosing to lend to their customers. So Robinhood can bear the consequences if the loan can't be repaid. (As others have pointed out, they have ways to protect themselves. Margin calls, forced liquidations, etc)
Good point. I sure hope that they're required to hold 100% reserves on loans. I'd like to see an end to fractional reserve banking. That's not unique to Robinhood, but part of a much larger conversation—one that more people should be having.
> so your naiive "how people spend their money has no consequences" attitude
Who said it has no consequences? People make bad decisions with money their all the time. In fact, many of the working class get their fix in real casinos, where there's no real chance of winning, even if you know what you're doing. But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product." Instead of allowing normal people (some of whom know what they are doing) to freely engage in leveraged -- or just free -- trading, would you rather people with small portfolios get their already modest earning potential chewed away by large trading fees that make short term investing impractical? The difference is that I don't think we should be protecting people from themselves.
But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product."
No, my comment was in the direction of: "It's bad if your core business is getting unsophisticated people making trades (bets) with credit."
It's the same reason we all know it's a bad idea to give someone a 400k mortgage on an ARM when we don't know if they can pay it back or not. Great way to find yourself in a recession.
> It's bad if your core business is getting unsophisticated people making trades (bets) with credit
I would agree, if there were evidence to support that primarily unsophisticated people are buying premium. However, I doubt this is the case (I'm sure someone will put together numbers on this eventually). I'm a competent trader who avoids leverage, simply because I don't want to pay for a membership (it's not just a loan; you need a gold membership, too, which is an added barrier to entry).
Based on what the stated publicly, it's in Robinhood's interest as a company to push everyone into Margin deals. Their core stated benefit of using Robinhood over other brokers is opening trading up to everyone, through ease and low carry to make it easy.
Ipso Facto that means their goal will be pushing new unsophisticated traders into leveraged deals. That is 100% implicit in this whole thing.
I'm not arguing that there is evidence that "primarily unsophisticated people are buying premium." I'm arguing that this is their plan going forward and it could be really really harmful to markets if they get to the scale they want to.
Best case, Robinhood can cover every margin call themselves, in which case they are effectively doing what Uber does which is unsustainably subsidizing investing on credit.
Worst case, they can't cover margin calls and neither can their users and they roll up.
I'm just waiting for them to allow leveraged shorts...
If you gave me a choice between running $1k through a blackjack table, or backing $1k of an unsecured loan for margin trading by a random Robinhood user, I might go for the blackjack.
They're offering 2x margin, if I read the article correctly. So it's at best 1/3 secured, and probably a lot less than that if you need to make a margin call and try to collect.
The gigantic risk to Robin Hood isn't that they'll have problems collecting occasionally. They can make up for that by fiddling with their fees to come ahead in the average case.
It's that some big market move busts everyone at once and they go bankrupt overnight.
Uhm, what? That's still fully secured. It's actually 4/3rds secured, not 1/3rds. If you have $1000 in your account and borrow $2000 to buy stocks, you've got $3000 worth of stocks that they can sell to cover a $2000 loan. Whenever this ratio goes near or below 1, they can sell the secured stocks to cover it.
If the stocks (or wacky option/derivative trade) still have value, then yeah, there's no problem.
The problem is when people make a bet that doesn't work out. There are a lot of exotic trades that can clean you out completely in an instant if you bet wrong.
It doesn't even need exotic trades. If you're doing margin trading on a stock for which there is a sudden dip in stock price (as in previous flash crashes), then there will be a margin call and from the customer's perspective, all their money and shares will evaporate.
I wonder how Robinhood will handle it when it happens.
"When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call."
You will always be the owner of the stocks you purchase. If Robinhood is set up like most (all?) brokerages, then your assets are held in a separate entity that would be unaffected by a bankruptcy. So creditors of Robinhood can't go after your assets, even when they are managed by Robinhood.
Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.
Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).
>Wouldn't want to enable people to make their own decisions with their money, would we?
While we're on that subject, Pattern Day Trading restrictions[0] are a fine example of how arbitrary regulations created with good intentions can lead to negative outcomes.
How it works is that margin accounts must maintain an equity balance of at least $25,000 in order to day trade freely. Otherwise, you're allotted three round-trip day trades within a 5-day period before there's serious consequences. Cash accounts are subject to long settlement periods, so the restrictions are moot in that case.
What this means is that you can't trade equities with any sort of frequency on an account that has a cash balance below $25k—at least not if you want anywhere near full utilization of your capital. That also rules out algorithmic trading on anything but medium or long timescales.
The "protection" afforded to the uninformed retail customers it was designed to protect is questionable at best. For example: it would be perfectly acceptable to allocate 100% of your portfolio plus leverage to a single stock just before market close, become subject to after-hours and pre-market price movement, then sell the next morning. Repeat by buying a different stock that same day.
Yet, round-trip trades during market hours are heavily discouraged to the point of prohibition beyond any number that isn't trivial.
In fact, I would argue that PDT restrictions create a perverse incentive that holds people to bad trades which they would otherwise prefer to exit, subjecting them to dangerous after-hours price movement in the process.
It also creates incentive for novices to abandon equities entirely in favor of forex markets. Not exactly risk reduction.
I recently got interested in the markets and the PDT rules are one thing that I feel I need to hear more informed opinions on before formulating my own. I'd love if more people chimed in here to put in their .02 cents on the benefits/drawbacks/intentions of the current rules.
I think they are fine. The way I look at it one just needs to get educated before they become a pattern day trader. Ideally that means they grow their account to $25K and have experience before they are put into a position where they can screw up bad enough that it affects others. Of course people don't do that, but at least there's some incentive.
In the end margin is irrelevant if you only trade with money that is actually available. Robinhood is for traders that know even less than the twits on StockTwits. I'm sure it's fine for investing but I'd bet that the vast majority of the people that use the app don't know what the difference is, just like StockTwits.
IIRC Robinhood just uses another service's API to transact a trade (can't remember the name), so you'd be leaving pennies on the table when you could just go straight to the source.
I use Robinhood and NO ONE should use margin if they don't know what a Margin Call is.
Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year. This last year, my return rate was 14%, so that margin was worthwhile.
If new to investing and you aren't sure what to invest in, I suggest investing in: VTI, VYM, or QYLD depending on your risk tolerance. I'm invested in all three.
It is probably helpful to explain individual investment vehicles and why it is sane for someone new to invest.
VTI is an ETF that is basically representative of the entire US market. It is somewhat like holding a little bit of everything in the US market.
If you have a bunch of cash sitting in a savings account, and instead want that cash tethered to the swings of equities market, VTI is a reasonable choice.
VYM is an index fund that tracks the FTSE High Dividend Yield Index invests in global equities (excluding REITs) with high dividend yields. About 1/3 of the current index is in 10 stocks all US: Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, JPMorgan Chase & Co., Wells Fargo & Co., General Electric Co., AT&T Inc., Procter & Gamble Co., Pfizer Inc. and Chevron Corp.
QYLD is even more exotic. It seeks to track the CBOE NASDAQ-100 BuyWrite Index. That index in turn seeks to track the performance of a theoretical portfolio of the 100 largest NASDAQ stocks on which covered calls are written with a certain formula. Covered calls are a type of options strategy.
I'm just another rando on the internet, but I would recommend neither VYM nor QYLD to people new to investing who aren't sure what to buy. VTI is a far more appropriate suggestion. As would be VT (like VTI but looking at all stock markets), BND (index fund for US investment grade bonds), and maybe BNDX (ex-US investment-grade bonds with currency hedges)
I'm just another rando on the internet, but I concur with bradleyjg. Consider reading some of John Bogle's books or reading the Bogleheads wiki page. You cannot go too wrong with (VT / (VTI+VXUS) ) + BND.
BND is composed very heavily (~66%) of US Government bonds. It's largely effectively like just buying treasury bonds. Worth considering to instead get a corporate bond index fund + muni bond fund.
> Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year.
If you are planning to use margin, I dearly hope you don't use Robin Hood. You can get much cheaper margin loan from other brokerages like Interactive Brokers (less than half as much).
Might be questionable for investors (although trading on margin is extremely common) but gambling seems to make a ton of money for casinos, betting parlors and lottery boards, many of which have been around for "long term." Sounds more like you have moral/personal objection.
It is very very common for Casinos to loan you money. This is how people often end up in debt by thousands (100s of thousands) of dollars to casinos, which causes all kinds of problems.
From the casino POV.. why limit their wins to what is in your pocket? Limit their win to what is in your pocket + what the risk model predicts they can make you pay back over time.
> Robinhood is effectively lending money with little guarantee to take anything back and no source of income.
i have not looked into robinhood's margin offering, so maybe it's very different, but in my other brokerage accounts, margin works something like this:
i buy $10k of SPY.
after the trade closes, the broker says "ok, you own $10k of SPY, and that's good for another $5k of margin."
so then i can go buy another $5k of whatever i want.
i pay 9% interest or so on that $5k.
if SPY drops in value "enough", the broker can on a moment's notice, sell as much of the SPY as they want to cover my debts.
so... they've got a great guarantee they can take it all back.
Actually, if your investments fall in value to the point where it looks like your account is in danger of becoming insolvent, they'll likely immediately sell as many of your assets as it takes to make up the difference, locking in your leveraged losses. This is known as a margin call, and it's very unpleasant to be on the receiving end of one.
The actual risk to the broker is minimal -- they just have to make sure to trigger the sale at a point where the value of all of your holdings (not just what you purchased on margin) is still greater than what you owe them.
Robinhood knows that people can just buy index funds and sit (which is what I do). But this doesn't make money, so they encourage people to buy individual stocks, "whatever new Elon Musk stock is out there", and trade on leverage.
To some extent they want to make Robinhood a game, rather than an investment platform.
Robinhood makes money off of uninvested capital and margin accounts, not trade commissions. So why would they care what we buy or whether we make purchases rarely or not?
Robinwood's target audience seems to be younger generation, most of whom are not hot about investment, not to mention whether they know what Wall Street did a long time ago (aside from 2008's financial crisis).
As someone who has looked into but not actively used Robinhood - the main benefit of the Gold subscription is for day traders. With a free account, if I decide I want to sell AAPL and buy GOOG, I have to wait 3+ days before I get the money from selling AAPL credited to my account. With Gold, they basically let you float, so you can immediately get into a new position after getting out of the previous one, without having to wait for your previous position to settle.
I believe that is far and away the primary use case for Gold.
If you're actually day trading you will still end up under SEC pattern day trading rules which require > $25k in the account. At that point, just get a real account with real tools.
What you said. Why would anyone not set up a real account and use their app? I think Scottrade, which is the entry-level broker, only has a $500 minimum balance and they provide real tools as well as educational resources.
I'm a current robinhood non-gold user and they actually eliminated this restriction around 6 months ago. Now as soon as I sell a position I can buy my next with the funds from the sale.
Which they have branded the loan they give you until deposits and sales settle "Robinhood Instant". Since you are trading without settled cash in the account, I believe the SEC considers this a margin account.
Yes, I have this too. Robinhood Instant is a margin account, with the same conditions/restrictions as a Gold account. They loan you money in that settlement time window, basically
Margin trading is a pretty standard feature across all brokerages. Dangerous if used ignorantly, but greatly increases you returns if used effectively.
With sufficient cash flow, margins aren't that dangerous, even in a downturn. For example, if you have $24,000 and invest $500/mo into an account, getting a $6,000 margin loan in january that you pay off throughout the year isn't really that dangerous.
The problem with margin trading as a retail investor is that they interest rate on the loan is ridiculous, between 6-9%. Making it almost worthless.
It depends on the brokerage. There is Reg T. margin and then there is portfolio margin (the latter has significantly higher capital deposit requirements).
It also is not a straight 1:1 ratio. You generally can't go absolutely nuclear with leverage unless you have portfolio margin. Typically, brokerages will require collateral in the account equal to the risk (for defined risk strategies) and you will need a higher trading clearance on your account for unlimited risk.
Your buying power is a function of how long the trade will be held as well as the risk profile.
At least often, yes, but you will also need approval to even get that far. Etrade for instance has several levels of approval.
I note that Etrade at least implements it less as "margin approval" and more as "advanced mode"; to do any sort of options trades, even the ones that don't require margin themselves, requires you to activate the "margin feature" on your account.
Robinhood makes you accept a new agreement to be in Gold which sounds about the same as getting margin approval at a brokerage (agree to the risks and approval is automated). They don't have special powers to waive regulations.
Consider the fact that every time you buy a house with a 10% downpayment mortgage, you're taking on 9x leverage. The fact that banks are willing to lend you ~$500k at a ~4% interest rate, on a piece of real estate that can produce >5% returns (including rent), is often what makes it such a fantastic investment.
The same principle can be applied as well to stock investments. Obviously a 9x leverage would be too risky for stocks, but a 1x leverage is reasonable and can easily lead to win-win outcomes for both lenders and investors.
If you're worried that unsophisticated investors can misuse this feature - there's nothing stopping such investors from putting all their money into a single penny stock either.
Eh I don't consider it a new credit vehicle, margin trading is available in every trading platform. It doesn't make a huge difference for Robinhood; they'll issue a margin call if you're undercapitalized, so the likelihood you would lose any of Robinhood's money is very low.
As for the investors, the percentage rate is very reasonable; given standard market conditions you'd make good money using robinhood gold and putting it in SPY. It's a pretty smart move to charge for it IMO.
Yes margin trading is available elsewhere but only on Robinhood is it so easy. Setting it up on Scottrade or what have you is difficult and has a lot of hoops to run through. On your phone it really feels like "not a big deal", so a lot more young, inexperienced ordinary people can get sucked into it.
> margin trading is available elsewhere but only on Robinhood is it so easy
What part of it is hard on eTrade or ThinkOrSwim? It's almost literally the same process.
The only difference is RobinHood is scooping up all of the people who are new to stock trading and the others aren't. Those same people would be offered the same margin on any other platform.
You sound like someone who has never set up a margin account. General margin accounts are almost no questions, and varying levels of options trading only ask you questions like "how many years have you traded options", with no verification. There's basically 0 barrier to entry except for having money to trade.
The only difference is that Robinhood is charging a subscription for access to margin whereas other brokerages do it for free.
Margin trading is not any easier on Robinhood than any other major brokerage platform. They all make it pretty trivial to trade on margin. Scottrade makes you sign a form saying you understand what you're doing, that's about it (I'm sure Robinhood has the same requirement).
> so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?
Not really different than what's currently available and which by the way, is heavily regulated as is the service that Robinhood appears to be offering.
You can use your full Gold buying power when buying stocks, though sometimes you can’t invest it all in one, single stock. Let’s explain. This is because US federal laws require all brokerages, including Robinhood, to have common-sense safeguards to prevent customers from losing too much money on a single, high-risk investment. Some examples where you can’t use your full Gold buying power on a single stock include leveraged ETFs (which are already leveraged) and newly-IPOed stocks (which can go up and down in price very quickly), stocks priced at less than $3.00 per share (these securities are at greater risk of getting de-listed), and others.
Brokerages have been doing this for ages. What's new? There's no test for "sophisticated investor." You fill out a paper form and margin is enabled. Oh, you want options, too? You check another box.
>Even if you are a professional trader you'll take a bath on margin over the long run.
Huh? It would be difficult to find a professional trader that doesn't trade equities on margin. They pretty much have to due to the way the settlement process works.
The returns of a professional trader depend on many factors, including available capital and the capacity or manner in which the trader operates. That said, they're enough that the employment of margin and the leverage it affords is simply mundane and considered a cost of doing business.
> Professional traders presumably make their living trading, so their returns far exceed 5%.
In theory, sure. But most do not "far exceed 5%", and instead have the fees of their employing funds to subsidize their strategies.
For traders who are working independently, or in prop shops, I suppose it might be true by definition (if they last in the market they are either re-upping and gambling, or at least profitable). But that's still not the rule.
More importantly, retail investors are not professionals, and Robinhood is basically catering to /r/wallstreetbets with this sort of product offered to them.
>More importantly, retail investors are not professionals, and Robinhood is basically catering to /r/wallstreetbets with this sort of product offered to them.
I agree with this and never asserted anything to the contrary. The scope of my reply was addressing a single point concerning margin in context of professional traders.
Also, the statment that most returns "far exceed 5%" probably wasn't the best choice of words. I've edited my original post accordingly.
Typical margin rates for professional traders are far below 5%. See https://www.interactivebrokers.com/en/index.php?f=1595. And IB is basically the most expensive professionally focused brokerage. If you've got a million bucks you can probably get Fed Funds + 50 basis points.
> Uh, IB is not a professionally-focused brokerage. It's the most professional retail brokerage though.
It's sort of in the middle. They have plenty of retail customers for sure, but they also have hedge fund and proprietary trader accounts. I doubt you would find a single hedge fund among Etrade customers.
> On what basis are you calling it most expensive though? It's much cheaper than any other brokerage I know when you look at fees holistically.
It's much cheaper than most retail brokerages. It's more expensive than firms that cater to professionals; for the most part those firms don't put their pricing on their website because they're individually negotiated with each customer. Some example firms: all the big banks, Apex Clearing, eRoom Securities, TJM Institutional Services. For the banks you're probably looking at a minimum $20 million account size just for them to accept you as a customer. The smaller players require $1-$5 million for decent rates, but might accept smaller account sizes.
Ah, I see what you meant now. Yeah, I was just comparing it to most retail brokerages since I see the others (Apex, etc.) as in a different category. IB is something which the average HN user could actually use.
- Robinhood Gold is not just about margin trading. It is also about instant money transfers. What truly prevents me otherwise from frequent investing is this long delay (upto 2 days) where I sell something and wait for money to be available for next purchase.
- I will happily pay Robinhood say $10 per month anyways for the kind of service they provide. Getting $2K credit for that is not really a big deal.
In the US, most retail investors are limited to 2x leverage for new positions, and 4x leverage for existing positions. This is the "Reg T" margin system. If you qualify for the "Portfolio Margin" system (usually offered to customers with account values greater than 100k or 250k), you can do up to 6.66x leverage in a stock-only position.
This is a lot of finance works. You offer a consumer product full of awesome features and freebies that is a loss-leader, and make up for it on interest. Cash back when you finance a car, credit card miles, discount stock and RE brokerages, etc.
> Even if you are a professional trader you'll take a bath on margin over the long run.
Id say not. Say your borrowing at 7%, markets tend to average around 10-14% return a year. So if you were doing some passive investing on margin you'd be likely to increase earning. The issue is it heightens risk and the speed of losses for those that invest badly, but being margin it should largely avoid losses greater than the principle invested which is better than other speculative investments so not all that bad.
Banks get by on a long term strategy of supporting gambling. A loan to invest is the same whether it's in a small business, a house, or stocks. In fact, the first two are even riskier because they aren't liquid so they can't get out in turbulent times like they can with a margin call.
"Always invest what you cant afford to lose" is a very common investing advice given to beginners. You don't need and an Economics PhD to understand this concept
I don't think so. Investing (i.e long term investing where you believe in a company) is usually a legitimately safe strategy, whereas speculation is more or less gambling.
Unsophisticated investors already have access to 4:1 leverage in every stock broker out there, which is quadruple the money, so you don't know what you are talking about?
Surprise! Robinhood is going to make revenues like a normal broker, who at this point already have mobile apps that are just as intuitive and more fully featured.
I have accounts with traditional brokers and with Robinhood. I assure you the barrier to entry with Robinhood is far lower than traditional brokers. I could definitely see this being a major concern with the potential to ruin some unsuspecting innocently curious "investors" lives.
financially naive speculators blow up their account with partially featured financial company
straight out of the onion folks.
Robinhood's gold account is still 100% less margin than other brokers and the regulations themselves allow! Yet they are getting people to pay for it! Have a laugh because it is hilarious, paying for the privilege to pay interest is the bigger article here.
> Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?
This is the hallmark of modern day capitalism. By issuing loans knowing full well they will never pay back, you can collude with banks to threaten to kill the economy when the government hesitates about cutting them a cheque.
Enticing millenials to "trade" individual stocks is quite possibly the most anti-Robinhood thing I can think of. The only thing more ironic would be to encourage them to take on margin...which as it turns out is literally Robinhood's business model.
99% of users on the platform will ulimately end up participating in a direct transfer of their own wealth to a more sophisticated trader or algo (i.e. The banks and hedge funds who aren't just doing this for "fun" and have the financial and political backing of the world's elite). Side note: even those hedge funds can't consistently beat the market.
If you are reading this, for your own finacial future I beg of you, please take your money to Vanguard instead and buy some index funds. Scratch your "trading" itch by trying to game your asset allocation instead. Future you will thank present you.
If you don't believe me, please look into any of the academic research that has been conducted around efficient markets.
I've written this on HN before but Fidelity(1) and Schwab(2) have similar low cost index fund offerings to Vanguard as well so don't think you are stuck with Vanguard. Both Fidelity and Schwab also offer the best checking account you can possibly get (no fees, minimums, plus ATM reimbursement) for free as well. Additionally, Fidelity has a great 2% cash back credit card. Even if you don't use Fidelity or Schwab's brokerage accounts it's a no brainer to sign up for a checking account with one of them.
Vanguard, however, is owned by it's investors if that's important to you.
Last I checked you can also trade some Vanguard ETFs on Robinhood as well. I just checked, you can buy VOO, among others, on Robinhood as well as iShares ETFs, which are also low cost index funds.
Basically, if you want low cost index funds you have a lot of options, including Robinhood
Schwab has the best checking accounts out there, I use them.
But I use Merrill Edge as a commission-free brokerage (30 trades per month with $50k assets, 100 trades per month with $100k assets). The upside (apart from not being limited to iShares at Fidelity and Schwab at Schwab) is in the credit card, which beats Fidelity.
Bank of America Travel Rewards rates:
* $50k+ Merrill Edge Balance: 2.25% travel rewards cash back
* $100k+ Merrill Edge Balance: 2.625% travel rewards cash back
Great deal. Oh, and they'll often pay you about 0.5% (up to $1000) of assets to transfer your equities in. Holding Vanguard/Schwab/iShares ETFs there is a dream for a personal finance geek. The credit card deal alone makes it all worthwhile.
Thanks for sharing your experiences. I know people who use Merrill Edge (owned by BoA) for index funds as well but I didn't feel comfortable writing about something I don't have any experience with and only a vague knowledge of.
My point was, while Vanguard is certainly a great option, there's plenty of other great options out there as well.
I can confirm that Fidelity has a great checking account (they call it a "cash management account"). They cover all of my banking & investing needs - they even have a 2% cash back credit card that's pretty great.
Many VG funds are also traded as ETFs. You can buy those like any other stock. Most brokerages also have a list of commission free ETFs that can be purchased. These typically many include low cost index funds. I agree with you completely, that if someone wants to invest, open a Schwab account (the checking account is one of the best out there and free), and just do it there.
Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.
That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.
>Enticing millenials to "trade" individual stocks is quite possibly the most anti-Robinhood thing I can think of.
Listen, I understand that this is widespread, so I'm not targeting you specifically. But could we try not to use generalizations like "millenial", especially when they refer to vaguely defined generational boundaries?
Your point is very strong, and stands on its own without making what I interpret as an implicitly ageist assumption about a large swath of the population. Millenials are adults. Young adults, sure, but they have agency. It is no more predatory or clearly unethical to lend to them versus lending to baby boomers or gen X.
I take issue with this because you have implicitly robbed them of their agency as a group by phrasing your criticism as "Enticing millenials...". There's no reason to single them out. They may have less money as a group, yes, but there's nothing about trading on margin that makes it inherently more dangerous for millenials over any other generation.
You didn't mean to intentionally portray them this way, but you singled out a particular group because, like I said, it's ubiquitous. We should really try to curb that, in my opinion.
I used the term as it was originally intended, to describe an age group in the context of marketing a product. Robinhood's massive growth is being driven largely by their target of "millennials" (ie. young adults) coming to the platform without any allegiances to legacy brokers. The millennial customer base is one of the reasons cited for their valuation, since legacy brokers have had trouble gaining younger customers.
Any negative assumptions being read into the phrase "enticing millennials" are created by the reader's own bias. I think because so many articles are published complaining about "those damn millennials" we automatically assume anyone using the word is doing so in a negative way. I wasn't (I am a millennial myself).
Robinhood's strategy would be predatory in the context of any target market. If they were going after boomers, I would have said "enticing boomers."
> Robinhood's massive growth is being driven largely by their target of "millennials" (ie. young adults) coming to the platform without any allegiances to legacy brokers.
Are you sure about that? I'm the only person I know in my age group using Robinhood. But it's gotten popular with my parents and their friends for example. My mom tried to sign up for Gold before I stopped her.
I don't think they're enticing millennials, just anyone who doesn't understand finance or trading very well, which it seems is most people.
Here's an example of how badly active funds underform passive funds:
'Given that active managers’ performance can vary based on market cycles, the newly available
15-year data tells a more stable narrative. Over the 15-year period ending Dec. 2016, 92.15% of
large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective
benchmarks.' [1]
The question folks need to ask is this - Will my stock trading strategy + low (zero with Robinhood?) trading fees outperform 90%+ of the top fund managers who are using the most sophisticated investment tools available? If not, just buy index funds and spend as little as a few hours / year managing your investments :)
Your research is sound and I agree with the bottom line but, in the interest of transparency, that's not a fair comparison.
"Top fund managers" are working with billions in AUM. If you have found meaningful alpha on a portfolio of $100k - $10M (or a section of capital within that range), you will have an easier time capitalizing on that strategy than a fund manager who needs to figure out how to scale a profitable strategy to billions in assets.
Difficulty in getting orders filled on one end and literally moving the price on the other are two big reasons it's far easier to find profitable strategies on relatively smaller portfolios. It's not just a comparison of the tools and skills used in institutional funds. The amount of money they are working with is an obstacle in of itself.
This is also why, incidentally, the most successful hedge funds in the world typically close their doors to outside capital and cap it at, say $10B or so.
Would you know if Robinhood supports pre-authorized purchase plans? For example the ability to buy x shares of VOO on the first day of each month automatically? I didn't see anything on the FAQ but maybe I missed it. Pre-authorized purchase plans + no commissions could be interesting.
I'm not aware of any such feature. You can set up a monthly deposit into your Robinhood account, and you'll get a notification on your phone each time it goes through, but you have to manually submit purchase requests each time as far as I know. At least, that's what I'm doing! I'd love to hear of an alternative. Not that hard to hit the sequence of buttons each month, though.
You can use Quantopian to write a Python script that trades on a live Robinhood portfolio. Their target audience is algorithmic traders, but I've written a simple script that just rebalances my portfolio among a small set of index funds each day. Pretty simple to do and completely free.
Robinhood is severely lacking in features and it is mobile app only, no website. If you want that kind of thing with index funds go with another brokerage (Fidelity, Schwab, Vanguard, all have commission free index funds.) The other really crappy thing about Robinhood is that it doesn't integrate with other platforms so if you want to track your wealth with Mint or Personal Capital you can't.
However the other online Brokers don't call themselves "Robinhood" and claim to be the champion of the little guy while simultaneously encouraging you into a strategy that has been proven to lose over the long run.
Use the advisor (robo or human) services of any of the top online brokers and they will recommend you put your money in index funds.
Also, putting together a "long term" portfolio of indexes at Robinhood assumes that Robinhood will be around offering free trades for the next 40 years. Otherwise you're looking at hefty capital gains taxes to transfer when they pivot or go belly up.
If I'm not mistaken trading (commissions) is not where they make their money, which is why most of them offer free trades now in some capacity to compete. If they don't you call them up and tell you are going to someone else and they will give you free trades. They make their money by having your money in their account. This gives them credit with other banks and allows them to trade on margin or borrow or lend and charge interest.
Out of my own ignorance on the subject of "buy some index funds": what happens when 50%, 75% or 90% of the market buys index funds? How will stocks be priced properly if no one is trading them directly?
Good question - this is an on-going topic in the market actually. The correct answer, like a lot of financial economic theory goes, is that no one actually really knows.
The traditional answer is that the incentive to find and exploit market inefficiencies gets higher if more and more funds are parked in indexes (e.g., if $GE is underpriced due to excessive indexing, savvy investors will swoop in and buy up more stock in $GE, this bringing the market back to efficiency).
Okay, there's two parts to this: "in theory", and reality.
---
Yes, you need somebody to listen to the news, crunch numbers, and then actively trade stocks in order to set an accurate price. But what matters here isn't the percentage, it's the absolute number of active traders, and their analysis "skill". Let's say you start with 50k professional bankers and 50k totally passive etf investors like you and me. Let's say that the passive investors buy/sell based on events that are totally uncorrelated with the market; they buy small orders of VTI every once in a while when they have a bit of extra cash, and they sell large blocks when they experience major life events like buying a house or having a kid. In other words, their effect on prices is random. Also let's assume that new passive investors are introduced into this system gradually, and that we're taking a "long term" view of everything. In this case, having another 100k, or 500k, new passive investors riding the wave of market growth doesn't change anything.
On the other hand, going back to our 50k/50k split, if you add another 100k poorly-performing analysts into the mix, e.g. uneducated consumers day-trading on emotion instead of news, they'll distort prices and create a bit of market inefficiency. Distorted prices are actually good for the above-average analysts, since they'll capture those extra pennies on their trades by more-accurately pricing stocks, but obviously bad for the below-average traders themselves--who will underperform the market--and the passive investors--who just buy/sell at market prices. You can kind of think of this situation as the etf investors paying an additional "management fee" to the good traders for their trading expertise.
So to summarize, the percentage of passive traders to total traders doesn't matter as long as the absolute number of active traders doesn't decrease, which won't happen because of the large incentives created whenever the system moves away from equilibrium.
---
Now, in practice you'll never have completely passive investors. People will panic if they lose 10% of their investments overnight. Also, merely making a decision to invest in a particular index, like the S&P 500, is making an active choice to invest in Apple and McDonalds but not Tesla or thousands of other companies. So in practice a horde of passive investors buying Vanguard ETFs won't be completely neutral to the maket, but nonetheless the effect will be minor and--according to some people--perhaps even positive:
http://www.businessinsider.com/passive-investing-makes-marke...
You can also scratch the trading itch by buying a small amount of some of the more specialized etfs and just holding forever. Think water is the next crisis? Look into PHO. Think India's being underestimated in the world economy or Palladium prices are going to skyrocket or the US tech sector will outperform the broad market? There are etfs for that, just use them sparingly and do your research.
Many of the newer ETFs have high expense ratios and alarming clauses in the prospectus (e.g. a forced sale if the ETF drops below $x). If you aren't a professional day trader you should be very wary of the proliferation of opaque ETFs, especially the high leverage ones.
Nothing wrong with leveraged ETFs in principle. It's just another, slightly sub-linear, point on the risk/reward spectrum (ie. 2x/3x extra risk for slightly less than 2x/3x reward).
It isn't myth. Prospectus of these leveraged ETFs say don't hold these instruments over a day. This is from JNUG which is popular with millennials:
"Because of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Index's performance increases."
Understood. But please read the whole link; you don't take a long position in any etf, geared or not, if you're expecting the underlying index to give negative or neutral returns. The whole point of the market is to grow--which is does "most of the time". (Caveat emptor, yadda yadda.)
Buying indexes is definitely safer than individual stocks, but also leads to lower returns over the long term compared to winning stocks. Also, they only go up while the market is going up. If you're just betting on the market, might as well buy and hold something like XIV and get higher returns/pay no fee on it.
"Just pick winning stocks" and "sell them before they go down" are not strategies that any human OR algorithm has been able to perform consistently over long time frames. And no, Warren Buffet didn't make his fortune just trading stocks.
So I assume based on your strategy you put all of your money in AMZN 10 years ago, sold it right before each drop, re-bought right before each rise, and are now filthy rich. Oh you're not? I wonder why.
Also, XIV is an inverse volatility trading vehicle. It's not meant for long term investors and frequently goes through 90% drops. This kind of extreme volatility is corrosive for long term returns. The last 5 years have had abnormally low volatility due to extremely low interest rates, hence why that ETF has done so well over that time period. Of course it's effortless to cherry pick winners when looking backwards instead of forwards.
> So I assume based on your strategy you put all of your money in AMZN 10 years ago, sold it right before each drop, re-bought right before each rise, and are now filthy rich. Oh you're not? I wonder why.
No, that's just a buy-and-hold... just the same as an index fund. I didn't cherry pick anything. Plenty of high profile stocks went up more than 72% in the last 10 years. They're not even hard to find.
Of course it's not hard to find stocks today that went up over 72% in the PREVIOUS 10 years. That's not the problem.
The problem is how do you pick the ones that will beat the market beforehand, when everybody has access to the same information about the prospects for future growth & earnings?
It's been proven by hundreds of studies to be a statistical near-impossibility over long periods of time. Any outperformance over the short term can be mathematically reframed as random luck (which a retail investor like you and I will incorrectly attribute to being the result of our own abilities).
From my experience having used Robinhood for almost two years now, it's fine up until something happens with your account and you need to talk to someone. Their customer support seems almost nonexistent, no phone number, only an email where their response time is anywhere from a day to a week+ and you have to bug them to follow up. On top of that, the support that I have gotten hasn't been very clear, like they don't know what's really going on with my account. When I have several thousand dollars somewhere with active investments, I don't want to have to wait around and deal with a different support person for each message.
Just recently I had to email them first to find out that they have an issue with my account and "any sell, dividend, etc. will have 28% removed and sent to the IRS." And I "will need to reach out to IRS regarding those funds." They did not tell me anything when they apparently started doing this. I was paying for Robinhood Gold too at the time.
I'm sure most people will have OK experiences with Robinhood, but I'm closing my account and moving to another broker with better support and communication.
>A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage
Users pay money to be loaned money? How is this different than a microloan service?
>Robinhood also earns money from rebates its gets for directing its order flow to broker dealers
That means, presumably, the dealers are profiting in some way by handling trades from investors less informed than themselves.
At the end of the day, Robinhood may not have trading fees, but the underlying brokers it works with do. I don't see how a microloans service and some kickbacks are enough to compensate. Presumably they are hemorrhaging money right now and the VC money is subsidizing novice investor's trading fees.
Despite the name "Robinhood" like this is giving money to the poor, this service seems extremely predatory to its users, offering them cheap loans to gamble with on the stock market and taking kickbacks from the exact type of people Robin Hood was stealing from.
The monthly fee for "gold" does seem a bit strange. But it gives you more than just margin. From https://support.robinhood.com/hc/en-us/articles/214681823-In... you also get instant settlement, instant deposit, and extended trading hours, which seems like something worth paying for.
As for "micro loans" - how is this any more predatory than a margin account at any other brokerage?
There are also other benefits that the Gold service provides, such as after-hours trading. As they become more feature-complete compared to established brokers, those new features will likely be exclusive to Gold members. I also think they are able to invest non-invested money in people's accounts for short-term small percentage gains
> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.”
Just so everyone knows, order flow from unsophisticated investors is considered a valuable resource because, when filling it, you know that you're more informed than the person trading against you.
I don't think that's a very good way of putting it.
I'd say its more correct to say orders from retail investors are valuable because:
1) They tend to be a relatively equal number of buys and sells. This is figurative manna from heaven for market makers
2) They don't mind crossing the spread, also a gift for market makers.
3) They can't really move the spread
and probably least importantly......
4) they aren't trading based on some sort of knowledge most of the time, ie they are typically just buying because they buy a bit each month or selling because they need money or selling to re-balance,
ie they aren't trading due to market signals, but rather due to their own personal situations.
I completely agree with this. I'm willing to take a few pennies hit because of HFT front running my order if it means I am saving several dollars per trade in commission. Especially when you first starting out with a tiny amount to invest, the commissions of normal brokers decimate any returns.
4 is the root cause of 1-3. By itself 4 doesn't mean much for a market maker, but the collective market behavior it results in (1-3) remove a lot of risk from market making against retail exclusively.
It has to do with how people/companies called "market makers" make money. Let's say you want to buy a share of stock. Generally you don't end up buying it from another random person who happens to want to sell a share of stock at the exact same time. There might not even be another random person that wants to sell right now.
Instead you are likely buying from a market maker. For pretty much any stock there are many market makers who are offering to both buy stock and sell it at the same time. The trick is they'll buy for, say, a penny less than they are willing to sell for. So if they can keep their buys/sells even they make a penny for every share they move. They're middle men.
Make sense so far?
OK, but there is a problem. Say that REALLY BIG HEDGE FUND has proprietary knowledge that some company is probably going to go up in value soon. So they go out and buy a lot of stock from a market maker. And then the stock goes up. Uh oh. The market maker sold a bunch of stock at PRICE and now instead of buying an equal amount at (PRICE - 1 penny) and making money the market maker has to buy an equal amount at (PRICE + the_stock_went_up_amt) and loses money.
Basically market makers would prefer not to trade with sophisticated investors making big trades with proprietary knowledge. When that happens and they lose it's called getting picked off. They want to trade with people like you and me who aren't trading because of any special knowledge but because we're just putting our regular $1,000 in our 401k for the month.
Retail brokerages like Robinhood are a good source of these types of trades.
(As with a lot of topics, there is a lot of nuance and detail underneath this relatively short description, but this is the gist of it.)
It's worth noting that "sophistication" is not really the defining characteristic that makes retail order flow appealing, it's that it's non-correlated with other market events.
Retail flow is driven by things like needing money for purchases or having excess cash lying around.
Also retail flow is less execution cost sensitive.
That's what people mean when they say less sophisticated.
In the London stock market they used to have a game where traders got a stack of pictures of girls, and had to rate each picture based on what they thought the average rating for each picture would be from everyone else. This essentially captures what stock trading is. It's not just about figuring out which company is the "prettiest girl" on the market, you have to be able to predict which girl everyone else is going to think is pretty in the future, because stock prices rise when a lot of people want to buy that stock and few people want to sell.
Order book data is valuable because it helps you figure out who everyone thinks is pretty, and retail investors make these decisions on much different factors than traders (I.e. Brand over financials)
Lets say you're unsophisticated. You say "I like my 1080ti, so I'll buy some NVIDIA stock." I'm a tech stock expert, I know NVIDIA is on a downward slope because its over-valued right now. I tell you "Sure kid, here's a promise for 100 shares at today's price of $50 each." I take your $5,000. Everyone is happy. Joe Investor doesn't actually have the stock in his possession just yet.
I buy the stock myself a few days later, but at $40 each for a grand total of $4,000, and I just made $1,000. You get your 100 shares, I make $1,000 plus fees. Now imagine doing this hundreds or thousands of times a day. Or I simply sell my own existing supply conveniently to my own buyer and I dictate the fees, which has value in itself. Sure I'm only making $5 per head per month with these low-end customers, but now I have 100,000 customers instead of 1,000.
A savvy investor wouldn't ask to buy these shares. He'd know that he's better off shorting himself. Unsavvy investors are all over the place and if you can get them to come to you, you can make a lot of money off them with minimal investment or risk.
On top of that you can offer them predatory loans for investing. This app offers loans, no idea on terms, but I can't imagine them being very nice. They put up collateral like their car or home, so you have no risk. They fuck up, or not, it doesn't matter, you're at least getting fees and probably screwing them in other ways. Oh and you're getting interest on that loan as well.
edit: Front Loading absolutely happens, it can be done in a way that's difficult or impossible to detect and has a lot of loopholes as well.
Well, I don't think this is a legal use of order flow (waiting days to make a purchase), but the analogy is kinda sorta on the right path.
Reality is more like "I know an order for NVIDIA is going to hit at $50, but I see it for sale for 49.9998 all over the place, I can go scoop some up at 49.9998 and put for sale at 49.9999 and make some money.
But then real reality is a step more complicated about when it is legal to do this vs not (front running is not legal, but things that are similar can be), and dark pool vs not, and you are way past what I know ;)
HK articles on finance sadden me. So much bad information.
The firm isn't buying days later after a price craters. They are usually buying or selling out of their own inventory. Sometimes this is speculative trades, more often it is more mundane like saving transaction fees (and a higher certainty of transacting) from going to the market.
Because when you buy shares on a platform you don't buy them yourself. You don't have an account at the exchange. The brokerage buys them on their account.
So let's calculate the fees. For a given stock, FCKD, the bid offer is $4.50, the lowest offer is $4.60. Transaction costs for this are $0.10 at the brokerage.
Investor A wants to buy a share, B wants to sell one, on the same brokerage. Okay let's see.
Brokerage does nothing (because the amount of shares they hold on the exchange for their clients doesn't change at all). So they don't pay anything for that either. No transaction fees, nothing.
A gets to buy the share, and has to pay the lowest offer + transaction costs for the share, or $4.70.
B wants to sell the share, and he gets to sell if for the highest bid, or $4.50, and in some cases another $0.10 in transaction costs.
So the brokerage "captures the spread", and of course the transaction costs. In this case they made $0.40 for doing ... nothing, no share was sold or bought.
This is the official story. Now in practice, this means that a rather large amount of value is "stored" at the brokerage. It is a long accepted practice in banking that only a percentage of the stored value is kept. So while you might think that as a result of this transaction the bank/brokerage makes $0.40 in profit, but it doesn't. Assuming 10% reserve ratio (which is on the high end, usually either 2 or 4%). It makes (100% - 10%) * 2 * $4.55 + $0.40, and pays that out to it's shareholders/managers/... (twice, because once in cash, one in a share)
Now you might think that's where it stops. Well, not quite. They then go to another bank, and they say "we are holding an asset worth $X on behalf of our customers, can we borrow against that ?", and the next bank say "sure ! if we can do the same". So bank A gets a 2 * $4.55 debt at bank B, and bank B gets a 2 * $4.55 debt at bank A. Since this also counts as reserves, they then only keep 10% of that money actually available, and pay 90% out to their shareholders.
So now the bank has paid out (100% - 10%) * 6 * $4.55 + $0.40 to it's shareholders.
Needless to say, keeping this whole situation stable if the market were to gasp drop even slightly is more than a little tricky. Hence, "too big to fail".
That's why you want to be a bank. This is the reserve currency system we currently work with.
To be fair, every large bank has a brokerage and wealth management division and a capital markets division. They are all analyzing trades placed on brokerage system to find trends and opportunities for the capital markets division. This is in fact the major driver for big data initiatives in the banks.
> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers, though Bhatt insists “We do not sell data to anyone. We have never sold data to anyone. We just do not do that.” There have been misconceptions that Robinhood sells high-frequency traders its data to help them trade against the startup’s customers. But Bhatt says “The rules around this stuff as so tight. We’re not a social media company. If we even step slightly out of line with anything we all go to jail.”
Basically all they're claiming is that they're following the rules - i.e. if the rules allow selling "data" (or something that we won't call "data" but "order flow" or something) to HTFs or banks' dark pools, they're not saying they don't do it!
> Robinhood also earns money from rebates its gets for directing its order flow to broker dealers
So they're selling some data (as opposed to running directly on an exchange, without any intermediaries). Or maybe not "selling" in the strict sense (I give you data, you give me money), but in an indirect way (I give you data, and you give me discount on your other services).
I give you data, and you give me discount on your other services
That's not what rebate means in this context. It is, in fact, actual money.
Robinhood also isn't just giving someone data. They're sending order flow to various market makers. Not data about the orders but the actual flow in need of execution.
That flow isn't really data. Like sure, ok, it's data in the sense that everything is data. But that's not the point. The point of retail flow is that it's not based on other market events but is based on mundane things like regular monthly 401k deposits.
This flow is a source of customers for market makers. Those customers get charged a fee. A % of that fee is rebated back to Robin Hood (or other retail brokers) for being originators of the customers.
Front running is something which only exists when you need to fill an order which is too large for one stock exchange's ledger at that price. For retail trader that should not be a common case.
Wow. Am I the only one here that remembers that feeling of 1999, when all stocks were going up, and one could do no wrong with leverage and a Quick and Reilly account?
Good idea for Robinhood to target millennials, who definitely aren't old enough to remember.
Some measures suggest the current bubble is even bigger than the one in 1999. Or at least more broadly carried, in the sense that in 1999 the bubble was limited to a fairly narrow range of tech stocks.
This time it's all over the place. It's not limited to a few stocks. It's not even limited to the broader stock market or to subprime credit. Today even government bonds are in a very special place.
PS: it's also very interesting that so many people here in these comments think that shaving a penny off on order flow is all there is to say about HFT.
And the comments also make me wonder about the staggering popularity of ETFs. ETFs are much bigger than in 2007. In themselves a sound idea, I do wonder how things like the 3x Inverse Synthetic Foobar ETF consisting of 99% bond meat with 1% mystery spices will fare during a real panic.
The difference however, is that interest rates were 5.5% in 1999. They currently sit below 1% (and it's been almost 10 years where they've been below that level). Interest rates are lower for longer than they've ever been in US history. And interest rates are extremely influential.
That's what I mean by government bonds being in a special place; like a balloon pushed underwater by the ever escalating central banking interventions of the last decades.
And it's not just in US history, we may be talking about all of history. And not just on the short end. In 2016, a country like Belgium, where the government has huge unfunded liabilities, was able to borrow on 10yrs for around 0.2%. Japan is even worse.
The price of all credit ultimately relates back to these bonds. That's why the entire financial market is setting new records, for the 3rd time in 20 years. That's why in some sectors being profitable is once again not being considered as important as various metrics of "growth potential". And, to get back to Robinhood, that's why they can offer margin trading rather cheaply to the masses.
It's a massive bubble, and some comments here reflect that. The only thing we can't know is when it finally pops and where the epicentre will be this time.
(My guess would be somewhere in the nexus between ETFs and the bond market. Throw in bipolar, on/off liquidity and high volatility-of-volatility caused by modern versions of program trading-style hedging and HFT and you can have a panic with a whole new look and feel.)
I have a modest amount of money in Robinhood. I love the app and they way it has encouraged me to learn about markets.
I started in March of 2016. I was naïve and I made a lot of silly mistakes early on, but I was able to learn a lot of fundamentals when the stakes were low.
I view it more as a gaming app than investing — it's a supplement, not a replacement for investing and asset management.
Absolutely! The app lives in my phone's "games" folder. I have a relatively small amount of money, just enough that it would sting a bit if I lost it all. I find that even having a tiny stake in things makes learning about investing and finance actually interesting, whereas the majority of my invested assets are all "Vanguard, take the wheel"
+ This. I keep a similar smaller trading account where I effectively gamble with stock picking. I do this as I enjoy researching and understanding businesses and find things more interesting, and you see opinions more honestly when I put money where my mouth is. And it helps you stay engages with your reading. I leave the 'retirement' investments elsewhere.
This is a good time to trot out that old tech company adage: if you aren't paying for the product, you are the product.
How does Robinhood make money? By selling order flow to market makers. Why do market makers want Robinhood's order flow? Because Robinhood's customers are, collectively, unsophisticated investor with no particular knowledge about the future performance of a stock making them the perfect customers for purchasing liquidity a penny at a time.
Worth keeping in mind as you trade stocks every day.
And why is that a bad thing? If I make a couple of $100 trades in a day and make $10, what do I care if the pros used me for liquidity? I believe the same would happen even if I was paying $7 at Fidelity to make the trades.
Not trying to be argumentative, just want to make sure I understand the conversation here.
Most Robinhood customers will not reliably make more money trading every day than they would buying and holding Vanguard Index funds ($VTI is a good place to start).
Now you could argue that diversification is key and that the best way to diversify is to choose an index vs picking your own asset mix. But deifying analysts is absurd
In short it means the pros aka The Market Makers control the market. What that means is they have the ability to see all of the price action which allows them to manipulate the market. When prices go up or down, it's them deciding whether they go up or down or at least throttling the rate to maximizes their earnings. They are both buying and selling at all times. What makes Robinhood such a joke is that they are a middleman between you and a middleman. So instead of buying your drugs from a dealer, you're buying from the pusher on the corner who gets free drugs for every new customer.
I don't really have time to respond to and refute this post, but anyone reading it should know this person doesn't really have any idea what they're talking about, and worse, probably thinks they do.
They are doing the exact same thing that other brokers do. The difference is they are trying to drive the trading fees down to zero and hope they can make up revenue on all the other avenues, like selling order flow. I don't know if that's a sustainable model or not, though. They need to deal with a lot of fraud associated with their platform which takes revenue from the top line.
Indeed you are correct and I think that's great. I just think it makes sense for the retail customers who use Robin Hood (like the OP) to have the realization that they are the "unsophisticated investor" in this transaction. And hence, if they're trading multiple times a day, they are probably not making a great financial decision.
Same exact situation here. Because I put in lots of relatively small dollar value trades $10 transaction fees at TD Ameritrade would eat all my profits pretty quickly.
Their margin rates are very high at best and potentially usury at worst. They are counting on you not using the full amount of margin on the tier you paid for and further, counting on you being too lazy to downgrade to a lower (or no) tier when you no longer need it. There was nothing I could find in the FAQ about them automatically dropping the tier as your use declined.
For comparison - and I have no vested interest here - Interactive brokers currently charges 0 - 100,000 2.41% (BM + 1.5%) and 100,000.01 - 1,000,000 1.91% (BM + 1%) on USD margin loans.
If you think you will be an active user of margin I would go elsewhere unless you can justify savings on the commission side against paying 0.005/shr elsewhere.
My Robinhood margin rate for $6,000 is only 5%/year. It also provides extended pre-market trading, after-market trading, and instant deposits. Interactive brokers charges commissions on trades. Also you don't have to use margin with Robinhood, it's not required.
That 5% rate only applies if you fully utilize the margin for the entire year. If you do not, and do not drop out of the gold tier when not using the margin, your effective rate sky rockets.
As to IB, again my point was there is a trade off between paying nothing for commissions and overpaying for margin vs paying a low commission and getting a market margin rate that only kicks in when in use.
I would be pretty surprised if they introduced short selling. There's no question that a good chunk of Robinhood's user base are novice investors. Those that do not understand short selling may land themselves into a lot of a hot water. There may be measures RH could take to prevent novice users from dangerous short selling plays. I'd be curious to see how they introduce it.
The way I approach betting against the market is inverse leveraged ETFs. If you want to bet against S&P 500, ProShares has a 2X inverse offering, and you can probably balance it with 3x leveraged gold JNUG / JDST as they track the market.
Not sure exactly what you're looking for in a Robinhood API, but I work for a company that provides a brokerage API (the sort of API that would power a Robinhood-type product). Might be relevant: https://www.thirdparty.com
We've got quite a few things on the roadmap that exceed Robinhood's offering.
People watch margin interest and amount of margin buys very closely. They can be indicators of over heated or bubble markets (especially in emerging markets). China has basically endorsed margin buying to prop up their insanely overvalued stocks. They're about to enter their own too big to fail territory, but I digress.
Why is there no browser version? Some of us don't like using our phones for this type of stuff. Just because I don't like little screens. Other than that, it is about time someone broke up this market. I welcome our new free overlords.
I've been using Robinhood for the past year and made a 14% return which amounted to an extra $1500 in my pocket that I wouldn't otherwise have. There is so much negativity surrounding Robinhood here and I think it's coming from speculative people who haven't actually used Robinhood and can't assess it empirically. They charge _0_ fees. What's so anti-robinhood about that? If you're concerned about them making money off of order flows, just use limit orders. I _only_ place limit orders.
Reminds me when my friend told me he was up like %30 using Wealthfront and I should complete his referral. And I told him the S&P was up the same amount over the past year, but I only paid a 0.05% fee.
"Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits."
I wonder if selling (or using) data from their customer is more profitable than the Gold plan.
Is there a chance of losing money that is invested in RobinHood? I am not talking about trading losses -- but some thing like RobinHood going under and me losing money as a consequence of that? Are there any protections for consumers?
Robinhood is SPIC insured upto $250,000. So you can get upto 250,000 worth of securities value back if company goes under.
Scroll down on the link https://www.robinhood.com/
Yes, there is a chance, but there are very tight regulations about the company's capital requirements that are designed to ensure you're protected. The only thing you're particularly susceptible to is outright theft/fraud on the part of Robinhood.
If Robinhood bundles user debt and sells it at varying ratings (depending on information about the stocks being bought, perhaps) they could protect themselves from a large default and probably make money doing it
It wouldn't necessarily protect them. Typically the broker sells off your shares/etfs on your behalf before they are owed anything net over your account deposit or margin.
My understanding is that if you trade through a platform like this, that's monetizing through order flow, you're getting screwed by HFTs. I.e. AFAIK Robinhood doesn't need to be selling the data to HFTs (which they don't do), for you to get screwed by them.
Anyone here in the space who can quantify the "hidden" cost you incur because of more sophisticated traders trading against you?
It feels like working with a broker who's explicitly charging you might actually be cheaper if you take this "cost" into account?
All the major retail brokers sell their order flow, so you generally eat this cost no matter who you use. In addition, the hidden cost is fractions of a penny on the dollar (so still better than the $5-7 a regular broker charges per trade anyways).
What's the long play then? Surely Robin Hood isn't absorbing the the transaction fees as a loss leader just to increase it's user base? If that's the play, any other company can emulate that.. The incentive seems to be this may cause a price war with existing brokerages.
The long play is that it actually doesn't cost significant money per trade at an institutional level. The only reason the other major brokers charge you money is because it covers their brick and mortar retail costs (e.g. Scottrade) and it adds to the bottomline (e.g. Etrade). So Robin Hood is actually just giving this surplus to the consumer instead of keeping it for themselves, and building a user base / brand in the process. Eventually once they have enough users, they will start to up sell you for other services (e.g. checking/savings, margin trading, options trading, check writing etc).
So majority of the brokers have brick and mortar operations that can't afford to compete on price. That leaves only the online brokers. Then the next step is to build a brand that attracts customer trust/loyalty, which is what Robinhood seems to be doing and to build a really nice experience which they do with their slick apps. Once customers (generally young ppl who are first time investors) are invested in the Robinhood platform, then Robinhood can up sell them on additional features/services (margin, options, API access etc). So sure Etrade could compete on price (I doubt they would want to since it would immediately hit the bottom line vs a new company not depending on broker fees), but if you look at it from a long term perspective eliminating broker fees is just step 1.
The long play seems to be deliver retail stock trading at the lowest possible price. There's a lot of money to be made even if they don't try to maximize profits.
Plus, I bet they are banking on the existing brokerages not responding until things are too late for them. Most brokerages offer free trades and other perks, but limited to "high-value" customers. They won't drop trading fees until they absolutely have to, but by that time, their low-value customers will all be gone.
There aren't actually any transactions fees to absorb. Wholesale brokers (think Citadel) pay retail brokers (think Robin Hood) for the privilege of executing their orders.
Because, for the most part, retail investors are not well-informed investors and are willing to cross the bid-ask spread. To simplify dramatically, suppose Citadel thinks the fair value of a stock is 25.185, the market is 25.18-25.19, and a Robin Hood customer wants to pay 25.19 to buy 1 share of the stock. If they buy from Citadel, Citadel makes $0.0050 on average. Given those basic economics, it makes sense for Citadel to pay, say $0.0018, to make sure that the Robin Hood customer buys from them instead of from Knight.
Oh damn, then it's just opening short/long term trading to a new segment of people that wouldn't otherwise do it. That's like 100% casino/poker bonuses during the poker boom.
Day trading is hazardous to your health and your wealth and more-so with the increase in HFTs. But the buy and hold for long-term strategy works very well. Use limit orders and you won't be paying any "hidden" costs.
For example, Lets say you put in a Market Order for 1 share of GOOG. Currently the price per share is about $900. It could fill immediately at $900, or it could fill immediately at $930 with that $30 premium. If instead, you place a Limit Order for 1 share of GOOG for $900.02, you will only buy 1 share of GOOG for $900.02 or less which effectively cuts out any "hidden" costs. Limit orders are almost always better.
Fun fact: All Robinhood market orders are actually placed as limit orders 5% above the market price. This is to limit investor risk.
Edit: Now only market buy orders are converted into limit orders. Market sell orders remain as market sell orders. They must have changed their policy in this last year.
Although that article reads like an ad for Interactive Brokers, it offers a bit of insight on the subject.
Namely how aggressive limit orders in an order flow situation will be less likely to fill in the face of desirable price movement, thus incurring an opportunity cost.
You'll actually get better fills from HFTs operating on purchased order flow than you would if you went directly to market. Also, there's nowhere you can go that won't sell your order flow on undirected orders. But if you don't like it, you can always send it directly to a particular exchange, regardless of who your broker is.
If you're going to gamble, have some real fun with Forex, which commonly offers 50:1 leverage in the US. Though I'm being a bit sarcastic, highly leveraged trading can be quite entertaining as long as you treat it exactly as you would a trip to Vegas - don't bet more than you care to lose, know when to quit and don't try to make a living doing it.
I think the most surprising aspect is their desire to offer a similar referral scheme as Uber.
"Now when one user refers someone else who signs up, both get one share of a randomly selected company from a set that includes Facebook, Apple, RiteAid, Ford, and General Electric."
How is that different from the dozens of other offerings from other brokers? Margin lending has been around for centuries, binary options on the other hand..
I've been using it for a while. I think it's best for longer term positions (2+ years at least). I realize it's ironic, because in theory, I could trade all the time with Robinhood, but I find that I don't do that. (Though that may be because I've learned over time that trading often is difficult, a recipe for me to lose money, and draining.)
It's really just good, from the customer perspective. It's the brokerage that needed to exist.
My uncle, who lives off of trading, gave me his transaction list and I saw that like 12% of his profits were eaten up by trading fees. Ouch.
I think more sophisticated individual investors don't jump on because you can't trade options. For me, that's a good thing, I'm not tempted to speculate.
I've used it for both about 6 months and it's wonderful. Very easy and nice to use. Only complaint is there is no features to explore stocks and financial news but there are other apps for that
encouraging retail investors to trade frequently and on a margin sounds like a terrible idea. Basically creating more suckers for the high frequency traders to trade against. Should rebrand the app and call it Robber-in-a-hood
Remember LendingClub which was a money lending business that touted it's machine learning KYC & AML process would automate the overhead but what happened was it just let a ton of people with non existent credit to grab money...that they will never pay back. Techcrunch, news, tv, they had it all.
I'm not saying Robinhood is bad or anything but the business model and the valuation built on top of it is very questionable.
It's almost like gravity does not exist anymore. It's all about making it across the IPO finish line and then it's like fuck what happens to everyone else because I've already got Monssack Fonseca shuffling my untaxable money.
They "lend" you money to buy assets they hold, up to 2x. There's essentially zero risk for them. They don't lend you money you can cash out to your account.
You buy $1000 of stock with your cash. They say cool your account can now "borrow" $1000 from us to buy more stock. If your stocks start crashing, they margin call and get their money back. The assets are always in their account, no risk to them.
The only real risk is probably fraud. Sign up with stolen account A, cash out to mule account B. This happens a ton and for small amounts no one is gonna follow up on it, so it's up to Robinhood to detect and prevent this ahead of time.
> Remember LendingClub which was a money lending business that touted it's machine learning KYC & AML process would automate the overhead but what happened was it just let a ton of people with non existent credit to grab money...that they will never pay back.
Last I checked, Lending club still had strong returns, even after their fees, for investors (though somewhat less attractive then the figures would suggest since it is taxable as personal income rather than capital gains), and a sub-5% default rate. This characterization seems to be pure fantasy.
Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?
Even if you are a professional trader you'll take a bath on margin over the long run. They are incentivizing what is effectively borrowing for gambling and that is their long term revenue strategy? Might be a great money maker but it certainly is playing with some really big barrels of fire.
"Three things ruin people: drugs, liquor, and leverage - Charlie Munger"
edit: The point here is not that Margin is a new service, yes every brokerage has it, it's that it is irresponsible to use Margin if you are not a sophisticated investor. Its even more irresponsible to push leverage onto unsophisticated investors.
Not everyone is going to understand the risks of leverage and if Robinhood makes it as easy as candy crush to trade on leverage, enough gamified users are "playing" stock market with real money and a margin call happens during a huge downturn, it will be exceptionally nasty.