By Gordon Gottsegen
Rates go as low as 5.7%, depending on amount borrowed
In a quarterly earnings call last week, Robinhood CEO Vlad Tenev said that the company saw net positive inflows as customers pulled their money from every major brokerage and transferred it into their Robinhood accounts. Now, Robinhood is trying to give them a reason to keep it there.
On Tuesday, Robinhood Markets (HOOD) announced its new tiered rate offering for investing on margin. Robinhood claims that it offers the lowest rates among leading brokerages, ranging from 6.75% to 5.7%.
Steve Quirk, chief brokerage officer, told MarketWatch that the lower margin rates are an attempt to deliver more value to Robinhood customers. The brokerage industry is a somewhat crowded space, with both established financial institutions and investing app startups trying to convince retail investors to trust their money with them. So brokerages often look for some differentiator or competitive edge to win over more customers, whether they are people just starting their investing journey or advanced traders looking for certain tools.
See also: Why are millions of people paying for Robinhood Gold?
Margin investing involves borrowing money from your broker to buy securities. Your broker uses your portfolio as collateral, and then lends you more money to place trades. Let's say you see a stock that's moving quickly and you want to get in on it before it's too late, or you don't currently have enough cash in your account to make a trade you want. Other traders use margin as a way to multiply their gains by investing more money than they would have otherwise. This is where margin comes in handy.
But it's important to keep in mind that margin is a form of leverage and is inherently risky. As with other kinds of loans, your broker will charge you interest on the money it lends you. If you buy stocks on margin and the share price goes up, great, you just made money on a trade you wouldn't have been able to make without that margin. But if that stock goes down, your holdings are now worth less than what you paid for, and you still owe the original amount of money to your broker plus interest.
So what this announcement means is that Robinhood is offering lower interest rates on its margin loans.
The rate customers get depends on the size of their loan. Here's the breakdown:
6.75% for up to $50K 6.55% starting at $50K and up to $100K6.25% starting at $100K and up to $1M6% starting at $1M and up to $10M5.95% starting at $10M and up to $50M5.7% starting at and above $50M
How many Robinhood customers will actually take out a margin balance greater than $50 million to secure that 5.7% rate? Probably not many. In fact, ChiefQuirk admits that a relatively small percentage of Robinhood customers actually trade on margin.
"Margin investing in and of itself is not something a huge percentage of our customer base uses," Quirk told MarketWatch. "People use it episodically when they see a great opportunity or love a specific investment. But I think where the opportunity lies is, in addition to our current customers, we're seeing a whole lot of new customers that are more frequent margin users with larger balances. This is a way for us to deliver more value to them."
Robinhood has seen a significant increase in assets under management in 2024. Customers transferred over $4 billion in retirement assets from brokerage competitors between January and April of this year, with transfers averaging over $90,000 per customer. With account balances that big, some of these more seasoned investors may be used to using more advanced tools, like margin investing, and competing brokerages.
Robinhood attributes this recent growth to its 3% retirement match and 1% deposit boost promotions that were active at the start of this year. Those two programs meant Robinhood would essentially pay people to transfer their assets into Robinhood, and keep them there.
Now that Robinhood has those customers on its platform and signed up for its Robinhood Gold paid subscription service, it has to convince them to stay with the brokerage.
This means releasing all sorts of features, from the Robinhood Gold credit card to higher interest rates for uninvested cash, in order to deliver enough value to make Robinhood worth it for customers.
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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05-21-24 0902ET
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