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.
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.)
https://support.robinhood.com/hc/en-us/articles/213262686-Ro...
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.
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.
But I'm not sure where to go to find information about the returns.
> 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.
Depending on the index you track, it can fall 80%. Consider the Asia ETFs in 2008, brutal.
I think Robinhood is doing a great service -- I just wish they would expose a better API.
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.
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.
Win/win really.
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...
[1] https://en.wikipedia.org/wiki/THOR_(trading_platform)
[2] http://www.nanex.net/aqck2/HowSlowIsTheNBBO_%20A_Comparison_...
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.
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.
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.
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 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.
Isn't a credit check required to open an account?
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.
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%.
[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal... (linked to from their FAQ[2], sorry for the sketch URL)
[2] https://support.robinhood.com/hc/en-us/articles/214681823-In...
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]
[0] https://www.interactivebrokers.com/en/index.php?f=interest&p...
>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.
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.
https://www.scottrade.com/investment-products/interest-margi...
https://www.fidelity.com/trading/advanced-trading-tools/marg...
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.
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.
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...
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.
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.
I wonder how Robinhood will handle it when it happens.
From http://www.investopedia.com/terms/m/minimummargin.asp:
"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."
Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.
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.
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.
I was lucky enough to have a father who ran a small business, so I got an early education in these matters. But that's the exception to the rule.
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.
Wow this is an ignorant thing to say in this context.
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.
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.
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)
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).
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.
When they lend you money, they know exactly how much of that will go back to their hands soon (and they have a ton of cash flow to cover).
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.
And what of the case where the value of your SPY position falls below your $5k+interest debt to them?
Edit: derp. A margin call would cover this.
They do receive payments for order flow.
If you don't pay back your margin they'll come after you like any other debt collector. There's nothing special about it.
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.
That's completely false. Casinos are huge money lenders.
Pretty common.
To some extent they want to make Robinhood a game, rather than an investment platform.
I believe that is far and away the primary use case for Gold.
http://www.finra.org/investors/day-trading-margin-requiremen...
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.
But hey, at least we're making debt available to more people.
So for example, if I was using an 100k account to trade, I had another 100k of leverage no?
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.
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.
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.
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.
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.
The only difference is that Robinhood is charging a subscription for access to margin whereas other brokerages do it for free.
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.
From their FAQ https://support.robinhood.com/hc/en-us/articles/213262686-Ro... :
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.
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.
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.
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.
Uh, IB is not a professionally-focused brokerage. It's the most professional retail brokerage though.
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 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.
Atleast in india every broker provides that.
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.
Is this a typo?
[1] https://duckduckgo.com/?q=always+invest+what+you+can%27t+aff...
You have it right.
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.
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.
I agree with the quote.
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.
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.