The Robinhood logo will be displayed on the smartphone screen.
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London – Robinhood On Monday it unveiled margin investing – the ability for investors to borrow money to increase their trading – in the UK
The US online investment site said the option would allow users in the UK to use existing assets as collateral to buy additional bonds.
The launch of margin trading follows the recent approval of the product after Robinhood held talks with Britain’s financial regulator, the Financial Conduct Authority (FCA).
Margin trading is rare in the UK, where regulators see it as highly controversial because of the risks it poses to users. Some platforms in the country restrict margin trading to high net worth individuals or businesses only. Other companies offering margin investment in the UK include: Interactive brokers, I.G and CMC Markets.
Robinhood in the UK in September launched a securities lending product that allows consumers to earn passive income on stocks they own, as part of its latest push to grow. Its Market share abroad.
The stock trading app advertised “competitive” interest rates by offering its margin loans. Rates offered by the platform range from 6.25% for margin loans up to $50,000 to 5.2% for loans of $50 million and above.
Jordan Sinclair, head of Robinhood UK, says many clients feel they don’t have access to advanced products such as margin trading in Britain, as they are usually reserved for a select few professional traders who invest in heavyweights such as banks. JP Morgan Chase, Goldman Sachs, Morgan Stanley And UPS.
“There are many barriers to entry,” Sinclair told CNBC in an interview. “Ultimately, we want to break down all the stigmas and barriers to fundamental investment tools.”
He added, “For the right client it’s a great way to diversify and expand their portfolio.”
Dangerous business
Investing in borrowed money can be a risky trading strategy. In the case of margin trading, investors can use borrowed money to increase the volume of their trades.
Say you want to invest $10,000 in a Tesla. Usually, you have to spend $10,000 of your own money to buy that stock. But by using a margin account, you can “leverage” your trades. With 10x leverage, you need to deposit $1,000 instead of $10,000.
This can be a profitable strategy for professional traders who can earn bigger returns than regular trading if the value of the purchased asset rises significantly.
It’s a dangerous path for retailers. If the value of the property you buy with the borrowed money goes down significantly, your losses can also be dramatic.
Robinhood announced its UK launch last November and will open its app to Brits in March. At the time of launch, Robinhood was unable to offer a margin trading option to UK users, pending discussions with the FCA.
“I think with the regulator, it’s about getting them comfortable with our approach, giving them the history of our product in the U.S., what we’ve built and the qualification,” Robinhood’s Sinclair told CNBC.
Sinclair said Robinhood implemented strong safeguards to ensure customers did not invest more money than they could lose when investing on margin.
Users who wish to trade on margin must deposit a minimum of $2,000 into their account. Customers must opt-in to use the product – they are not automatically signed up for a margin account.
“There are eligibility criteria. There is a way to review the suitability of this product for the right customer,” Sinclair added. “Fundamentally, that’s the most important part of this product. We recognize that it’s not for the novice investor starting with our client.”
Robinhood says its customers’ uninvested money is protected up to $2.5 million by the U.S. Federal Deposit Insurance Corporation, which the company says adds another layer of protection for users.
