LONDON – Robinhood said on Monday it is launching margin investing – the ability for investors to borrow money to boost their trading – in the UK
The US online investment platform said the option would allow users in the UK to leverage their existing assets as collateral to purchase additional bonds.
The launch of margin trading follows the product’s recent approval after Robinhood held talks with Britain’s financial regulator, the Financial Conduct Authority (FCA).
Margin trading is a rarity in the UK, where regulators consider it more controversial due to the risks involved for users. Some platforms in the country limit margin trading to only high-net-worth individuals or companies. Other companies offering margin investing in the UK include Interactive Brokers, Instagram and CMC Markets.
The launch comes after Robinhood debuted a securities lending product in the UK in September, allowing consumers to earn passive income from the shares they own as part of the company’s latest attempt to grow. that’s it market share abroad.
The stock trading app promoted “competitive” interest rates with its margin loan offering. The 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, chairman of Robinhood UK, said many customers feel they cannot access more advanced products such as margin trading in Britain, as they are typically reserved for a select group of professional traders who invest in heavyweight banks. JPMorgan Chase, Goldman Sachs, Morgan Stanley and UBS.
“There are so many barriers to entry,” Sinclair told CNBC in an interview. “Ultimately, this is what we want to break down all these stigmas and barriers to just basic investment tools.”
He added: “For the right client, this is a great way to diversify and expand your portfolio.”
A risky 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 size of their trades.
Let’s say you want to make a $10,000 investment in Tesla. Normally, you would have to shell out $10,000 of your own money to buy these shares. But by using a margin account, you can “leverage” your trading. With 10x leverage, you would only need to have $1,000 upfront to make the trade instead of $10,000.
This can be a profitable strategy for professional traders, who can achieve even higher returns than in normal trading if the value of the asset purchased increases significantly.
It is a riskier path for retail traders. If the value of the asset you are purchasing with borrowed money drops significantly, your losses will also be dramatic.
Robinhood announced it would launch in the UK last November, opening its app to Brits in March. At the time of launch, Robinhood was unable to offer UK users the option of margin trading, pending discussions with the FCA.
“I think with the regulator, it was just about getting them comfortable with our approach, giving them a history of our product in the US, what we’ve developed and the eligibility,” Robinhood’s Sinclair told CNBC.
Sinclair said Robinhood has implemented robust protections to ensure customers don’t invest more money than they can afford to lose by investing on margin.
The platform requires users who wish to trade on margin to have a minimum of $2,000 in cash deposited in their accounts. Customers also have to opt-in to use the product – they are not just automatically enrolled in a margin account.
“There are eligibility criteria. There is a way to evaluate the suitability of this product for the right customer,” Sinclair added. “Fundamentally, this is a very important part of this product. We recognize that it is not for the novice investor who is just starting out with our client.”
Robinhood says its customers’ uninvested money is protected to the tune of $2.5 million by the U.S. Federal Deposit Insurance Corporation, which the company says adds another layer of protection for users.
