The Robinhood logo appears on a smartphone screen.
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london – Robin Hood On Monday it said it was launching margin investing in the UK, the ability for investors to borrow cash to expand trades
The US online investment platform said the option would allow UK users to use their existing assets as collateral to purchase more securities.
The launch of margin trading follows Robinhood’s recent approval of the product following conversations with the UK’s financial regulator, the Financial Conduct Authority (FCA).
Margin trading is rare in the UK and is considered more controversial by regulators because of the risks it poses to users. Some platforms in the country restrict margin trading only to high-net-worth individuals or businesses. Other companies offering margin investing in the UK include Interactive Brokers, Immunohistochemistry and CMC market.
Robinhood previously launched a securities lending product in the UK in September, allowing consumers to earn passive income on stocks they own, as part of the company’s latest growth plans it is foreign market share.
The stock trading app offers “competitive” interest rates through its margin loans. The platform offers interest rates ranging from 6.25% on margin loans under $50,000 to 5.2% on loans of $50 million and above.
Jordan Sinclair, president of Robinhood UK, said many customers felt they couldn’t access more advanced products such as margin trading in the UK because they were typically reserved for a small number of professional traders who invested in institutions such as heavyweight banks. JPMorgan Chase, Goldman Sachs, Morgan Stanley and UBS.
“There are so many barriers to entry,” Sinclair told CNBC. “Ultimately, that’s why we want to break down all the stigma and barriers around basic investment vehicles.”
“For the right customer, this is a great way to diversify and expand our product portfolio,” he added.
a risky business
Investing borrowed cash can be a risky trading strategy. In the case of margin trading, investors can use borrowed funds to increase the size of their trades.
Let’s say you want to invest $10,000 in Tesla. Typically, you would have to spend $10,000 of your own money to purchase the stock. But by using a margin account, you can “leverage” your trades. With 10x leverage, you only need $1,000 upfront to trade, instead of $10,000.
This can be a profitable strategy for professional traders, who can earn greater returns than they would from a normal trade if the value of the asset being purchased rises significantly.
This is a riskier path for retail traders. If the value of the asset you borrowed cash to purchase drops significantly, your losses will also be substantial.
Robinhood announced its UK launch in November and opened its app to Brits in March. Robinhood will not be able to offer margin trading options to UK users at launch, pending discussions with the FCA.
“I think the intent of the regulators is just to get them to accept our approach and let them understand the history of our products in the U.S., the products we develop and the qualifications,” Robinhood’s Sinclair told CNBC.
Sinclair said Robinhood has implemented strong safeguards to ensure customers don’t invest more cash than they can afford to lose when investing on margin.
The platform requires users seeking margin trading to deposit at least $2,000 in cash in their accounts. Customers must also choose to use the product – they are not just automatically signed up for a margin account.
“There are eligibility criteria. There is a way to vet whether the product is suitable for the right customers,” Sinclair added. “Fundamentally, this is a very important part of the product. We recognize that this is not suitable for novice investors who are just starting to engage with our clients.”
Robinhood said its customers’ uninvested cash is protected by the Federal Deposit Insurance Corporation up to $2.5 million, which the company said adds another layer of protection for users.
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