Nandini Roy Choudhury, writer
Brief news
- Robinhood has launched margin investing in the UK, allowing users to borrow funds against their asset holdings to purchase additional securities, following FCA approval.
- Margin trading is typically restricted in the UK due to consumer risks, with Robinhood aiming to make sophisticated investment tools more accessible to a broader audience.
- The platform emphasizes safeguards for users, requiring a minimum deposit and consent for margin trading, while also providing competitive interest rates on margin loans.
Detailed news
LONDON — On Monday, Robinhood announced that it will be introducing margin investing in the United Kingdom. This feature allows investors to borrow funds to complement their transactions.
According to the online investment platform based in the United States, the option would enable users in the United Kingdom to use their current asset holdings as collateral to acquire additional securities.
Following the Financial Conduct Authority (FCA)’s recent approval of the product, Robinhood has initiated margin trading.
Margin trading is uncommon in the United Kingdom, as regulators regard it as more controversial due to the risks it poses to consumers. Margin trading is restricted to high-net-worth individuals or businesses on certain platforms in the country. Interactive Brokers, IG, and CMC Markets are additional companies that provide margin investing in the United Kingdom.
The expansion follows Robinhood’s September introduction of a securities lending product in the United Kingdom, which enables consumers to generate passive income from equities they own. This move is part of the company’s ongoing efforts to expand its market share internationally.
Margin loans were advertised by the stock trading application as having “competitive” interest rates. The platform provides rates that vary from 6.25% for margin loans of up to $50,000 to 5.2% for loans of $50 million or more.
According to Jordan Sinclair, president of Robinhood U.K., a significant number of customers believe that they are unable to access more sophisticated products such as margin trading in Britain. These products are typically reserved for a small number of professional traders who invest with major banks such as JPMorgan Chase, Goldman Sachs, Morgan Stanley, and UBS.
Sinclair stated in an interview with CNBC, “There are numerous obstacles to entry.” “Ultimately, our goal is to eliminate all of the stigmas and obstacles that impede the use of basic investing tools.”
He further stated, “This is an excellent method for the appropriate customer to broaden and diversify their portfolio.”
A enterprise that is fraught with peril
Borrowing money to invest can be a hazardous trading strategy. Investors have the option of increasing the scale of their transactions by borrowing money in the context of margin trading.
Assume that you were interested in investing $10,000 in Tesla. Typically, the cost of purchasing that stock would require you to contribute $10,000 of your own money. However, it is possible to “leverage” your trade by employing a margin account. The trade would require only $1,000 in upfront capital, as opposed to $10,000, with 10x leverage.
For professional traders, this can be a lucrative strategy, as they can earn even greater returns than they would on typical transactions if the value of the asset they have purchased increases considerably.
It is a more hazardous course of action for retail merchants. Your losses will be substantial if the asset you are purchasing on borrowed cash experiences a substantial decline in value.
Robinhood declared its intention to establish operations in the United Kingdom in November of last year, and Brits were granted access to its application in March. Robinhood was unable to provide margin trading to U.K. consumers at the time of commencement due to ongoing discussions with the FCA.
Robinhood’s Sinclair stated to CNBC, “I believe that the regulator was primarily interested in establishing a rapport with our approach, which involved providing them with a history of our product in the United States, the developments we have made, and the eligibility requirements.”
Sinclair stated that Robinhood has instituted substantial safeguards to prevent customers from investing more money than they can afford to lose when engaging in margin investing.
A minimum of $2,000 in currency must be deposited into the accounts of users who wish to trade on margin, as instructed by the platform. Customers must also consent to the product’s use; they are not automatically registered for a margin account.
“There are eligibility requirements.” Sinclair also mentioned that it is possible to evaluate the suitability of this product for the appropriate customer. “That is a critical component of this product.” We acknowledge that it is not suitable for the novice investor who is just beginning to engage with our customer.
Robinhood asserts that its customers’ uninvested currency is safeguarded by the U.S. Federal Deposit Insurance Corporation to the extent of $2.5 million. The company describes this as an additional layer of protection for its users.
Source : CNBC News
