Ahead of the IPO, Robinhood Expands Risky Lending to the Stock Exchange
Robinhood quickly expanded its business of providing potentially risky loans to clients of the stock trading app in preparation for its IPO.
The popular but controversial online brokerage firm confirmed on Tuesday that it has started the process of selling Robinhood shares to the public for the first time. The company said in a blog post that it had filed confidential IPO documents with the Securities and Exchange Commission and that the regulator is revising its registration. Robinhood did not disclose a timeline for the public offering.
In a separate regulation depositRobinhood reported earlier this month that its loans to help clients buy stocks “on margin” – in which someone borrows money to buy stocks, options or other securities in the market. hope to increase their returns on investment – grew by $ 2 billion in the second half of 2020 At the end of the year, Robinhood had $ 3.4 billion in outstanding margin loans, up more than by 400% from the $ 650 million he had at the end of 2019.
Robinhood, launched in 2013, has become particularly popular with young investors because it offers commission-free trading through an app aimed at Millennials and Gen Z consumers high on video games and other online tools. Indeed, Robinhood and Square Cash were the top two sites in terms of total time spent among so-called “power users” of finance and trading apps who log more hours than the average customer, according to a study. recent report on trends in the use of mobile applications by Global. Wireless solutions.
Generation Z Flocked To Robinhood [and other] exchanging apps throughout the pandemic, ”Global Wireless Solutions reported, citing a doubling of the time recorded on these apps by Gen Z users from March 2020 to February 2021.
Unlike other brokerage firms, Robinhood does not charge stock trading fees, forcing it to find other ways to make money. This includes lending money for a fee so that clients can invest more money in the stock market.
Robinhood charges $ 5 per month to borrow up to $ 1,000 for investment purposes. For any amount over $ 1,000, investors must pay an annual interest rate on the loans. Previously, the company charged an annual interest rate of 5%, but in December – just a month before GameStop and other “meme” actions have taken off – Robinhood cut that annual rate in half, to 2.5%, making it even cheaper for clients to borrow and bet on stock picks.
Many planners and financial advisers have long warned individual investors against buying stocks “on margin”, in large part because buying stocks with borrowed money can quickly lead to unexpected losses. that exceed what was initially invested. Nonetheless, Robinhood on its website claims that buying on margin gives customers “more flexibility, additional purchasing power and less waiting time to access” their account. He also says he can add risk.
A Robinhood spokesperson defended the company’s investor lending practices. “Our margin loan rate is one of the lowest and [most] competitive rates in the industry and we’ve seen margin lending grow along with the rest of our business as we’ve brought millions of people into the financial system, ”the spokesperson wrote in a statement.
High rate of defaulted loans
Yet Robinhood equity loans have not always produced positive results for the company and its clients. CBS MoneyWatch reported in February that by mid-2020 Robinhood customers were 14 times more likely unable to repay their equity loans as investors who borrowed from rival brokerage firms like eTrade, TD Ameritrade and others.
In 2020, Robinhood wrote off $ 42 million in defaulted stock loans. The company said an additional $ 41 million in loans was at risk of defaulting.
Robinhood was sued last month by the parents of 20-year-old client Alex Kearns who committed suicide last year after mistakenly believing he had lost nearly $ 750,000 in a risky transaction through the app.
Some pundits told CBS MoneyWatch that they believe the company’s aggressive lending may also have helped inflate the bubble in the GameStop stocks and other so-called “meme” stocks. Activity increased on the Robinhood app earlier this year, as online retail investors began buying shares of battered companies as part of a collective movement against Wall Street short sellers, or investors who are trying to make money by betting that a stock will drop in price.
That sent those stocks skyrocketing by thousands of percentage points in just a few days. It also led to a cash flow crisis at Robinhood. The company had to seek emergency funding from venture capitalists in order to meet its regulatory requirements, which increased due to large numbers of its clients crowding into a small number of volatile stocks.
Robinhood also had to restrict trading in these shares. Congress has since held two hearings on the case, in part to question whether Robinhood and a hedge fund that pays the company to deal with the the trades had done well.
“Margin loans have amplified the purchasing power and ability of these investors to drive up GameStop’s stock price,” said Joshua Mitts, professor of securities law at Columbia University., told CBS MoneyWatch last month. “What people are so upset about is that it is Robinhood’s own risky lending practices that have limited its clients’ ability to trade and undermined investor confidence in the fairness of the market.”
The Associated Press contributed reporting for this article.
First published on March 24, 2021 / 17:17
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