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Comment by AndrewKemendo | Hacker News Reader

“But ‘how are you going to make money long-term?’ has been a question mark” Bhatt says. Gold has answered that question.” A Gold subscription lets users borrow up to double the money in their account to trade on margin with leverage

Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?

Even if you are a professional trader you'll take a bath on margin over the long run. They are incentivizing what is effectively borrowing for gambling and that is their long term revenue strategy? Might be a great money maker but it certainly is playing with some really big barrels of fire.

"Three things ruin people: drugs, liquor, and leverage - Charlie Munger"

edit: The point here is not that Margin is a new service, yes every brokerage has it, it's that it is irresponsible to use Margin if you are not a sophisticated investor. Its even more irresponsible to push leverage onto unsophisticated investors.

Not everyone is going to understand the risks of leverage and if Robinhood makes it as easy as candy crush to trade on leverage, enough gamified users are "playing" stock market with real money and a margin call happens during a huge downturn, it will be exceptionally nasty.

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Depends what you want to do, I'm about 98% in plain old, boring index-tracking ETFs.

But sometimes I want to take a bit of money to make some stupid bet. Yes, to gamble. And for that purpose, often having the leverage is a good thing.

The way I see it, the bets are much more entertaining than those at casinos and with better odds. Maybe it's just me, but I find casinos incredibly boring, but gambling on the market can be quite interesting.

I think the bigger problem is the erosion of the distinction between "investor" and "speculator", which is often unclear for novices entering the market (for whom Robinhood is significantly lowering the barrier for). Robinhood provides the firing range and a gun but no safety instructions.

So I'm willing to bet you view this app very differently than someone who finds it on the App Store in a spur of the moment enticed-by-Wall-Street feeling, where it can be mistakenly thought as a get-rich-quick scheme. There's no education component to Robinhood

(This conflation between speculator/investor has been happening for a while, see "The Intelligent Investor" by Benjamin Graham.)

But even if you pay the $9-$15 for their Gold account, you still can only get on margin the amount of capital you have in the account max ie: if you deposit $5 and have $5 of cash on hand in your robinhood, but own ~$1200 of stocks, you can use < $1200 of "Gold" which is what they call margin money. It is explained quite well here:

https://support.robinhood.com/hc/en-us/articles/213262686-Ro...

Note that I am a robinhood user and do not use gold or any margin investing. I use it for speculation for long term stuff and have the rest in boring index ETFs / funds primarily. I think the entire idea of investing on margin as playing with fire when you lack fireproof gloves.

Investing or trading on margin is intended to allow you to trade while you are waiting for previous trades to settle. It's not meant to be a loan, but it is exploited that way by both banks and traders at their own risk. It's simple enough to fix, only allow margin to cover the amount of money waiting to be settled. In other words if a trade hasn't settled then the funds are not available for trading.

Margin can be powerful as a wealth building strategy, when interest rates are low. Risky? Yes. Profitable? Sometimes, if you've done your homework.

I don't think you can be a consistent good stock picker, HOWEVER, there are certain companies you just know will do well because they're closely aligned to the industry you work in, for example. "Doubling down" using margin (borrowed at 1-2% per year, not 8-10%) can (maybe, sometimes, not always) be a good strategy.

If you can borrow at 1-2% a year, it's almost a no-brainer.

I've not heard this history before, is there a source you can point to? I'm interested in the history of financial instruments.

As the old saying goes, in the morning two kind of people enter the market. One with money, the other with experience. By evening they exchange positions.

What are returns like on "boring index-tracking ETFs"?

Long term (10+ year) returns have historically been around 7%. Obviously that can vary quite a bit year-to-year.

Ask Jack Bogle... I'm sure he'll have a lesson or 5 for you.

If someone is unfamiliar with the return on index funds they are unlikely to know who Jack Bogle is or what his lessons are.

I got here: http://johncbogle.com/wordpress/

But I'm not sure where to go to find information about the returns.

That's John Bogle. You're looking for Jack Bogle. https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...

Apparently, they're the same person. https://www.bogleheads.org/wiki/John_Bogle

> John C. (Jack) Bogle, after whom the Bogleheads® are named, is founder of the Vanguard Group and creator of the world's first retail index mutual fund.

What's the lesson?

Index funds (over time) tend to beat most professional money managers, much less amateur speculators.

It's worse than that. Over any period of time index funds beat the average actively invested money because they have the exact same returns and less fees:

https://web.stanford.edu/~wfsharpe/art/active/active.htm

Less fees and transaction costs.

http://performance.morningstar.com/funds/etf/total-returns.a...

A historical returns of the stock market calculator: http://www.moneychimp.com/features/market_cagr.htm

Yes, index funds are less risky than undiversified individual assets but they can me much worse than boring.

Depending on the index you track, it can fall 80%. Consider the Asia ETFs in 2008, brutal.

Wouldn't want to enable people to make their own decisions with their money, would we? The fact that you have to make a paid account to use leverage (whereas you can trade indefinitely for free) is deterrent enough for most people who do not already actively manage their investments.

I think Robinhood is doing a great service -- I just wish they would expose a better API.

Unless I misunderstood him, he's not complaining that people can make their own decisions with their money, aka that anyone can use this service even if they're not well versed in that field, he's complaining that Robinhood entire business model is based on pushing the very users who don't know how to use it in a sane way, to do it anyway. That will be the company's lifeline, as its way to make money.

I can see the benefit in making it easier for people to get access to things that are often hidden behind layer of complexity and "need an in", but I can also see the perversity of building a business where your money making system is "put debt on people who don't quite know what they're getting into". The point is not that they allow it, it's that they have a direct incentive to make it happen as much as possible.

However, they still sell their client order flow to the bank that pays them the most to execute their trades. This isn't illegal and was a HUGE point of Michael Lewis's hack-n-slash book on electronic trading "Flash Boys".

If my Robinhood trades of 100 lots or more execute at a few pennies higher than the price when I place the order, I think that is entirely fine. Why? Because it costs 5-10 to trade from Etrade or most other normal brokerage accounts. From what I've seen thusfar (I've got maybe 20k invested with RH), all of the trades have executed at the price I expected them to, or 1 cent higher on very volatile stocks (TSLA in specific). I'm still paying massively less than if I used a traditional broker and RH is making a bit of money by selling my order flow.

Win/win really.

If my Robinhood trades of 100 lots of more execute at a few pennies higher than the price when I place the order

They're not really allowed to do that and I don't think they are doing that. Robinhood (or whatever wholesaler they route your order too) is required to execute your order within the nbbo. They can't just e.g. fill your buy orders a few cents above the national best offer because they want to make some extra money. The regulations don't work that way...

I'm familar with NBBO, my previous employer (Virtu Financial) and current employer (another large electronic trading firm) are very well known HFT firms but I'm in tech, not the trading side. That doesn't mean the NBBO doesn't change before your order can fully execute? Is it fair to assume you've never heard of RBC's Thor[1] and aren't super familar with maker-taker rebates and the scandal behind them? The NBBO and the proliferation of trading exchanges is in fact what allows this to be possible legally. Like many regulations, it became a tool to perform the types of things it was designed to prevent. This article[2] has an interesting take on the NBBO wrt the SIP that is used. Many firms can calculate their own information faster than the NBBO updates. Note that this isn't the kind of trading (speed only) that my current employer does at all, which is why I sleep well at night.

[1] https://en.wikipedia.org/wiki/THOR_(trading_platform)

[2] http://www.nanex.net/aqck2/HowSlowIsTheNBBO_%20A_Comparison_...

What are your thoughts on RH being mobile only and how that affects your ability to manage this amount of money. Isn't it hard to keep track of your positions, performance, etc with all those taps and lack of ability to export or read on a real device?

It bugs the crap out of me that they don't integrate with other services like Mint. Right now I do a few things. I manually track my position using personal capital (I can't recommend this service / app enough for tracking ALL of your investments and planning for your future). It is kind of like mint, but exclusively for your investments (https://www.personalcapital.com/)

I've written a fair bit of code (python) to parse my statements and make sure things true up with what personal capital says. The app thing is annoying, but RH just closed 110M and they'll get more functionality in the future. You're not the first person to ask that and I figure eventually they'll have to open things up or they'll lose customers (like me). Right now, I'm ok with using it for a year or two provided they allow me to continue no-fee trades.

I've been retargeted by Personal Capital on FB for several months now. Are you recommending the "free financial tools" from Personal Capital? I sort of assumed the "free" was just there to entice you into paying for their wealth management services which look like every other robo but with higher fees.

Are the tools actually good? Several low-cost robos (Wealthfront and Betterment) now have fairly good retirement planning interfaces which take your outside accounts into consideration and Mint has investment tracking now as well.

They very politely try to upsell you on their wealth management "call and speak with our professional advisers today!" services, which I simply decline. Their ability to track investments seems superior to mint for the things I want to do, but to each their own. If you just use the free tier, it is great. I simply use it to make sure I don't need to do much rebalancing of my investments every year based on my investment goals and risk tolerance. Having been a mint user since early 2007, I actually prefer PC for the investment only advice, and mint for everything else.

Thanks! Sounds pretty solid. I may check it out if my investment side gets a little more complex.

You think Etrade doesn't sell order flow?

They do, and they still charge you fees to trade, unlike Robinhood!

100% agree that depending on people going into margin for monetization is a poor alignment of incentives. The humorous thing to me, is that being aligned with forcing people into leverage is an apt description of the economy at large.

Most lifestyle business have similar revenue models. We shouldn't just object against one company.

Lifestyle businesses, by definition, turn a profit. I doubt the same can be said for Robinhood.

The difference being that margin investing by novice investors has already led to the worst economic collapse in history.

Many home buyers are novice investors. There was more to it than novice investors blowing up the real estate market due to misunderstanding margin.

Believe it or not, buying a very expensive home with poor understanding of the market and finance mostly through debt can be seen as analogous to un-collateralized leveraged investing....

> Wouldn't want to enable people to make their own decisions with their money, would we?

As a blanket statement? No, we don't. Two reasons why:

1. "Make their own decision" is an extremely inaccurate phrasing. Unsophisticated investors do not have enough information to properly evaluate a decision, and are therefore unduly influenced by companies wanting to take advantage of them.

2. There's a cost to society from people who take risks that have negative expected value and then expect society to help them. Of course, society could just refuse to help them, but find that society works better when certain support structures (e.g., the ability to discharge debts in bankruptcy) exist, and it's very hard to distinguish people who "really" need the support structure and those whose petard is their own. If social pressure or regulation can deter people from taking these risks, that's slightly unfortunate for the person who would have won the gamble, but very advantageous to the health of society as a whole.

Both reasons are also why outright gambling is regulated, why publicly-traded companies are subject to financial regulation, why we don't let people "make their own decisions" about raw milk, untested drugs, aircraft, etc. - there are strong incentives for the people selling you that product to lie to you by omission in the hope of influencing your decision to be profitable to them.

"Make your own decisions" and "choose what is right for you" are often euphemisms for "get thrown to the sharks" but give the illusion that you are really being given control over your own destiny by those who will likely take advantage of you.

> Wouldn't want to enable people to make their own decisions with their money, would we

I think you're missing what the criticism here is.

Let's say you, right now, have $10,000. I say "Hey, lend me that money so I can play the stock market with it." Would you give me the money? You know literally nothing about me. You don't know if I've ever traded a stock before. You don't know if I can ever pay you back. There's a higher than normal probability that I will never pay you that money back.

Robinhood is taking on a lot of risk and using that as proof that they're a profitable company.

Margin loans are lower risk than you may think, as they're secured by highly liquid assets that are held in custody at the broker that's lending the money. That's not to say the broker can't take a loss, but it's not as risky for the broker as you might think.

> Robinhood is taking on a lot of risk and using that as proof that they're a profitable company.

Margin positions are typically liquidated when they go negative. At worst, the customer owes Robinhood some leftover slippage after their margin gets called. And typically, margins are called before your account goes negative.

I agree, it's not as risky as it might be. But there's still something unsettling about lending money to people to gamble with.

Do you actually understand how margin loans work?

If your trade starts going bad they'll be aggressively unwound. They're a very well-understood model offered by tons of (profitable) brokerages out there. Robinhood is not doing anything new by offering them.

I agree that the GP missed the criticism, but…

That's not how margin trading works. It is a loan, but it's collateralized against your existing holdings. Most institutions will only loan you a percentage of your existing holdings (somewhere between 30% and 50%). Additionally, if the market value of your existing holdings dips such that the total loan amount is greater than the maximum percentage loan, those assets can (in most cases) be immediately sold to pay back the loan. This is called a "margin call".

To use your example, if you were using margin from an institution that allows for a 50% rate, in order to get that $10k loan, you'd have to already have $20k available in a relatively liquid assets (stocks, bonds, ETFs, mutual funds). If the value of your holdings ever dipped such that you held less than $20k, thus making your loan greater than the institutions 50% limit, some of those assets would be sold to pay down the loan.

There are additional safety measures built into margin accounts by brokers that offer them such as ensuring that the collateral assets aren't 100% allocated a single risk prone stock for example. Margin is a very well understood and safe business model for many brokers.

My understanding of the criticism of the GGP is not that Robinhood's business model is unsafe for Robinhood, it's that it's unsafe for their target market (casual stock traders). The idea is that casual trading is, for most of the population, gambling. Depending on your moral stance on gambling, using "free trades" as a marketing funnel for loans designed to be used for gambling falls somewhere between grey and repugnant.

> You know literally nothing about me

Isn't a credit check required to open an account?

As a small investor, borrowing money to invest is almost invariably a terrible, terrible idea, because any return you make on the investment will likely be cancelled out by the interest paid to borrow the money.

I just looked up margin interest rates, for loans of 10 000 or less (which is what we are likely talking about with robin hood) the interest rate is Base Rate + 1.25% which is 8.50% interest. I don't know many stocks you can buy even in the best of circumstances that will get you a guaranteed return of more than 8.5%. Moral of the story - robin hoods retail investors should not engage in margin trading.

Where are you getting these numbers? Their rates appear to go from ~4.8-7.2%[1]

Also, it should be noted that Gold is a flat fee based on account value brackets and margin brackets not a percent fee of your margin like every other brokerage. That means your effective margin rate can be much higher. e.g. if you borrow $100 for a $2000 account, you're looking at an effective margin rate of 72%.

[1] https://d2ue93q3u507c2.cloudfront.net/assets/robinhood/legal... (linked to from their FAQ[2], sorry for the sketch URL)

[2] https://support.robinhood.com/hc/en-us/articles/214681823-In...

> I just looked up margin interest rates, for loans of 10 000 or less (which is what we are likely talking about with robin hood) the interest rate is Base Rate + 1.25% which is 8.50% interest.

Is that from Robin Hood? If so it's a travesty specific to them. You can borrow from Interactive Brokers for 2.4%, which is a lot easier to overcome even with straight broad-market ETFs. [0]

[0] https://www.interactivebrokers.com/en/index.php?f=interest&p...

No it wasn't robin hood, it was just basic rates charged by another firm. I figured robin hood is going to charge the industry standard. But that 2.4 % interest rate is being charged daily on those loans so that's even scarier.

Uh, I think you don't understand how compounding works. It's not 2.4% a day. Do you know anything about finance?

from the link

>IB accrues interest on a daily basis and posts actual interest monthly on the third business day of the following month.

from investopedia

>Interest accrues on loans, such as a mortgage, or on savings accounts and investments. Daily accrual means interest amounts are added to the account balance every day. Interest can accrue on any time schedule; common periods include daily, monthly and annually

it would be different if the rates were annual percentage rates, but your site doesn't specify that.

no I don't know anything about finance but I got google.

A little knowledge is dangerous.

You found the right terms but totally missed the meaning. Daily accrual means that your interest for that day is calculated daily. It doesn't mean the interest rate is 2.4% a day.

Did you even think about this logically? 2.4% a day would be 876% a year. That's obviously insane.

2.4% a day would be 574756% a year (yes 5747 fold). Compound interest FTW! (or For The Bankruptcy in this case)

Interest rates are almost always annualized and cited in terms of APR or Annual Percentage Rate. If the APR is not cited, then it is implied.

This makes it easier to compare loans even if they have different terms. The fine print will usually provide the daily interest rate, for example 2.00% APR is 2/365 = 0.005479% per day interest.

Often interest is compounded continuously in which case calculus can be used to compute the exact interest, but it ends up as a famous formula in investing, FV = PV * e^(R*T). In practice, it ends up being very close to daily compounding, but it allows banks to advertise an ever-so-slightly higher APY (annual percentage yield) which is why everybody does it this way for interest paid on deposit accounts.

Is that Base Rate something specific to them? Because it's a goddamned travesty for a pretty well secured loan.

Take a look at these broker's rates for comparison:

https://www.scottrade.com/investment-products/interest-margi...

https://www.fidelity.com/trading/advanced-trading-tools/marg...

Yeah. Then you compare it to what IBs are charging actual funds...

Except it's credit, not their own money, so your naiive "how people spend their money has no consequences" attitude, doesn't hold water. That's the whole point.

Sure. It's Robinhood's money, which they're choosing to lend to their customers. So Robinhood can bear the consequences if the loan can't be repaid. (As others have pointed out, they have ways to protect themselves. Margin calls, forced liquidations, etc)

Is it Robinhood's money? Are they required to maintain reserves to cover 100% of the loans they issue? If not, then it's not their money.

Good point. I sure hope that they're required to hold 100% reserves on loans. I'd like to see an end to fractional reserve banking. That's not unique to Robinhood, but part of a much larger conversation—one that more people should be having.

Another more clever way is to deliver shares from their own pool.

> so your naiive "how people spend their money has no consequences" attitude

Who said it has no consequences? People make bad decisions with money their all the time. In fact, many of the working class get their fix in real casinos, where there's no real chance of winning, even if you know what you're doing. But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product." Instead of allowing normal people (some of whom know what they are doing) to freely engage in leveraged -- or just free -- trading, would you rather people with small portfolios get their already modest earning potential chewed away by large trading fees that make short term investing impractical? The difference is that I don't think we should be protecting people from themselves.

But the parent argument is going in the direction of "people shouldn't have the freedom to use this type of product."

No, my comment was in the direction of: "It's bad if your core business is getting unsophisticated people making trades (bets) with credit."

It's the same reason we all know it's a bad idea to give someone a 400k mortgage on an ARM when we don't know if they can pay it back or not. Great way to find yourself in a recession.

> It's bad if your core business is getting unsophisticated people making trades (bets) with credit

I would agree, if there were evidence to support that primarily unsophisticated people are buying premium. However, I doubt this is the case (I'm sure someone will put together numbers on this eventually). I'm a competent trader who avoids leverage, simply because I don't want to pay for a membership (it's not just a loan; you need a gold membership, too, which is an added barrier to entry).

Which is exactly my point.

Based on what the stated publicly, it's in Robinhood's interest as a company to push everyone into Margin deals. Their core stated benefit of using Robinhood over other brokers is opening trading up to everyone, through ease and low carry to make it easy.

Ipso Facto that means their goal will be pushing new unsophisticated traders into leveraged deals. That is 100% implicit in this whole thing.

I'm not arguing that there is evidence that "primarily unsophisticated people are buying premium." I'm arguing that this is their plan going forward and it could be really really harmful to markets if they get to the scale they want to.

Best case, Robinhood can cover every margin call themselves, in which case they are effectively doing what Uber does which is unsustainably subsidizing investing on credit.

Worst case, they can't cover margin calls and neither can their users and they roll up.

I'm just waiting for them to allow leveraged shorts...

If you gave me a choice between running $1k through a blackjack table, or backing $1k of an unsecured loan for margin trading by a random Robinhood user, I might go for the blackjack.

The loan is secured by the assets purchased, it's not unsecured.

They're offering 2x margin, if I read the article correctly. So it's at best 1/3 secured, and probably a lot less than that if you need to make a margin call and try to collect.

The gigantic risk to Robin Hood isn't that they'll have problems collecting occasionally. They can make up for that by fiddling with their fees to come ahead in the average case.

It's that some big market move busts everyone at once and they go bankrupt overnight.

Uhm, what? That's still fully secured. It's actually 4/3rds secured, not 1/3rds. If you have $1000 in your account and borrow $2000 to buy stocks, you've got $3000 worth of stocks that they can sell to cover a $2000 loan. Whenever this ratio goes near or below 1, they can sell the secured stocks to cover it.

If the stocks (or wacky option/derivative trade) still have value, then yeah, there's no problem.

The problem is when people make a bet that doesn't work out. There are a lot of exotic trades that can clean you out completely in an instant if you bet wrong.

It doesn't even need exotic trades. If you're doing margin trading on a stock for which there is a sudden dip in stock price (as in previous flash crashes), then there will be a margin call and from the customer's perspective, all their money and shares will evaporate.

I wonder how Robinhood will handle it when it happens.

How can they offer 2x margin? This seems afoul of federal regulations.

From http://www.investopedia.com/terms/m/minimummargin.asp:

"When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call."

Question: if they do go bankrupt then you still own your stocks, right? Do customers lose anything?

You will always be the owner of the stocks you purchase. If Robinhood is set up like most (all?) brokerages, then your assets are held in a separate entity that would be unaffected by a bankruptcy. So creditors of Robinhood can't go after your assets, even when they are managed by Robinhood.

Of course, should Robinhood go under, don't expect easy access to your assets, until some other brokerage takes it over.

Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).

Thanks!

>Wouldn't want to enable people to make their own decisions with their money, would we?

While we're on that subject, Pattern Day Trading restrictions[0] are a fine example of how arbitrary regulations created with good intentions can lead to negative outcomes.

How it works is that margin accounts must maintain an equity balance of at least $25,000 in order to day trade freely. Otherwise, you're allotted three round-trip day trades within a 5-day period before there's serious consequences. Cash accounts are subject to long settlement periods, so the restrictions are moot in that case.

What this means is that you can't trade equities with any sort of frequency on an account that has a cash balance below $25k—at least not if you want anywhere near full utilization of your capital. That also rules out algorithmic trading on anything but medium or long timescales.

The "protection" afforded to the uninformed retail customers it was designed to protect is questionable at best. For example: it would be perfectly acceptable to allocate 100% of your portfolio plus leverage to a single stock just before market close, become subject to after-hours and pre-market price movement, then sell the next morning. Repeat by buying a different stock that same day.

Yet, round-trip trades during market hours are heavily discouraged to the point of prohibition beyond any number that isn't trivial.

In fact, I would argue that PDT restrictions create a perverse incentive that holds people to bad trades which they would otherwise prefer to exit, subjecting them to dangerous after-hours price movement in the process.

It also creates incentive for novices to abandon equities entirely in favor of forex markets. Not exactly risk reduction.

[0] https://en.wikipedia.org/wiki/Pattern_day_trader

I recently got interested in the markets and the PDT rules are one thing that I feel I need to hear more informed opinions on before formulating my own. I'd love if more people chimed in here to put in their .02 cents on the benefits/drawbacks/intentions of the current rules.

I think they are fine. The way I look at it one just needs to get educated before they become a pattern day trader. Ideally that means they grow their account to $25K and have experience before they are put into a position where they can screw up bad enough that it affects others. Of course people don't do that, but at least there's some incentive.

In the end margin is irrelevant if you only trade with money that is actually available. Robinhood is for traders that know even less than the twits on StockTwits. I'm sure it's fine for investing but I'd bet that the vast majority of the people that use the app don't know what the difference is, just like StockTwits.

Agreed! life was great before these restrictions.

On the flip side, we do a terrible job of educating young people about even the basics of personal finance (in the US).

I was lucky enough to have a father who ran a small business, so I got an early education in these matters. But that's the exception to the rule.

> I just wish they would expose a better API

IIRC Robinhood just uses another service's API to transact a trade (can't remember the name), so you'd be leaving pennies on the table when you could just go straight to the source.

> Wouldn't want to enable people to make their own decisions with their money, would we?

Wow this is an ignorant thing to say in this context.

I use Robinhood and NO ONE should use margin if they don't know what a Margin Call is.

Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year. This last year, my return rate was 14%, so that margin was worthwhile.

If new to investing and you aren't sure what to invest in, I suggest investing in: VTI, VYM, or QYLD depending on your risk tolerance. I'm invested in all three.

It is probably helpful to explain individual investment vehicles and why it is sane for someone new to invest.

VTI is an ETF that is basically representative of the entire US market. It is somewhat like holding a little bit of everything in the US market.

If you have a bunch of cash sitting in a savings account, and instead want that cash tethered to the swings of equities market, VTI is a reasonable choice.

Thanks for this, can you explain the others the parent mentions?

VYM is an index fund that tracks the FTSE High Dividend Yield Index invests in global equities (excluding REITs) with high dividend yields. About 1/3 of the current index is in 10 stocks all US: Microsoft Corp., Exxon Mobil Corp., Johnson & Johnson, JPMorgan Chase & Co., Wells Fargo & Co., General Electric Co., AT&T Inc., Procter & Gamble Co., Pfizer Inc. and Chevron Corp.

QYLD is even more exotic. It seeks to track the CBOE NASDAQ-100 BuyWrite Index. That index in turn seeks to track the performance of a theoretical portfolio of the 100 largest NASDAQ stocks on which covered calls are written with a certain formula. Covered calls are a type of options strategy.

I'm just another rando on the internet, but I would recommend neither VYM nor QYLD to people new to investing who aren't sure what to buy. VTI is a far more appropriate suggestion. As would be VT (like VTI but looking at all stock markets), BND (index fund for US investment grade bonds), and maybe BNDX (ex-US investment-grade bonds with currency hedges)

I'm just another rando on the internet, but I concur with bradleyjg. Consider reading some of John Bogle's books or reading the Bogleheads wiki page. You cannot go too wrong with (VT / (VTI+VXUS) ) + BND.

BND is composed very heavily (~66%) of US Government bonds. It's largely effectively like just buying treasury bonds. Worth considering to instead get a corporate bond index fund + muni bond fund.

> Having understood that, the effective yearly simple interest rate on my particular Robinhood margin (extra buying power) is only 5%/year so all I have to do is earn higher than a 6% return each year.

If you are planning to use margin, I dearly hope you don't use Robin Hood. You can get much cheaper margin loan from other brokerages like Interactive Brokers (less than half as much).

s/qyld/qqq/g

Might be questionable for investors (although trading on margin is extremely common) but gambling seems to make a ton of money for casinos, betting parlors and lottery boards, many of which have been around for "long term." Sounds more like you have moral/personal objection.

Casinos do not make money on borrowing for gambling, but on gambling.

It is very very common for Casinos to loan you money. This is how people often end up in debt by thousands (100s of thousands) of dollars to casinos, which causes all kinds of problems.

From the casino POV.. why limit their wins to what is in your pocket? Limit their win to what is in your pocket + what the risk model predicts they can make you pay back over time.

Casino have truly insane margin on the money you play with them (and equally truly insane revenues).

When they lend you money, they know exactly how much of that will go back to their hands soon (and they have a ton of cash flow to cover).

Robinhood is effectively lending money with little guarantee to take anything back and no source of income.

> Robinhood is effectively lending money with little guarantee to take anything back and no source of income.

i have not looked into robinhood's margin offering, so maybe it's very different, but in my other brokerage accounts, margin works something like this:

i buy $10k of SPY. after the trade closes, the broker says "ok, you own $10k of SPY, and that's good for another $5k of margin." so then i can go buy another $5k of whatever i want. i pay 9% interest or so on that $5k. if SPY drops in value "enough", the broker can on a moment's notice, sell as much of the SPY as they want to cover my debts.

so... they've got a great guarantee they can take it all back.

> so... they've got a great guarantee they can take it all back.

And what of the case where the value of your SPY position falls below your $5k+interest debt to them?

Edit: derp. A margin call would cover this.

They don't charge commission.

They do receive payments for order flow.

If you don't pay back your margin they'll come after you like any other debt collector. There's nothing special about it.

Actually, if your investments fall in value to the point where it looks like your account is in danger of becoming insolvent, they'll likely immediately sell as many of your assets as it takes to make up the difference, locking in your leveraged losses. This is known as a margin call, and it's very unpleasant to be on the receiving end of one.

The actual risk to the broker is minimal -- they just have to make sure to trigger the sale at a point where the value of all of your holdings (not just what you purchased on margin) is still greater than what you owe them.

Exactly. They have the right to liquidate to protect themselves at any time and if it doesn't cover your margin, your still on the hook for the rest.

I think you may end owing money to the broker, if the margin call cannot be executed in a clean way. That has to be even more unpleasant.

Reminds me of Owning Mahowny

>Casinos do not make money on borrowing for gambling, but on gambling.

That's completely false. Casinos are huge money lenders.

The difference is Casinos are your effective counterparty and not a marketplace.

https://wynn.nccreports.com/

Pretty common.

I would expect that they also make money on borrowing for gambling. How do you know that they don't?

Not to mention the whole concept of credit cards are based on that and here people do not even gamble. They spend the money with 100% certainty.

Robinhood knows that people can just buy index funds and sit (which is what I do). But this doesn't make money, so they encourage people to buy individual stocks, "whatever new Elon Musk stock is out there", and trade on leverage.

To some extent they want to make Robinhood a game, rather than an investment platform.

Robinhood makes money off of uninvested capital and margin accounts, not trade commissions. So why would they care what we buy or whether we make purchases rarely or not?

According to TFA they also make money off of rebates, which are proportional to the number of shares traded.

So then they make money of both.

Someone who trades frequently is more likely to upgrade to Robinhood Gold than somebody who buys an index fund once and forgets.

Wall street did that a loooong time ago

Robinwood's target audience seems to be younger generation, most of whom are not hot about investment, not to mention whether they know what Wall Street did a long time ago (aside from 2008's financial crisis).

As someone who has looked into but not actively used Robinhood - the main benefit of the Gold subscription is for day traders. With a free account, if I decide I want to sell AAPL and buy GOOG, I have to wait 3+ days before I get the money from selling AAPL credited to my account. With Gold, they basically let you float, so you can immediately get into a new position after getting out of the previous one, without having to wait for your previous position to settle.

I believe that is far and away the primary use case for Gold.

If you're actually day trading you will still end up under SEC pattern day trading rules which require > $25k in the account. At that point, just get a real account with real tools.

http://www.finra.org/investors/day-trading-margin-requiremen...

What you said. Why would anyone not set up a real account and use their app? I think Scottrade, which is the entry-level broker, only has a $500 minimum balance and they provide real tools as well as educational resources.

I'm a current robinhood non-gold user and they actually eliminated this restriction around 6 months ago. Now as soon as I sell a position I can buy my next with the funds from the sale.

Which they have branded the loan they give you until deposits and sales settle "Robinhood Instant". Since you are trading without settled cash in the account, I believe the SEC considers this a margin account.

Yes, I have this too. Robinhood Instant is a margin account, with the same conditions/restrictions as a Gold account. They loan you money in that settlement time window, basically

Margin trading is a pretty standard feature across all brokerages. Dangerous if used ignorantly, but greatly increases you returns if used effectively.

*Dangerous if unlucky, but greatly increases your returns if lucky

With sufficient cash flow, margins aren't that dangerous, even in a downturn. For example, if you have $24,000 and invest $500/mo into an account, getting a $6,000 margin loan in january that you pay off throughout the year isn't really that dangerous.

The problem with margin trading as a retail investor is that they interest rate on the loan is ridiculous, between 6-9%. Making it almost worthless.

As it stands, the stock market is 50% being average, 49.9999% being unlucky.

But hey, at least we're making debt available to more people.

And regulated - you have to be approved for margin trading by the brokerage.

See below http://www.finra.org/sites/default/files/Industry/p122203.pd...

I thought it was based on the % you traded?

So for example, if I was using an 100k account to trade, I had another 100k of leverage no?

It depends on the brokerage. There is Reg T. margin and then there is portfolio margin (the latter has significantly higher capital deposit requirements).

It also is not a straight 1:1 ratio. You generally can't go absolutely nuclear with leverage unless you have portfolio margin. Typically, brokerages will require collateral in the account equal to the risk (for defined risk strategies) and you will need a higher trading clearance on your account for unlimited risk.

Your buying power is a function of how long the trade will be held as well as the risk profile.

At least often, yes, but you will also need approval to even get that far. Etrade for instance has several levels of approval.

I note that Etrade at least implements it less as "margin approval" and more as "advanced mode"; to do any sort of options trades, even the ones that don't require margin themselves, requires you to activate the "margin feature" on your account.

Robinhood makes you accept a new agreement to be in Gold which sounds about the same as getting margin approval at a brokerage (agree to the risks and approval is automated). They don't have special powers to waive regulations.

Consider the fact that every time you buy a house with a 10% downpayment mortgage, you're taking on 9x leverage. The fact that banks are willing to lend you ~$500k at a ~4% interest rate, on a piece of real estate that can produce >5% returns (including rent), is often what makes it such a fantastic investment.

The same principle can be applied as well to stock investments. Obviously a 9x leverage would be too risky for stocks, but a 1x leverage is reasonable and can easily lead to win-win outcomes for both lenders and investors.

If you're worried that unsophisticated investors can misuse this feature - there's nothing stopping such investors from putting all their money into a single penny stock either.

Eh I don't consider it a new credit vehicle, margin trading is available in every trading platform. It doesn't make a huge difference for Robinhood; they'll issue a margin call if you're undercapitalized, so the likelihood you would lose any of Robinhood's money is very low.

As for the investors, the percentage rate is very reasonable; given standard market conditions you'd make good money using robinhood gold and putting it in SPY. It's a pretty smart move to charge for it IMO.

Yes margin trading is available elsewhere but only on Robinhood is it so easy. Setting it up on Scottrade or what have you is difficult and has a lot of hoops to run through. On your phone it really feels like "not a big deal", so a lot more young, inexperienced ordinary people can get sucked into it.

> margin trading is available elsewhere but only on Robinhood is it so easy

What part of it is hard on eTrade or ThinkOrSwim? It's almost literally the same process.

The only difference is RobinHood is scooping up all of the people who are new to stock trading and the others aren't. Those same people would be offered the same margin on any other platform.

You sound like someone who has never set up a margin account. General margin accounts are almost no questions, and varying levels of options trading only ask you questions like "how many years have you traded options", with no verification. There's basically 0 barrier to entry except for having money to trade.

The only difference is that Robinhood is charging a subscription for access to margin whereas other brokerages do it for free.

Margin trading is not any easier on Robinhood than any other major brokerage platform. They all make it pretty trivial to trade on margin. Scottrade makes you sign a form saying you understand what you're doing, that's about it (I'm sure Robinhood has the same requirement).

> so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?

Not really different than what's currently available and which by the way, is heavily regulated as is the service that Robinhood appears to be offering.

From their FAQ https://support.robinhood.com/hc/en-us/articles/213262686-Ro... :

You can use your full Gold buying power when buying stocks, though sometimes you can’t invest it all in one, single stock. Let’s explain. This is because US federal laws require all brokerages, including Robinhood, to have common-sense safeguards to prevent customers from losing too much money on a single, high-risk investment. Some examples where you can’t use your full Gold buying power on a single stock include leveraged ETFs (which are already leveraged) and newly-IPOed stocks (which can go up and down in price very quickly), stocks priced at less than $3.00 per share (these securities are at greater risk of getting de-listed), and others.

Brokerages have been doing this for ages. What's new? There's no test for "sophisticated investor." You fill out a paper form and margin is enabled. Oh, you want options, too? You check another box.

>Even if you are a professional trader you'll take a bath on margin over the long run.

Huh? It would be difficult to find a professional trader that doesn't trade equities on margin. They pretty much have to due to the way the settlement process works.

The returns of a professional trader depend on many factors, including available capital and the capacity or manner in which the trader operates. That said, they're enough that the employment of margin and the leverage it affords is simply mundane and considered a cost of doing business.

> Professional traders presumably make their living trading, so their returns far exceed 5%.

In theory, sure. But most do not "far exceed 5%", and instead have the fees of their employing funds to subsidize their strategies.

For traders who are working independently, or in prop shops, I suppose it might be true by definition (if they last in the market they are either re-upping and gambling, or at least profitable). But that's still not the rule.

More importantly, retail investors are not professionals, and Robinhood is basically catering to /r/wallstreetbets with this sort of product offered to them.

>More importantly, retail investors are not professionals, and Robinhood is basically catering to /r/wallstreetbets with this sort of product offered to them.

I agree with this and never asserted anything to the contrary. The scope of my reply was addressing a single point concerning margin in context of professional traders.

Also, the statment that most returns "far exceed 5%" probably wasn't the best choice of words. I've edited my original post accordingly.

Typical margin rates for professional traders are far below 5%. See https://www.interactivebrokers.com/en/index.php?f=1595. And IB is basically the most expensive professionally focused brokerage. If you've got a million bucks you can probably get Fed Funds + 50 basis points.

> And IB is basically the most expensive professionally focused brokerage.

Uh, IB is not a professionally-focused brokerage. It's the most professional retail brokerage though.

On what basis are you calling it most expensive though? It's much cheaper than any other brokerage I know when you look at fees holistically.

> Uh, IB is not a professionally-focused brokerage. It's the most professional retail brokerage though.

It's sort of in the middle. They have plenty of retail customers for sure, but they also have hedge fund and proprietary trader accounts. I doubt you would find a single hedge fund among Etrade customers.

> On what basis are you calling it most expensive though? It's much cheaper than any other brokerage I know when you look at fees holistically.

It's much cheaper than most retail brokerages. It's more expensive than firms that cater to professionals; for the most part those firms don't put their pricing on their website because they're individually negotiated with each customer. Some example firms: all the big banks, Apex Clearing, eRoom Securities, TJM Institutional Services. For the banks you're probably looking at a minimum $20 million account size just for them to accept you as a customer. The smaller players require $1-$5 million for decent rates, but might accept smaller account sizes.

> It's much cheaper than most retail brokerages.

Ah, I see what you meant now. Yeah, I was just comparing it to most retail brokerages since I see the others (Apex, etc.) as in a different category. IB is something which the average HN user could actually use.

Thanks for pointing this out. 5% is probably more representative of typical major retail margin rates. I removed the statement in question.

Few things to note:

- Robinhood Gold is not just about margin trading. It is also about instant money transfers. What truly prevents me otherwise from frequent investing is this long delay (upto 2 days) where I sell something and wait for money to be available for next purchase.

- I will happily pay Robinhood say $10 per month anyways for the kind of service they provide. Getting $2K credit for that is not really a big deal.

Doesn't most brokers already provide up to 7 to 10 time leverage for intraday and 2 to 3 times for future?

Atleast in india every broker provides that.

In the US, most retail investors are limited to 2x leverage for new positions, and 4x leverage for existing positions. This is the "Reg T" margin system. If you qualify for the "Portfolio Margin" system (usually offered to customers with account values greater than 100k or 250k), you can do up to 6.66x leverage in a stock-only position.

This is a lot of finance works. You offer a consumer product full of awesome features and freebies that is a loss-leader, and make up for it on interest. Cash back when you finance a car, credit card miles, discount stock and RE brokerages, etc.

> Even if you are a professional trader you'll take a bath on margin over the long run.

Id say not. Say your borrowing at 7%, markets tend to average around 10-14% return a year. So if you were doing some passive investing on margin you'd be likely to increase earning. The issue is it heightens risk and the speed of losses for those that invest badly, but being margin it should largely avoid losses greater than the principle invested which is better than other speculative investments so not all that bad.

True, but all major retail brokers allow investors to trade on margin (and charge you interest on it), so this is nothing new.

And that interest is tax deductible

Banks get by on a long term strategy of supporting gambling. A loan to invest is the same whether it's in a small business, a house, or stocks. In fact, the first two are even riskier because they aren't liquid so they can't get out in turbulent times like they can with a margin call.

"Always invest what you cant afford to lose" is a very common investing advice given to beginners. You don't need and an Economics PhD to understand this concept

>"Always invest what you cant afford to lose"

Is this a typo?

I don't think so. Investing (i.e long term investing where you believe in a company) is usually a legitimately safe strategy, whereas speculation is more or less gambling.

Really? Because that sounds like stupid, stupid advice and searching for that advice[1] yields results for the opposite.

[1] https://duckduckgo.com/?q=always+invest+what+you+can%27t+aff...

Wonderful advice, right up there with "Buy High, Sell Low"

But what's the added systemic risk outside of RobinHood's own capital?

I worked in risk management in the mid 90's with Bond to Swap hedging.

You have it right.

They make their money from bad routing rules. No such thing as zero fee.

I came here to write pretty much exactly this.

Unsophisticated investors already have access to 4:1 leverage in every stock broker out there, which is quadruple the money, so you don't know what you are talking about?

Surprise! Robinhood is going to make revenues like a normal broker, who at this point already have mobile apps that are just as intuitive and more fully featured.

I have accounts with traditional brokers and with Robinhood. I assure you the barrier to entry with Robinhood is far lower than traditional brokers. I could definitely see this being a major concern with the potential to ruin some unsuspecting innocently curious "investors" lives.

financially naive speculators blow up their account with partially featured financial company

straight out of the onion folks.

Robinhood's gold account is still 100% less margin than other brokers and the regulations themselves allow! Yet they are getting people to pay for it! Have a laugh because it is hilarious, paying for the privilege to pay interest is the bigger article here.

"Three things ruin people: drugs, liquor, and leverage - Charlie Munger" - ???

Leverage is the ability to use credit or partial collateral (i.e., non-secured or non-fully-secured assets) to purchase other assets.

I was just making light of the fact that he included the quote author's name in quotes :-)

I agree with the quote.

> Wow, so that's effectively opening up new easy to get credit vehicles for unsophisticated investors. How could that go wrong?

This is the hallmark of modern day capitalism. By issuing loans knowing full well they will never pay back, you can collude with banks to threaten to kill the economy when the government hesitates about cutting them a cheque.

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