Robinhood Markets has introduced reduced interest rates on margin investing, aiming to enhance its appeal to retail investors by offering some of the lowest rates in the industry.
The firm announced that margin rates will now vary between 5.7% and 6.75%, depending on the customer's margin balance. For instance, a client with a $50,000 margin balance will now incur a 6.75% rate, significantly lower than the previous 12%. Additionally, Robinhood Gold subscribers will benefit from zero interest on the first $1,000 of margin utilized.
Previously, Robinhood's method for determining margin interest involved adding 6.5% to the upper limit of the target federal-funds rate. "This new rate structure not only provides exceptional value but also encourages investors to consolidate their assets with Robinhood, enhancing their buying power," remarked Steve Quirk, the chief brokerage officer at Robinhood.
Margin investing allows investors to borrow funds from their brokerage to purchase securities, using other securities they own as collateral. This strategy increases both potential gains and risks, as losses can also be amplified. Approval from the brokerage is required to engage in margin trading.
Despite the lower rates, Robinhood maintains profitability through the spread between the federal-funds rate and the rates charged to customers. "Offering the lowest rates among top brokerages makes it compelling for customers to consolidate their trading activities with us, which is beneficial for our business growth," Quirk added.
Robinhood, widely recognized for its commission-free trading and pivotal role during the meme stock phenomenon of the pandemic, has expanded its services to include retirement accounts and a credit card, aiming to enhance its subscription service. This service provides access to advanced trading tools, research, and additional benefits.
This month, Robinhood reported a 65% annual increase in assets under custody, reaching $129.6 billion. CFO Jason Warnick highlighted that the platform experienced net positive asset transfers from major brokerages, with a 42% increase in subscribers over the past year, now totaling 1.7 million.
Robinhood's stock has seen a substantial rise of 64.5% this year, outperforming the 11.5% gain observed in the S&P 500.
