Investing in the stock market can be an exciting journey towards building your wealth.
Robinhood is one of the most popular brokerage platforms out there, offering a simple and user friendly investing app.
However, one of the features offered is margin investing, and investors might be wondering what that is and how it works.
Simply put, margin investing means borrowing money from your broker in order to have additional buying power to invest with.
For those new to margin investing on Robinhood, understanding the basics and the associated risks is crucial. Here’s a beginner-friendly guide to help you navigate margin investing on Robinhood.
New to Robinhood? Check out my full video tutorial below!
Robinhood is a popular "all-in-one" investing app.
While they are most well-known for their commission free stock trading, they've recently shaken up the Retirement Investing World too.
Introducing Robinhood Retirement; home of the biggest IRA match on the market.
Here's what you need to know:
And don't worry, this comes with a Portfolio Builder Tool. You don't have to construct your investment portfolio from scratch if you don't want to.
Lastly, you'll even get a free stock worth up to $200 when you open a new Robinhood account using our link.
Margin investing allows you to borrow money from your broker, Robinhood - in this case, to purchase securities.
This borrowing increases your buying power, enabling you to invest more than what you currently have in your account. Essentially, you’re leveraging your existing holdings to access additional funds.
Margin investing is not automatically available when you sign up for Robinhood.
Instead, it is offered as part of Robinhood Gold - their premium subscription service.
For $5 a month, you get access to premium features - in addition to your first $1,000 of margin being included. If you decide to borrow more than $1,000, Robinhood charges interest on the additional borrowed amount.
Here's the premium features you'll get access to with Gold:
Keep in mind, you can sign up for Robinhood Gold with or without access to margin. Based on the risks associated with investing borrowed money, many investors will choose not to use margin.
Once approved for margin investing, you’ll notice an increase in your buying power. This extra buying power allows you to purchase more securities than you could with just your own money.
Robinhood will match your account value when you enable margin investing. For example, if you have an account value of $5,000 - Robinhood will extend you a loan of $5,000 giving you $10,000 worth of buying power. You could then invest that additional buying power in whatever you wish.
However, it’s essential to understand that any gains or losses on securities bought on margin will be magnified.
If the securities you’ve purchased with borrowed money decline in value, the losses will come out of your account, not the borrowed funds. This can result in losing more than your initial investment.
In order to prevent you from losing more than your account value, Robinhood has the right to issue a margin call if the value of your investments decreases substantially.
A margin call occurs when the value of your portfolio (excluding any crypto positions) falls below the required maintenance level.
When this happens, you have a limited amount of time to bring your portfolio value back up to the minimum margin maintenance requirement. This is often accomplished by depositing additional money from your bank account.
Failure to do so may result in Robinhood automatically liquidating (selling) your positions to meet the requirement.
In summary, margin investing is quite risky.
You're investing borrowed money that you have to pay monthly interest on, and that rate changes based on federal interest rates.
If you make a bad investment with the borrowed money, it's still your responsibility to pay back the money that you borrowed and pay the interest monthly.
In addition, if the value of your portfolio falls below the required maintenance level, a margin call may be issued. This will require you to deposit additional funds, otherwise your investments will be automatically sold to bring you back to the maintenance level.
Overall, margin investing is not recommended for most investors.
