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Written by Cari Scribner on February 26, 2023
Category: 
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How Does Robinhood Margin Work For Beginners?

Trading on margin can be risky business because you are investing with borrowed money.

If the stock takes a downturn, you will lose not only your own cash but also the money you borrowed from Robinhood.

On the other hand, if the stock sees an increase in value, you can see higher returns than if you had just used the cash you had on hand.

It could go either way.

Before trading on margin, it is imperative that you do your own research and understand how it works. So, in this article, we cover Robinhood margin for beginners.

But before even considering investing on margin, you should give some thought to the following:

  • Specific investment goals
  • Tolerance for risk
  • Current financial status

Most people borrow on margin to invest because they think they need extra buying power. Before doing so, check out this article on earning compound interest. You might not need that extra buying power and risk.

If you prefer watching instead, check out our video on Robinhood Margin below!

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What Is Margin Trading?

Before diving into all the details, it is important to understand how margin trading works.

The idea with margin trading is simple. Investors can increase their buying power buy borrowing funds from the brokerage. This is turn can increase their returns.

Consider this example: say you have $5,000 to invest. You also decide to use margin and borrow an additional $5,000. With that, you choose to invest in company XYZ and buy 100 shares at $100 a piece for a total of $10,000.

After a period of time, the share price increases to $125. Your investment is now worth $12,500. You sell the investment and repay the $5,000 borrowed leaving you with $7,500. The profit of $2,500 is yours to keep. Had you invested just $5,000 instead of using margin to invest $10,000, then your profit would have been $1,250.

Of course, this is a simplified example. You also need to consider the margin rate that would come out of your profit (or loss).

How Much Does Robinhood Margin Cost?

In order to access margin, you ought to understand the margin rate or the interest rate that you will pay.

The interest rate that you pay depends on your account level.

The base interest rate is 11.25%. With Robinhood Gold, you gain access to a discounted rate of 7.25%. (More on this below.)

To better understand this rate, let's look at an example:

Suppose you borrow $3,000 with a standard account. Interest begins accruing after a transaction is settled and will continue accruing until the margin is paid back. The interest that you will owe is calculated daily and charged to your account at the end of the month.

With a standard account, you will pay 11.25%. With $3,000 borrowed, you will accrue $0.94 per day. Calculation below:

  • $3,000 * (11.25% / 360) = $0.94 per day

Compared to Webull margin and many of the other options out there, Robinhood's pricing is highly competitive.

What Is Robinhood Gold?

Robinhood offers investors two different account options. They have the standard account and the Robinhood Gold account for $5 a month.

Robinhood Gold comes with a number of great features:

  • Margin interest rate of 7.25% vs 11.25% with a standard account
  • First $1,000 of margin included
  • Larger instant deposits
  • Level II market data
  • Morningstar Research Reports

For $5 a month, you get all the Robinhood Gold premium features, and your first $1,000 of margin is included. You will be charged $5 every 30 days at the beginning of your billing cycle.

If you use more than $1,000 of margin, you’ll pay 7.5% interest on the amount you use above $1,000. Your interest is calculated daily and charged to your account at the end of each billing cycle.

Suppose you borrow $3,000 from Robinhood. With Robinhood Gold, the first $1,000 is covered by the $5 monthly fee.

The remaining $2,000 will begin accruing interest while it is used. To calculate the interest that you would owe, you would take the $2,000 and multiply it by the interest rate divided by 360. This would give you the amount owed per day.

  • $2,000 * (7.25% / 360) = $0.40 per day

In other words, you would accrue $0.40 per day until the margin was paid back.

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How To Enable Margin Investing In Robinhood

To enable Margin Investing, you can follow the steps below in the Robinhood app on your phone:

  1. Tap on the account icon in the bottom right of the navigation menu along the bottom of the app
  2. Next tap the three bars in the top left of your screen
  3. Choose the "Investing" option in the menu
  4. Scroll down until you see the Margin Investing section and tap "Enable Margin Investing"
  5. This will open a new screen that explains a bit more about margin investing. Tap "Continue" to move forward to see potential benefits and risks of margin investing. Here, you can also read Robinhood's margin disclosure statement. Tap "Continue" again to move forward
  6. The next screen walks through a few important considerations like limits and maintenance. Tap "Get Started" to continue
  7. Review your investor profile and update any answers if they have changed. Tap "Confirm" when you are finished
  8. Robinhood will now check your eligibility and then show you your available margin. You can also set a borrowing limit on this screen by tapping on "Set a borrowing limit." Once you finished on this screen, you can tap "Continue" to move forward
  9. Now you will choose your interest rate. You can either choose to join Robinhood Gold for $5 a month with a reduced rate or choose the standard interest rate. Tap "Continue" to finish up
  10. Finally, you will review your selection and tap "Enable Margin Investing"

Can I Set Margin Limits?

Yes, you can. Robinhood allows you to set up borrowing limits to help you control how much margin you use.

By setting a limit, you can restrict the amount of margin you access to the amount that you feel comfortable using. You can set this limit to any amount, though there are a number of regulatory rules on margin that will limit the amount of margin Robinhood is able to give you.

How Do I Know How Much Margin I Can Use?

You can track how much margin you can use in the Margin settings screen. In addition to how much margin you can use, you will also see the following:

  • Total Margin – The total margin that your account can have based on your account equity and the volatility of your holdings.
  • Margin Available – The margin available in your account is based on the minimum of your total margin and your borrowing limit.
  • Margin Used – The portion of your margin available that you are currently using.
  • Borrowing Limit – Your set maximum limit on the amount of money you can borrow.

To find this screen, you will open the app on your phone. Tap on the account icon in the bottom right of the navigation menu along the bottom of the app. From there, tap the three bars in the top left of your screen. Choose the "Investing" option in the menu. Scroll down until you see the Margin Investing section and tap on the "Margin investing settings."

What Is A Margin Call?

If your stocks decline too far in value, Robinhood starts to worry about your ability to pay them back. As a result, they will issue a margin call and require you to either add more of your own money to the position or sell it and pay them back.

If you get a margin call, you need to bring your account value back up to your minimum margin maintenance amount. If you fail to do this, you are at risk for Robinhood liquidating your position(s) to meet the margin call.

Margin calls can happen for several reasons but are mostly due to a decline in the value of your holdings, causing your account value to fall below your margin maintenance requirement.

How Can I Avoid A Margin Call?

Make sure you regularly check the buying power screen or the margin investing section of the Robinhood account settings page.

Look out for updates from Robinhood when you’re getting close to a margin maintenance call. You’ll typically receive an inbox message when you’re close to receiving a margin maintenance call, and an email once you’ve received one.

There are two ways for you to resolve a margin call:

  1. You can deposit additional funds to increase your account value above the margin maintenance. This will allow you to keep your positions.
  2. You can close some of your positions by selling shares. The proceeds from the sales will help cover your margin call. This may allow you to avoid depositing additional funds.

If you think you may be approaching a margin call, it might be a wise idea to cut it off before it happens.

What Is Minimum Margin?

In order to buy stocks on margin, Robinhood will require you to have at least $2,000 or 100% of the security’s purchase price, whichever value is less, deposited into your account. This is called the minimum margin.

This is intended to protect Robinhood and ensure that you have enough skin in the game.

If you will be day trading, you must deposit $25,000 into your account before buying securities.

Is Robinhood Margin Worth It?

Robinhood Financial is an online broker platform designed to open doors to the financial markets by offering commission-free trades on an easy-to-use mobile app. It does not require any account minimums. They don’t charge any fees when you open an account, transfer funds to it, or for maintaining your account.

Robinhood Gold is a premium feature that lets you buy on margin with a reduced rate.

Buying on margin is extremely risky, particularly for new investors. Think carefully about whether or not you need – or can manage – margin trading to reach your money goals.

In order to trade on margin with Robinhood, you need a minimum of $2,000 in your brokerage account. In addition to paying back the borrowed funds, you also need to consider the margin rate. Before borrowing money, consider whether or not you really need margin.

Article written by Cari Scribner

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