The Robinhood logo is displayed on the smartphone screen.
Rafael Henrique | soba pictures | Rocket Lite | Getty Images
LONDON — Robinhood It said on Monday it would roll out margin investing – the ability for investors to borrow cash to increase their trades – in the UK
The US online investment platform said this option would allow UK users to leverage their existing holdings of assets as collateral to purchase additional securities.
The launch of margin trading follows the recent approval of the product, after Robinhood held talks with Britain's financial regulator, the Financial Conduct Authority (FCA).
Margin trading is rare in the UK, with regulators seeing it as more controversial due to the risks involved for users. Some platforms in the country limit margin trading to high-net-worth individuals or companies only. Other companies offering margin investing in the UK include: Interactive Brokers, AG and CMC Markets.
The rollout comes after Robinhood debuted a securities lending product in the UK in September, allowing consumers to earn passive income on stocks they own, as part of the company's latest attempt to increase its market share overseas.
The stock trading app promotes “competitive” interest rates by offering margin loans. The rates offered by the platform range from 6.25% for margin loans of up to $50,000 to 5.2% for loans of $50 million and above.
Jordan Sinclair, head of Robinhood UK, said many customers feel they cannot access more advanced products such as margin trading in Britain, as they are typically reserved for a small number of professional traders who invest with the likes of heavyweight banks. JPMorgan Chase, Goldman Sachs, Morgan Stanley and UPS.
“There are a lot of barriers to entry,” Sinclair told CNBC in an interview. “Ultimately, that's what we want to break down all those stigmas and barriers to just basic investment tools.”
“For the right client, this is a great way to diversify and expand their investment portfolio,” he added.
Risky business
Investing in borrowed money can be a risky trading strategy. In the case of margin trading, investors can use borrowed funds to increase their trading volume.
Let's say you want to invest $10,000 in Tesla. Typically, you would have to shell out $10,000 of your own money to buy this stock. But by using a margin account, you can “leverage” your trade. With 10x leverage, you'll only need to have $1,000 up front to place the trade, instead of $10,000.
This can be a profitable strategy for professional traders, who can make greater returns than regular trades, if the value of the assets purchased rises significantly.
It is a riskier path for retailers. If the value of the asset you buy with borrowed money declines significantly, your losses will also be large.
Robinhood announced its UK launch last November, and opened its app to Britons in March. At the time of launch, Robinhood was unable to offer a margin trading option to users in the UK, pending discussions with the Financial Conduct Authority (FCA).
“I think with the regulator, it was just a matter of getting them comfortable with our approach, giving them a history of our product in the US, what we've developed, and eligibility,” Robinhood's Sinclair told CNBC.
Robinhood has implemented strong guardrails to ensure customers don't invest more money than they can afford to lose when investing on margin, Sinclair said.
The platform requires users seeking to trade on margin to have at least $2,000 of cash deposited in their accounts. Clients also have to sign up to use the product – they are not automatically enrolled in a margin-only account.
“There are eligibility criteria. There is a way to review the suitability of this product for the right customer,” Sinclair added. “Fundamentally, this is a really important part of this product. We realize that it's not for the novice investor who is just starting out with our clients.”
Robinhood says its customers' uninvested funds are protected up to $2.5 million through the U.S. Federal Deposit Insurance Corporation, which the company says adds another layer of protection for users.
