Robinhood quickly expanded its business of providing potentially risky loans to clients of the stock trading app in preparation for its IPO.
The popular but controversial online brokerage firm confirmed on Tuesday that it had started the process of selling Robinhood shares to the public for the first time. The company said in a blog post that he had filed confidential IPO documents with the Securities and Exchange Commission and that the regulator is reviewing his registration. Robinhood did not disclose a timeline for the public offering.
In a separate regulation depositRobinhood reported earlier this month that its loans to help clients buy stocks “on margin” – in which someone borrows money to buy stocks, options or other securities in hope to increase the return on their investments – grew by $ 2 billion in the second half of 2020 By year-end Robinhood had $ 3.4 billion in outstanding margin loans, up over 400% from the $ 650 million it had outstanding at the end of 2019.
Robinhood, launched in 2013, has become particularly popular with young investors because it offers commission-free transactions through an app aimed at Gen Z and Gen Z consumers high on video games and other online tools. Indeed, Robinhood and Square Cash were the top two sites in terms of total time spent by so-called “power users” of financial and trading apps who log more hours than the average customer, according to a recent trend survey. use of mobile applications by Global Wireless Solutions.
Generation Z Flocked to Robinhood [and other] marketing apps throughout the pandemic, “Global Wireless Solutions reported, citing a doubling of the timed time on these apps by Gen Z users from March 2020 to February 2021.
Unlike other brokerages, Robinhood does not charge stock trading fees, which forces them to find other ways to make money. This includes lending money for a fee so that clients can invest more money in the stock market.
Robinhood charges $ 5 per month to borrow up to $ 1,000 for investment purposes. For anything over $ 1,000, investors must pay an annual interest rate on the loans. The company was charging an annual interest rate of 5%, but in December, just a month before – Robinhood cut that annual rate in half, to 2.5%, making it even cheaper for clients to borrow and bet on stock picks.
Many planners and financial advisers have long warned individual investors against buying stocks “on margin”, in large part because buying stocks with borrowed money can quickly lead to unexpected losses. which exceed what was initially invested. Nonetheless, Robinhood says on its website that buying on margin gives customers “more flexibility, additional purchasing power and less waiting time to access” their account. He also says it can add risk.
A Robinhood spokesperson defended the lending practices of the company’s investors. “Our margin loan rate is one of the lowest and [most] competitive rates in the industry and we have seen margin lending increase along with the rest of our business as we have welcomed millions of people into the financial system, ”the spokesperson wrote in a statement.
High rate of defaulted loans
Yet Robinhood equity loans have not always produced positive results for the company and its clients. CBS MoneyWatch reported in February that by mid-2020 Robinhood customers werebeing unable to repay their equity loans as investors who borrowed from rival brokers like eTrade, TD Ameritrade and others.
In 2020, Robinhood canceled $ 42 million in stock loans that clients failed to repay. The company said an additional $ 41 million in loans was at risk of defaulting.
Robinhood was sued last month by the parents of 20-year-old client Alex Kearns who committed suicide last year after mistakenly believing that he lost nearly $ 750,000 in a risky transaction through the app.
Some pundits told CBS MoneyWatch that they believe the company’s aggressive lending may also have helped inflate the bubble in the market for GameStop stocks and other so-called “memes” stocks. Activity surged on the Robinhood app earlier this year as online retail investors began buying shares of battered companies in a collective movement against Wall Street short sellers, or investors who are trying. to make money betting that a stock will go down.
This sent those stocks up to thousands of percentage points in a matter of days. It also led to a cash flow crisis at Robinhood. The company had to seek emergency funding from venture capitalists in order to meet its regulatory requirements, which increased because a large number of its clients had crammed into a small number of volatile stocks.
Robinhood also had to restrict trading in these shares. Congress has since held two hearings on the case, in part to question whether Robinhood and a hedge fund that pays the company to treat its clients.
“Margin loans have amplified the purchasing power and ability of these investors to drive up GameStop’s stock price,” Joshua Mitts, professor of securities law at Columbia University, told CBS MoneyWatch last month. “People are so upset that it is Robinhood’s risky lending practices that have limited its clients’ ability to negotiate and undermined investor confidence in the fairness of the market.”
The Associated Press contributed to the writing of this article.