Content of the material
- What Is Robinhood Gold?
- What is a Pattern Day Trader?
- What Does Robinhood Gold Cost?
- Can I Set Margin Limits?
- How Do I Know How Much Margin I Can Use?
- 2. Avoid speculating with options
- Cons Explained
- Is Robinhood Gold the Right Choice?
- Robinhood Special Features
- Fractional Share Trading
- Crypto Trading
- Margin Trading
- The benefits of margin
- How to Increase Your Available Margin?
- Is Robinhood Margin Worth It?
- Benefits of Robinhood Gold
- Margin call
- Our Verdict
What Is Robinhood Gold?
In order to trade on margin, you need to subscribe to Robinhood Gold for $5 a month. This includes the interest on your first $1,000 of margin.
Robinhood Gold comes with:
- Access to margin investing
- Larger instant deposits
- Level II market data
- Morningstar Research Reports
Even if you have Robinhood Gold, the platform only permits three daily trades in a five-trading day period. However, this restriction is lifted if you have $25,000 of equity in your account. Robinhood Gold also gives you access to extended-hours trading from 9 AM to 6 PM, so you have a few more hours per day to trade than you would with the free service.
What is a Pattern Day Trader?
Because day trading is considered riskier, it is more closely monitored. Under FINRA regulation, a pattern day trader is anyone who makes more than 4-day trades in a rolling 5 day period. Anyone who executes this number of day trades will be automatically flagged by their brokerage as a Pattern Day Trader.
This person is required to hold a minimum account balance of $25,000. If the balance is less than $25,000, the individual will not be able to execute more day trades until the balance comes back up.
A day trade is simply buying and selling the same security within the same day. Purchasing multiple securities in a day is not considered a day trade.
What Does Robinhood Gold Cost?
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 2.5% yearly 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.
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 Gold settings screen. The Gold settings screen includes the following values:
- 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.
2. Avoid speculating with options
Speculating with short-dated options is yet another mistake most Robinhood investors should avoid. Trying to guess the upcoming moves of stock markets is immensely difficult. Timing them to occur in just the next few weeks is even tougher.
Let’s take Moderna, for example. The stock for this pharmaceutical company more than doubled in July due to promising coronavirus vaccine news (and it was promising). Last week, the stock price fell 15% with no company-specific news. Why? Because a competing inoculation from Pfizer showed promise. That’s all it took. This was entirely out of Moderna’s control and still led to a sharp price decline.
Derivative option traders who stayed bullish on Moderna thinking the company’s own vaccine news would keep propelling it higher lost a fortune from the Pfizer headline risk. When you trade options, you have to be right about the direction of the stock. You also have to be right about when that price movement will occur. The company may very well reach higher highs in the future. Equity holders will benefit, but those options expiring this week or next will most likely not.
Options are generally meant to be used for hedging stock trades, not speculating. If a position is performing especially well or poorly, using puts and calls can be an effective way to limit exposure and downside. When contracts are instead used to guess the next move in a stock, the odds are not in your favor.
Stock markets are an exciting vehicle for building wealth over time. When too much risk is taken — with margin, options, etc. — investing can quickly turn into a cash-burning activity, especially for those who tend to be less experienced with stock trading. I stay away from margin and options speculation. Perhaps you should, too.
- Robinhood has little in the way of research or educational resources available for customers. If you want more than the basic stock quotes, you will likely need to subscribe to Robinhood Gold. Even then, Robinhood lacks resources when compared to its competitors’ offerings.
- Robinhood doesn’t offer any mutual funds or fixed income investment products and you will not be able to trade any commodities, forex, or futures. Moreover, Robinhood only supports taxable brokerage accounts.
- Payment for order flow statistics are usually published by brokers. It is the best way for investors to compare and ensure accurate and timely trade executions. Robinhood doesn’t disclose this important information to the public and loses points for this lack of transparency.
Is Robinhood Gold the Right Choice?
People who want to open margin accounts can benefit from Robinhood Gold. Those who like the idea of commission-free trades but want a few more bells and whistles will likely be pleased with Robinhood Gold.
However, those who aren’t interested in margin trading and just need basic features might find that the standard Robinhood app is enough.
It’s a good idea to give Robinhood a test run, and you can decide to upgrade to Robinhood Gold later on if you think you are missing out on features. The company is currently offering a 30-day free trial for current users to test out the Robinhood Gold platform. Although, you won’t be able to downgrade afterward if you are using margin or the bigger instant deposit feature.
Robinhood Special Features
Robinhood also has a few special features that make it unique.
Fractional Share Trading
Robinhood allows investors to buy fractional shares of a company. So, if you are dying to own Tesla but cannot afford its $500 share price, you can buy as little as 1/1000000 of a share, or $0.0005 worth of Elon Musk’s enterprise.
Robinhood Crypto enables users to buy and sell Bitcoin, Ether, Dogecoin, and other alternative coins, 24/7 and commission-free. This service is incredibly unique to Robinhood and is another distinguishing feature.
Trading on the margin means you can trade on borrowed cash, but also lose more money than you invest. Margin trading is risky, and if you aren’t careful you can lose serious money. The Financial Industry Regulatory Authority requires a $2,000 minimum for margin accounts.
The benefits of margin
When used for investing, margin can magnify your profits—and your losses. Here’s an example of the potential upside. (For simplicity, we’ll ignore trading fees and taxes.)
Assume you spend $5,000 cash to buy 100 shares of a $50 stock. A year passes, and that stock rises to $70. Your shares are now worth $7,000. You sell and realize a profit of $2,000.
A gain without margin
You pay cash for 100 shares of a $50 stock
Stock rises to $70 and you sell 100 shares
Here’s what happens when you add margin into the mix. As we saw above, $5,000 in cash gives you buying power totaling $10,000—your existing cash, plus another $5,000 borrowed on margin from your brokerage firm—allowing you to buy 200 shares of that $50 stock.
A year later, when the stock hits $70, your shares are worth $14,000. You sell and pay back $5,000, plus $400 of interest,1 which leaves you with $8,600. Of that, $3,600 is profit.
A gain with margin
You pay cash for 100 shares of a $50 stock
You buy another 100 shares on margin
Stock rises to $70 and you sell 200 shares
You repay margin loan
You pay margin interest
So, in the first case you profited $2,000 on an investment of $5,000 for a gain of 40%. In the second case, using margin, you profited $3,600 on that same $5,000 for a gain of 72%.
How to Increase Your Available Margin?
Increasing your available margin is rather simple. First, you must ensure your account isn’t in deficit and you shouldn’t have received a margin call. These two factors are important to increase your margin.
Next, add more money into your Robinhood Gold account. Increasing your portfolio value will usually increase your available margin. The scale is approximately 1:1, so a $4,000 account should have around the same available margin.
However, if you have a borrowing limit set up, your available margin won’t increase. Even if you add a lot of money, the limit will prevent the margin from rising. You’ll have to remove the borrowing limit first before you can proceed.
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. However, this is extremely risky, particularly for new investors. You will also have to pay for a gold account. 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. You also need a Gold subscription for $5 per month. This will cover your first $1,000 of margin. Beyond that, you will have to pay 5% interest on any additional funds borrowed. Before borrowing money, consider whether or not you really need margin.
Click Here To Sign Up With Robinhood + Get 1 FREE Stock!
Click Here To Sign Up With Robinhood + Get 1 FREE Stock!
Benefits of Robinhood Gold
Robinhood Gold comes with numerous benefits. Robinhood also shines when it comes to account minimums. Many people aren’t able to trade with other brokerages because they don’t have the minimum to open an account. Robinhood doesn’t have account minimums; however, users need to have at least $2,000 of Portfolio Value (minus cryptocurrency positions) to be eligible for margin trading.
Robinhood Gold is also a breeze to use. Users can sign up and fund their accounts in minutes, and they can start trading quickly and easily. The streamlined interface means that everything people need is just a click away. They can click on a stock and buy it just like that. Then they can go back to the app to monitor the stock. They can also view graphs and can see how it is performing in real-time. Robinhood has now also given Gold users the ability to see live bids and asks through Nasdaq Level II Market Data. Level II is likely helpful for users placing large orders and in situations where order volume is low. In short, Level II allows Gold users to analyze the depth of the order book as a way to identify situations where supply and demand may impact the future price of a stock.
While the value of the stocks used as collateral for the margin loan fluctuates with the market, the amount you borrowed stays the same. As a result, if the stocks fall, your equity in the position relative to the size of your margin debt will shrink.
This is important to understand, because brokerage firms require that margin traders maintain a certain percentage of equity in the account as collateral against the purchased securities—typically 30% to 35%, depending on the securities and the brokerage firm.2
If your equity falls below the minimum because of market fluctuations, your brokerage firm will issue a margin call (also known as a maintenance call), and you will be required to immediately deposit more cash or marginable securities in your account to bring your equity back up to the required level.
So, assume you own $5,000 in stock and buy an additional $5,000 on margin. Your equity in the position is $5,000 ($10,000 less $5,000 in margin debt), giving you an equity ratio of 50%. If the value of your stock falls to $6,000, your equity would drop to $1,000 ($6,000 in stock less $5,000 margin debt) for an equity ratio of less than 17%.
If your brokerage firm’s maintenance requirement is 30%, then the account’s minimum equity would be $1,800 (30% of $6,000 = $1,800). Accordingly, you would be required to deposit:
- $800 in cash ($1,000+$800=$1,800), or
- $1,143 of fully paid marginable securities (the $800 shortfall divided by [1 –the .30 equity requirement] = $1143), or
- Or some combination of the two.
Important details about margin loans
- Margin loans increase your level of market risk.
- Your downside is not limited to the collateral value in your margin account.
- Your brokerage firm may initiate the sale of any securities in your account without contacting you, to meet a margin call.
- Your brokerage firm may increase its “house” maintenance margin requirements or remove specific securities from the marginable list at any time and is not required to provide you with advance written notice.
- You are not entitled to an extension of time to meet a margin call.
Triggering a margin call
Buy stock for $10,000, half on margin
Stock falls to $6,000
Brokerage firm’s maintenance requirement: 30%
What happens if you don’t meet a margin call? Your brokerage firm may close out positions in your portfolio and isn’t required to consult you first. In fact, in a worst-case scenario it’s possible your brokerage firm would sell all of your shares, leaving you with no shares, yet still owing money.
Again, these examples are based on 50% margin debt, which some investors might consider extreme. If your debt is lower, you also decrease your risk of receiving a margin call. A well-diversified portfolio may also help make margin calls less likely, as you would avoid the risk of having a single position drag down your portfolio.
If you decide to use margin, here are some additional ideas to help you manage your account:
- Pay margin loan interest regularly.
- Carefully monitor your investments, equity, and margin loan.
- Set up your own “trigger point” somewhere above the official margin maintenance requirement, beyond which you will either deposit funds or securities to increase your equity.
- Be prepared for the possibility of a margin call—have other financial resources in place or predetermine which portion of your portfolio you would sell.
- NEVER ignore a margin call.
If you’re new to investing and have a small balance to start with, Robinhood could be the place to get you accustomed to investing. The mobile-first broker sports a simple app and website, providing a seamless on-ramp to investing in stocks and ETFs. Although the user experience cannot be customized, the app and website have all the essentials a new investor would need. The recent controversies with Robinhood may have tarnished its reputation with some of the younger investors it craves, but the company still has commission free stocks, ETFs, options, and cryptocurrencies, and borderline addictive app to trade them on. New investors should consider the lack of transparency payment for order flow and other issues before making a decision.
If you’re an active investor or trader, however, there are much better options on the market as Robinhood does not support robust charts, screeners, and so on. Although most brokers charge for options contracts, and some still have ticket charges for equity trades, you will have access to research, data, trading tools, customer service, and educational offerings in exchange. Even if you are a new investor only interested in buying and holding stocks, there are other zero-fee brokers with more resources that are worth serious consideration.
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