Ahead of IPO, Robinhood Expands Subprime Stock Loan News

Robinhood quickly expanded its business of providing potentially dangerous loans to stock trading app customers ahead of its first public offering.

The popular but controversial online brokerage confirmed on Tuesday that it had launched the process of promoting Robinhood shares to the general public for the first time. The company mentioned in a blog post that it has filed confidential documents for the IPO with the Securities and Trade Fee and that the regulator is reviewing its registration. Robinhood did not disclose a timeline for general public delivery.

In a separate regulatory filing, Robinhood reported earlier this month that its loans to help customers buy stocks “on margin” — in which someone borrows money to buy stocks, picks or other titles hoping to boost their funding returns — rose $2 billion in the second half of 2020. By the end of the year, Robinhood had $3.4 billion in excellent margin loans, up more than 400% from the $650 million it had at the end of 2019.

Robinhood, launched in 2013, has become particularly popular with younger merchants as it offers commission-free buying and selling through an app aimed at millennials and Gen Z customers high on video games and other online tools. line. Granted, Robinhood and Sq. Money have been the two most prominent websites of all time among the so-called “energy customers” of finance and buying and selling apps that display hours over the typical shopper, according to a latest study of cellular app usage trends by International Wi-fiOptions.

“Gen Z flocked to Robinhood [and other] buying and selling apps throughout the pandemic,” International Wi-fi Options reported, citing a doubling of time spent on these apps by Gen Z customers from March 2020 to February 2021.

Unlike other brokerages, Robinhood would not cost stock trading fees, which would force it to research different methods of making money. It involves lending money for a fee so that customers can invest more money in the stock market.

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Robinhood costs $5 per month to borrow up to $1,000 for funding functions. For anything above $1,000, traders must pay an annual loan interest rate. Previously, the company charged an annual interest rate of 5%, but in December, only a month before GameStop and other “meme” shares have taken off – Robinhood cuts that annual fee in half, to 2.5%, making it even cheaper for buyers to borrow and bet on inventory picks.

Many money planners and advisers have long warned individual traders against buying stocks “on margin”, largely because buying stocks with borrowed money can quickly lead to sudden losses that exceed what was initially invested. Nonetheless, Robinhood on its website states that buying on margin gives customers “additional flexibility, additional purchases for energy, and less time to access” their account. He also says it may add danger.

A Robinhood spokesperson defended the company’s investor lending practices. “Our margin lending fees are among the lowest and [most] aggressive loads within the business and we’ve seen margin lending improve alongside the rest of our business as we’ve welcomed thousands and thousands into the monetary system,” the spokesperson wrote in A press release.

Excessive fees for unpaid loans

But Robinhood’s inventory loans haven’t always produced positive results for the company and its customers. CBS MoneyWatch reported in February that in mid-2020, Robinhood customers were 14 possible additional covers be unable to repay their inventory loans than traders who borrowed from rival brokerages like eTrade, TD Ameritrade and others.

In 2020, Robinhood forgave $42 million worth of inventory loans that customers failed to repay. The company said another $41 million loan was likely to go into default.

Robinhood was sued last month by the father and mother of Alex Kearns, a 20-year-old shopper who killed himself last year after mistakenly believing he had lost nearly $750,000 in a dangerous trade by enforcement.

Some consultants told CBS MoneyWatch they believe the company’s aggressive lending may have also helped inflate the stock market bubble in GameStop stocks and other so-called “meme” stocks. Activity surged on the Robinhood app earlier this year as online retail traders began buying shares of overwhelmed companies as part of a collective movement against short sellers on Wall Avenue, or traders trying to make money by betting that an inventory will drop in value.

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This caused these stocks to skyrocket hundreds of factors of proportion in just a few days. This also leads to a financial crisis in Robinhood. The company had to seek emergency funding from venture capital investors to meet its regulatory demands, which increased because so many of its clients had piled into a small number of choppy stocks.

Robinhood was also to prohibit the buying and selling of these shares. Congress has since held two hearings on the case, in part to find out whether Robinhood and a hedge fund that pays the company over its customers. the trades had acted correctly.

“Margin lending has amplified the buying energy and flexibility of these traders to increase the value of GameStop’s inventory,” said Joshua Mitts, professor of securities regulation at Columbia College., told CBS MoneyWatch last month. “What bothers people so much is that it is Robinhood’s dangerous personal lending practices that have limited its customers’ means to trade and undermined traders’ confidence in the fairness of the market.”

The Related Press contributed to this text.

Troy M. Hoffman