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What could possibly go wrong? Robinhood loaning to small investors so they can multiply gains

edited June 1 in Other Investing
“Online brokerage Robinhood touts its willingness to lend money to customers so they can multiply their returns just like Wall Street pros, even likening investing with borrowed money to the thrill of riding a motorcycle. What the company doesn't say is that its lending strategy has put clients — who tend to be younger and less experienced at playing the market — in financial peril even before many piled into the shares of struggling video game retailer GameStop in January.

“Robinhood's lending so customers could "buy on margin" — in which someone takes out a loan to buy stock, options or other securities — more than doubled in the first six months of 2020, all too often with negative results. Regulatory filings reviewed by CBS MoneyWatch show that investors who borrowed money from Robinhood were nearly 14 times more likely to be unable to repay the loans than investors who borrowed from rival brokerages eTrade, TD Ameritrade and others.”

(Sorry / Article a bit dated.(References 2020) Likely, more relevant today than then)

Story

Comments

  • We’ve seen this show before haven’t we? Pretty much everything can and will go wrong except for a small few. Nothing like a stock market loss to get your mind right and the lawsuits flying. Can’t wait.
  • edited June 1
    Mark said:

    We’ve seen this show before haven’t we? Pretty much everything can and will go wrong except for a small few. Nothing like a stock market loss to get your mind right and the lawsuits flying. Can’t wait.

    “Congress will investigate … “
  • That's all we need amiright?
  • "Congress will investigate." If one of the two major Parties does not block the move. And would it do any good, anyway? "That's all we need, amiright?" Congress can't even get out of its own way.

    This whole thing will not end well. Financial literacy NEEDS to be taught to young people. Everyone else would do well to learn about it, without a doubt. I've got "pre-approved loan" offers ready for me to view and take advantage of when I log-in to my credit union account. If I was very stoopid, I'd hop right on and take them! ORK.
  • It is starting to sound like dotcom era. I wonder when the music will stop?
  • investors who borrowed money from Robinhood were nearly 14 times more likely to be unable to repay the loans than investors who borrowed from rival brokerages eTrade, TD Ameritrade and others.”
    Is it more like gambling?
  • What do these borrowers put up for collateral ?
    Derf
  • Don't think there is any. Just like buying stocks on margin in major brokerages. They charge a healthy interest rate on borrow $. The investors can in turn sell stocks to pay back the brokerage, or they have to raise cash from elsewhere. This may works when the market is moving up but it also magnifies the loss when the market gpes the opposite direction.
  • edited June 2
    Investor said:

    It is starting to sound like dotcom era I wonder when the music will stop?

    I was going to say it sounds like the game musical chairs, where one hapless individual has no chair on which to park his arse when the music stops. However, in this instance a whole group of “investors” may lose theirs.

    For anyone trying to assess “market climate” and factor that into their macro analysis, this can’t be a positive indicator. I don’t remember the dot com era getting quite this nutty - but do think the hype was more pervasive than - with a very high percentage of (otherwise intelligent) investors drinking the kool-aide.
  • Derf said:

    What do these borrowers put up for collateral ?
    Derf

    @Derf - Just a guess …

    image

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