$10 a Month For Extended Trading and Interest-Free Margin
The Robinhood app (App Store/Google Play) became well-known for their free stock trades and sleek app-only interface. People wondered, how will they make money? Well, they just announced one way – Robinhood Gold, a premium plan starting at $10 per month with the following highlights.
- Extended hours trading. In addition to standard trading hours, you can start trading a half-hour earlier (pre-market) and two hours later (after-market).
- Additional buying power. The equivalent of a margin account, or a line of credit for the stock market. You get up to 2x your buying power so you can invest more, and keep any profits. You pay no interest, just the flat monthly fee.
- Bigger instant deposits. Instant Reinvesting lets you access proceeds from a stock sale immediately, instead of having to wait for it to settle. Instant Deposit eliminates the three-day wait period for funds to transfer from your bank into Robinhood.
Let’s look at these features more closely.
Extended hours trading.. Traditionally, the markets are open from 9:30 am EST to 4:00 am EST during normal business days. With extended hours trading, every market day you’ll be able to trade an extra two and a half hours:
Pre-Market opens 30 minutes earlier starting at 9:00 am EST
After-Hours continues for 120 minutes (2 hours) until 6:00 am EST
Do you really need these hours? If you don’t have a specific reason, then you may want to steer clear. Liquidity is limited, price volatility is high, and you’ll be trading against mostly professionals and/or computers. It’s also not that special… Most other brokerage firms also allow extended hours trading.
Additional buying power. Robinhood Gold upgrades you to a “full” margin account. For one, this means that you can get immediate access to funds after selling stock. That means you can reinvest those funds without waiting three days for settlement. This also means that they are required by law to have a minimum balance of $2,000.
Margin is essentially borrowing money from Robinhood and using your cash and stocks as collateral. The amount of extra “Gold Buying Power” you get is based on how much you pay, up to 2X your normal buying power. If you invest in high volatility stocks like penny stocks or leveraged ETFs, they may also limit your buying power to less than 2X.
- $2,000 of extra buying power is $10 a month, with 0% interest
- $4,000 of extra buying power is $20 a month, with 0% interest
- $6,000 of extra buying power is $30 a month, with 0% interest
- $10,000 of extra buying power is $50 a month, with 0% interest
- Additional buying power over $50,000.00 has a yearly interest rate of 5.0%.
For example, if you have $2000 in your account, you can get at most $2000 in Gold Buying Power. But if you increase your account value to $3000 by depositing $1000, you can get at most $3000 in Gold Buying Power (if you are on the appropriate tier).
Now, if you really cared about margin, you’d probably use a broker with cheap margin rates like Interactive Brokers. IB’s current margin rates for a $2,000 balance is 1.9%, which would amount to $38 a year in interest if you carried a $2,000 balance for an entire year. (IB also requires you to spend at least $10 a month in commissions and fees if you hold less than $100,000 in assets.) On the other hand, TD Ameritrade will charge you 9.25% on a $2,000 balance, or $185 a year. Compare with Robinhood Gold at $10 a month would be $120 a year.
Bigger instant deposits. Another way that Robinhood lets you borrow some short-term money is with Instant Deposits. When you initiate an ACH deposit at most brokerages, you have to wait 3 business days for the money to actually show up. With Instant Deposits, you can use the money to buy stocks instantly. Your maximum instant deposit amount is the same as your extra buying power tier above ($2,000 for $10/month, $4,000 for $20/month) etc.
Instant deposits let you act on a stock idea quickly without having a bunch of idle cash sitting around all the time. You can keep it in an online savings account earning 1% instead of nothing at Robinhood.
What about Robinhood Instant? Robinhood Instant is a free middle tier that has been around for a while. Priority access is given based on the number of referrals you send to them. Your mileage may vary, but I referred two other people to Robinhood and was given access to Robinhood Instant. There is no hard number, that’s just my data point. This is a “limited” margin account that has the following features:
- Get immediate access to funds from selling stock. That means you can reinvest those funds without waiting three days for settlement. (Again, any brokerage margin account offers this.)
- Limited instant deposits. Use up to $1,000 of your pending bank deposits right away.
How do I get Robinhood Gold? They are rolling it out gradually. Preferred clients, including those that have referred other new users, will have priority. They will e-mail you, or you can see it in your app. Some people got access to it immediately upon launch.
Bottom line. Robinhood has been doing a nice job of meeting their basic promise of free stock trades. Robinhood Instant is a useful upgrade, although you’ll have to convince a couple friends to join. At the same time, they don’t let you use leverage, which magnifies both gains and losses.
Robinhood Gold takes off the training wheels and gives you a full margin account, for a fee. You are moving from credit as a temporary convenience to enabling riskier trading with long-term leverage and extended trading hours. This may be appealing to a newer trader that eventually wants a bit more buying flexibility. For a serious trader that uses a lot of margin, it may be cheaper to go with another broker with low margin rates.
Disclosure: I have an account opened with Robinhood for two years, and subscribed to Robinhood Gold.