Robinhood Markets, Inc. (HOOD), the discount online brokerage, will reportedly launch a stock lending program this month. The feature will enable Robinhood users to lend fully paid stocks to borrowers, facilitated by the company’s brokerage app. The company expects the feature to be available to all users by the end of May.
The company has positioned itself as a brokerage aiming to expand access to the larger financial system. It says that stock lending through Robinhood can be an easy way for users to generate passive income. The company has previously introduced initial public offering (IPO) access and trades of fractional shares, among other non-standard discount brokerage features.
- The discount online brokerage Robinhood will launch a stock lending feature beginning in May 2022.
- The platform will allow users to lend out fully paid stocks and receive payment at the time of the loan.
- Robinhood will provide cash collateral for the loans.
- As with other stock lending scenarios, there is a risk of default and the lent stocks not being returned to Robinhood users.
Robinhood Stock Lending Focuses on Ease of Experience
Stock lending is typically not facilitated by individual investors, rather by brokers or dealers that identify partners and finalize loan agreements. In Robinhood’s case, the company will source borrower candidates and manage transactions for users, who will be paid when their stocks are successfully lent out.
One barrier to stock lending for many investors is the collateral requirement. Investors may need to have hundreds of thousands of dollars in their account in order to be accepted for a stock loan agreement. Robinhood has said that it will provide cash collateral for securities loans through its platform, easing the burden for investors.
Stock lending is a crucial component of short selling, a practice in which investors borrow securities with plans to sell them immediately. If the price of the security drops, the investor can buy it back at a lower price and earn a profit when returning the loan. Short selling is considered an advanced and typically risky investment practice, as the borrower is liable for returning the security or facing penalties including loss of collateral, and there is no guarantee that the price of the security will behave as predicted. Stock lending also plays a role in hedging, arbitrage, and similar strategies.
Robinhood has warned that stock lending may not be appropriate for all users due to the risk that Robinhood could default on its obligations and fail to return the borrowed stocks.
How Does Robinhood Stock Lending Work?
Robinhood’s stock lending feature will allow users to lend out fully paid stocks to borrowers. Robinhood will identify borrowers and facilitate the loan process, including providing cash collateral. Lenders are paid at the time the stock is lent out.
Do Other Online Brokerages Provide Stock Lending?
Some other online brokerages already offer a stock lending feature. Brokerages including TradeStation, Webull, and E*TRADE currently provide similar programs.
Why Is Robinhood Offering Stock Lending?
Robinhood has said that it will offer stock lending as a way to “democratize a product that has been historically preserved for the wealthy with high barriers to entry.” Stock lending programs often require hundreds of thousands of dollars in a brokerage account. Robinhood’s program will lower the threshold to open up stock lending to more users.