Robinhood Increases Its Margin Rates. Here's What It Means for You

Margin trading has just become more expensive.

Robinhood, the commission-free trading app, has announced it is increasing its margin rates. For those not familiar with margin trading, that's when you trade with borrowed money. On Nov. 3, Robinhood announced that it was increasing its margin interest rate from 5.75% to 6.5% for its Gold customers and from 9.75% to 10.75% for non-Gold customers.

So what does this mean for you? If you're a Robinhood user and you trade on margin, your costs are going to go up. If you don't trade on margin, then this change won't have any impact on you. For those who are thinking about starting to trade on margin, you will need to account for the increased costs given the higher rates.

Why is the rate changing?

Since the beginning of the year, the Federal Reserve has raised interest rates six times to combat high inflation. The current Federal Reserve interest rate, or federal funds rate, is 3.75% to 4.25% as of Nov. 2, 2022. This is the fourth consecutive rate hike of 0.75% and the sixth rate hike this year. These rate hikes are the fastest cycle in history, pushing borrowing costs to a 15-year high.

Robinhood calculates its new margin rates by adding the upper bound of the Target Federal Funds Rate (now 4.25%) to 2.5% for Robinhood Gold customers and 6.5% for non-Gold customers. Given that margin is one of the ways that Robinhood makes money, investors can continue to expect that Robinhood will change its rates based on what the Fed does.

What does this mean for your investments?

While these changes may not seem like much, they can have a significant impact on an investor's bottom line. For example, let's say you're considering buying $5,000 worth of Apple stock on margin. Under the old margin rate of 5.75%, you would have to pay $287.50 in interest annually. However, under the new rate of 6.5%, you would pay $325.00 in interest.

This interest is calculated daily, and Robinhood charges your account at the end of each billing cycle. The daily interest rate is 6.5% divided by 360 calculated daily at the end of the day. The change in margin rates means that you'll be charged $5.42 instead of $4.79 every 30 days for each $1,000 you borrow. This is on top of the first $1,000, which is included with the Gold membership. A Gold membership is $5 per month and benefits include:

• Lower margin rates
• Bigger instant deposits
• Professional research from Morningstar
• Level II market data from Nasdaq

This is a big increase from 2020, when Robinhood's margin rates were at 2.5%. While the increase in margin rates may seem like bad news for investors, Robinhood is still one of the most competitively priced brokerages out there. TD Ameritrade's base margin rates are currently 12%, almost double that of Robinhood's.

Margin trading can be beneficial for investors because it allows them to control a larger position than they would be able to with just their own capital. However, it's important to remember that when you buy securities on margin, you're responsible for not only the cost of the securities but also any interest charges associated with borrowing the money from your broker. Ultimately, it's up to each individual investor to decide whether they want to pay higher marginal rates at Robinhood.