Ahead of IPO, Robinhood expands risky stock market lending

Robinhood has rapidly expanded its business of extending potentially risky loans to customers of the stock-trading app in the run-up to its initial public offering.

The popular but controversial online brokerage confirmed on Tuesday that it has begun the process of selling shares in Robinhood to the public for the first time. The company said in a blog post that it had filed confidential paperwork for the IPO with the Securities and Exchange Commission and that the regulator is reviewing its registration. Robinhood did not disclose a time frame for the public offering.

In a separate regulatory filing, Robinhood reported earlier this month that its lending to help customers buy stock “on margin” — in which someone borrows money to purchase stock, options or other securities in hopes of boosting their investment returns — rose by $2 billion in the second half of 2020. As of the end of the year, Robinhood had $3.4 billion in outstanding margin loans, up more than 400% from the $650 million it had outstanding at the end of 2019.

Robinhood, launched in 2013, has become particularly popular with young investors because it offers commission-free trading through an app geared to millennial and Gen Z consumers raised on video games and other online tools. Indeed, Robinhood and Square Cash were the top two sites in total time spent among so-called “power users” of finance and trading apps who clock more hours than the average customer does, according to a recent study of mobile app usage trends by Global Wireless Solutions.  

“Gen Z flocked to Robinhood [and other] trading apps throughout the pandemic,” Global Wireless Solutions reported, citing a doubling of time clocked on such apps by Gen Z users from March 2020 through February 2021.

Unlike other brokerages, Robinhood doesn’t charge stock-trading fees, requiring it to find other ways to make money. That includes lending money for a fee so customers can invest more money in the stock market.

Robinhood charges $5 a month to borrow up to $1,000 for investment purposes. For anything above $1,000, investors have to pay an annual interest rate on the loans. The company used to charge an annual interest rate of 5%, but in December —just a month before GameStop and other “meme” stocks took off — Robinhood cut that annual rate in half, to 2.5%, making it even cheaper for customers to borrow and bet on stock picks.

Many financial planners and advisers have long warned individual investors against buying stocks “on margin,” in large part because buying shares with borrowed money can quickly lead to unexpected…