Robinhood is a popular stock trading app that offers commission-free trades on stocks, ETFs, options, and cryptocurrencies. One of the key features Robinhood provides is margin trading, which allows you to trade with borrowed money from Robinhood. This amplifies both gains and losses, allowing experienced traders to take larger positions.
Margin trading involves higher risk and is not suitable for all investors. However, if used properly, it can be a useful tool to boost returns. Here is a step-by-step guide on how to apply for and obtain margin trading privileges on Robinhood:
Table of Contents
Step 1: Understand Margin Trading and Know the Risks
Before applying for margin, it’s essential to fully understand what margin trading is, how it works, and the potential downsides.
Margin trading allows you to borrow money from Robinhood to buy stocks and other securities. For example, if you deposit $2,000 cash and Robinhood approves you for 2:1 margin, you can trade with up to $6,000 buying power. So a $5,000 stock purchase would use $2,000 of your cash and $3,000 borrowed from Robinhood’s margin loan.
Key risks include:
- Amplified losses: Losses are doubled compared to trading just with your own cash. A 50% loss declines your $2,000 to $1,000 instead of $2,000 to $1,500.
- Margin calls: If your account equity drops too low, Robinhood can issue a margin call requiring you to deposit more cash or sell positions.
- Interest costs: You pay interest on the borrowed margin loan amount. This daily interest can add up over time.
So while margin trading can boost profits, use it carefully and don’t over-leverage account buying power.
Step 2: Make Sure Your Robinhood Account is Eligible
To qualify for margin trading, your Robinhood account must meet certain requirements:
- Live brokerage account opened for at least 30 days
- Personal (not joint) account
- Account holder is 18 years or older
- Verified SSN and personal information
- Gold account level or higher
- $2,000 minimum account equity
Before applying, log into your Robinhood account and ensure you meet all eligibility criteria. If not, take necessary steps like updating your personal info or upgrading to Robinhood Gold.
Step 3: Apply for Margin Trading
If your Robinhood account meets the requirements, you can apply for margin simply by tapping the Account icon -> Settings -> Day Trade Settings.
Here you’ll find the margin trading application. Tap “Apply for Margin” to begin the quick approval process.
Robinhood states that margin privileges are usually granted in 1-3 business days. However, they may take longer to review based on account history, trading activity, and other risk factors.
Patience is key, as constantly contacting Robinhood to check status likely won’t speed up the process.
Step 4: Get Approved and Activate Margin Trading
Once approved for margin trading, Robinhood will send you an in-app notification. They’ll specify your buying power multiplier and margin maintenance requirements.
For example, they may grant you level 3 options trading privileges, 2:1 margin buying power, and 25% margin maintenance.
To activate margin trading, open the Robinhood app and tap the Account icon -> Settings -> Day Trade Settings. Toggle the margin switch on.
Your buying power should now reflect the boosted amount available from Robinhood’s margin loan. However, no margin is utilized until you tap Trade and place buy orders exceeding your cash balance.
Step 5: Use Margin Responsibly to Avoid Pitfalls
With margin activated, use it selectively and responsibly. Remember, margin amplifies potential profits but also losses.
Here are some tips:
- Don’t over-leverage: Use margin to take larger positions in stocks you have high conviction in, but avoid overusing margin simply because it’s available.
- Manage risk: Use stop losses, maintain diversity, and size positions based on account size to manage risk.
- Monitor maintenance requirements: Check your account often to ensure you meet Robinhood’s margin maintenance minimums and avoid costly margin calls.
- Pay interest costs: Try to minimize margin loan balances to reduce interest fees. Don’t leave excess margin borrowed long-term.
