Margin accounts: marginal benefits

Hey all. After discussion in a few threads, @Rob has written up some of our thoughts on margin accounts and why they just ain’t right for Freetrade.

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I’m a sucker? I’m using leverage to boost my aggressive long equity strategy. Plus I bought this tie.

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image

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Maybe for simplicity purposes, but the 5% interest would probably be pro rated and 5% could be 0.03% within a couple of days. I would not think margin traders would hold for a year to wait for Rihanna to eat the jam.

But investing on 20% margin long term may still be a viable option, cannot remember markets going down 80% ever, and believe that a very low margin may potentially be healthy for people that are less risk averse.

Edit: only a subjective opinion for discussion purposes, not advice nor recommendation for Freetrade to offer this service

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You’re right regarding the interest, it’s a simplified example to explain how it can work, and in the context of an investor (rather than a trader) who we’d expect to hold positions for longer terms.

However if you do use a margin account, you still need to accept that the first x% of your gains are lost to fees - in this case an annualised 5%. If you’re using a margin account I agree you’re unlikely to hold a position for a year, but you may we’ll have used the full facility for a year, in which case the first 5% of your annual growth disappears in fees.

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Fully support that. Went through Rihanna’s twitter and have not noticed any Jam pics so I guess someone is still waiting with their IR ticking :roll_eyes:

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Other brokers will warehouse trades (I.e. it’s all artificial - you’re aren’t buying and selling on the market) and they’ll have hedge funds taking the other side of client bets! They’re able to make money this way because the average client loses as well as via clever hedging. (This is as I understand it anyway!)

There’s a classic story of a teacher on £18k per year who lost £280k!! :scream:

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Thanks for that @Rob!

We care about our customers, their investment outcomes, and building a healthy, non-exploitative investing culture. We’ll continue to focus on products and services that help you grow your portfolio in a long-term, sustainable way.

And leave margin accounts to the old world of screw-our-customers financial services

:point_up:t3: How thoroughly refreshing is this though? :metal:t3:

Also, can you guys share your content with Finimize?! Education and growth all at the same time.

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If there’s any jam manufacturers based near the Freetrade offices theirs will be the first shares I buy when the app launches!

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Saw Robinhood have added more advanced option trading:

I then started looking on their website and found it interesting that their marketing page doesn’t require some warning for the following statement: “Trading options allows you to take bigger positions with less funds.” https://robinhood.com/options/

Why would you need a warning? After all, you are not trading on margin and will not lose anything. You simply pay an option fee upfront and then you chose whether you utilise your option or not. I do not see it being different to to buying insurance: if you use it - nice you had one, if you do not - at least you hedged your risk.

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@Vlad I’m used to seeing warnings about risk when statements like that are made. Interestingly they do have warnings on their help desk:

Options transactions may involve a high degree of risk. Please review the options disclosure disclosure document entitled the Characteristics and Risks of Standardized Options available through Disclosure Library | Robinhood or https://www.theocc.com to learn more about the risks associated with options trading.

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I think this thread is as good as any.

On the subject of CFD brokers, they now have to display a message with the % if retail investors who lose money. It’s more than a bit jaw dropping

Trading212 - 80%
IG - 79%
Saxo - 69%
eToro - 64%
IB - 62%

(Source - their respective websites. Hidden at the bottom, if they could use size 1 type they would)

The best performing of those has 62% of retail investors lose money. That’s just insane

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OMG that is absurd, 8/10 lose money
That is why finance is always discriminated, I think that a big chunck of those investors barely know basic terms of finance and decide to use derivates like cfds to “invest”. Unbelievable, those Cfd firms have reasons to exist only because people lose their savings on a misleading marketing strategy leveraged on spreaded low financial knowledge.
:no_mouth::no_mouth::no_mouth:

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I get stalked round the interned by banners telling me how great CFDs are. It looks too good to be true the way they are advertised (spoiler: it’s because it is) so I can see how some people totally get caught up in the hype.
Small step in the right direction making them show those figures but it should be more prominent so people can make informed decisions

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Here’s a gruesome discussion about someone using margin to trade options on Robinhood, bragged about it on Reddit, was told he was a genius for about a few days, then it turned into a huge loss, then forced Robinhood to change their rules. Margin + options = horribly risky and hard to understand.

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Yeah have you seen this:

Notably, Robinhood lets you trade “options” with scarily little oversight. I went through the service’s in-app options trading application process and, despite not quite understanding what options trading actually is, was approved in seconds, and my Robinhood home screen was showered with celebratory confetti as I was set loose.

…I figured out that I hadn’t bought a single potential $19 share of Under Armour but that I’d instead spent 19 cents 100 times, and that since the price of Under Armour had gone up six cents, my call was now worth six hundred cents. The fact that I only fully understood how this dangerous short-term financial product worked after I’d actually bought the thing probably means a terrible idea for Robinhood to offer this as a service.

By the time I finished writing this piece, my potential net gain of $6 had morphed into a potential loss of one.

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no hadn’t seen that thanks! I think the general lesson is that the vast majority of retail investors (ie definitely me and probably most people here?) shouldn’t be allowed anywhere near that kind of stuff.

I think there should just be more framework around making sure the risks are explained in a uniform way. Perhaps guiding everyone through a FCA approved service that asks the questions, then test how well the person understood the risks? If they fail, then they are not allowed to open a account, I’m sure people would game something like this, but it might be sufficient way to filter out more people.

If you buy options the only risk is that you lose the price(or premium) you paid for the option. However if you sell an option you are on the hook to sell or buy the shares at expiry regardless of the price, so your loss is effectively unlimited

You can protect yourself, but involves strategies that are a bit advanced for new investors

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