Robinhood has launched a stock lending program that lets users lend out their stocks to market participants and earn passive income. The move is an effort to diversify the company’s revenue stream, which has dipped since the start of the year as crypto trading declined and its user base dwindled due to the broader economic slowdown.
Stock Lending: What It Is And How It Works
With this new service, Robinhood users will be able to lend fully paid stocks out to market participants. They will be paid when they find a borrower, and Robinhood will provide cash collateral for the loans. But stock lending isn’t insured by the Securities Investor Protection Corporation (SIPC) and doesn’t return borrowed stocks to investors, so there are risks involved.
In order to be eligible for the program, Robinhood customers must meet certain qualifications. They must have $5,000 in total account value and at least $25,000 in reported income or trading experience. They also must agree to a legal agreement with the company, which states that they will be liable for their shares if borrowers default on their loan agreements.
The program won’t be available to all investors, but the firm is aiming to make it easier for customers who have been losing money in the stock market to generate additional cash flow. “We want to offer this as a way to rekindle our users’ interest in the app,” said Quirk.
But investors shouldn’t expect to get rich off the new product. It’s still risky for short-sellers, and there’s no guarantee lenders will get their shares back if a massive short-squeeze causes a price crash.
It’s also risky for stock lenders, who may lose their right to vote in shareholder meetings or collect dividends if they lend out their stocks. In addition, if the security’s price goes up, the lender could lose a large sum of money if they’re forced to sell their stock in an effort to repay the loan.
In the meantime, the firm is investing in new platform features that are expected to drive transaction growth across its platform, including “hyper-extended hours” to extend trading time from 7AM EST to 8PM EST and Automated Customer Account Transfer Service to enable faster movement of assets from other accounts into their Robinhood account.
Lastly, the new features are aimed at lowering trading costs and making Robinhood’s platform more competitive against its rivals. These efforts, paired with the company’s overseas expansion plans, should help expand its addressable market and mitigate the impact of a slowdown in retail investment activity.
As a result, we remain positive on the stock’s prospects for fundamental growth over the longer-term despite an equity selloff that is hitting high-growth tech stocks the hardest. We maintain a 12-month target price of $10 to $12, which represents upside potential of up to 20% based on the current share price. This reflects compressed valuation multiples observed across the fintech and financials peer group and a conservative case of stabilizing near-term fundamental growth at Robinhood by mid-decade.