If you want to call that margin, it's margin with 100% collateral. It's not margin in any meaningful sense. It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check. Would the trade clear before the check? Sure. Is that margin? I really struggle to see how.
Except the collateral hasn't settled yet, so you can't guarantee what could happen.
> It's like if you handed your broker a check and said you wanted to make buy a stock for the value of the check.
There are tons of things that could happen here. The check could bounce. Your bank could go under. The check could be fake. You could have stolen the check from someone else, and when they see it clear, they'll call their bank and the funds will be withdrawn.
> Would the trade clear before the check? Sure. Is that margin?
Yes, it is. The broker may choose to loan you the money short term with the assumption that the check will clear, but they don't have to. They could just refuse to make the trade until the funds clear.
If they did choose to buy the stock for you, they would be accepting that risk. If your money doesn't clear, they will be stuck with the stock.
If this was a share of VTI, with low volatility, they'd likely be fine with it. Even if the check didn't clear, they could just re-sell the stock. It's super unlikely to drastically check in value in the 2 days before the check clears.
If this was a share of GME today, they are buying it for you for $350. There is a change that your check doesn't clear. There is a chance that tomorrow GME is worth $50. If both of those things happen, your broker would have paid $350 for a stock that they didn't want, and can only sell for $50, and be stuck holding a $300 loss.
Ie, they have loaned you money (even if it's short term and with no interest), but if the account doesn't actually get funded, or a previous trade doesn't actually settle[0], they are left holding the bag, the same as if it was "traditional" margin.
[0] This is unlikely, but it could happen for a variety of reasons. I believe this would correlate with much larger issues with the state of the financial system, and in that case would just start compounding issues (because if your trade doesn't settle, then chances are a whole bunch of trades don't settle, and your broker will be left holding the bag for all of them)
In typical times, yes, it is "amazing" for the user, in that they get to trade more often without worrying about the underlying complexity.
People right now are complaining because they are (reportedly) being margin-called, largely yelling on the internet that they are being margin called but weren't using margin therefore Robinhood is conspiring with George Soros or some shit, even though they technically were trading with Robinhoods money.
Should Robinhood be allowed to treat something as a trade on margin when the fact that it is on margin is papered over and the user clearly doesn't understand what they're doing? Probably not.
But this isn't Robinhood "manipulating the market to support Hedge Funds (or whoever the new enemy is today[0]); this is Robinhood having a gold-plated pile of dog-shit that they've been selling as solid gold for the last couple of years, and now the cracks are showing.
[0] I heard this morning that the new enemy who is trying to manipulate the market is the DTCC. Which is just... comical in my opinion, but hey, the internet is gunna internet I guess
Ok sure, but I still don't really see what's so bad about being margin called. Like even given that unlikely occurrence where RH might margin call you, what you get out of RH doing this still seems all around great for the user.
Margin calls typically end poorly for the user because they are highly correlated with the asset being in a negative position.
If you buy a $10 stock on margin, and it raises to $15, you owe Robinhood $10, and that is secured by a $15 stock. This is extremely unlikely to get margin called. Even if it does, you're up.
If you buy a $10 stock on margin, and it drops to $5 (even if just temporarily), you owe Robinhood $10 secured by a $5 stock, which puts them in a riskier position, and may margin-call to cut their losses. You get the $5 from the sale, but still owe Robinhood the initial $10.
I'm sure you can see how this can compound to amplify drops if a large number of people have bought the same thing, all on margin, and it starts dropping for whatever reason.
Edit: Follow-on
This is particularly "bad" if your goal was to "own the stock" (at pretty much any price) just so that someone else can't buy it.
