How Does M1 Finance Make Any Money?

Investing Simple is affiliated with M1 Finance. This relationship does not influence our opinion of this platform.

Times have changed, and investing in the stock market is not the same as it was 10 years ago. The rise of the roboadvisor and algorithm based trading have taken the brokerage industry by storm. One of the most established examples being M1 Finance.

M1 Finance has an offer that on the surface might seem too good to be true. First of all, they offer commission free trading. Second of all, the minimum account balance is just $100. Is M1 Finance operating as a charity? Not quite.

First, M1 Borrow

M1 Finance makes money in a couple of different ways. The first way that M1 Finance makes money is by offering a feature known as M1 Borrow.

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M1 Borrow

M1 Borrow allows investors to take out a portfolio line of credit. Your investments in your M1 Finance account serve as the collateral. M1 Borrow allows you to borrow up to 35% of your M1 Finance account balance at an interest rate of 3.75% per year. Essentially, M1 Finance extends a loan to you and in return if you do not pay it back they can sell your investments to cover the loan. The risk on M1 Finance is relatively low, so this is easy money.

Second, lending shares to short sellers 

Short sellers are borrowing shares to bet against them. Short selling is a relatively complicated subject, and that is a topic for another article. However, M1 Finance is able to loan shares held by investors to short sellers and profit from doing this.

Third, uninvested cash in your account

You know that cash sitting in your investment account? Depending on what brokerage you are using, you may or may not be earning interest on it. Free investing platforms like M1 Finance do not offer interest on the cash in your account. Instead, they keep the interest earned on the cash balances.

On a cash balance of $10,000 this could be as little as $50 per year. However, when you consider that M1 Finance has millions of dollars in cash sitting in investment accounts these small bits of money add up.

Fourth, directing order flow 

Brokerage accounts like M1 Finance can receive commission or compensation for directing orders to different parties for execution. The brokerage receives a small payment for directing the order to different parties.

Between these methods, M1 Finance is able to make money and offer a brilliant investing platform completely free.

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