This is partially in response to Robinhood having a Checking/Savings account with a 3% return. Barron's does a good analysis:
<The money will be SIPC insured, but not FDIC insured like most savings accounts> “We don’t think that’s something that a lot of customers are going to be scrutinizing the details of, or will really see value in there being the difference between the two,” Bhatt says. “The product we’re offering has the same insurance amount, which is a quarter of a million dollars.”
It’s also not clear that Robinhood will be able to sustainably make money off this product.
The company says it will make money on the product by investing the proceeds in U.S. Treasury securities. The 10-year Treasury note was trading at 2.91% on Thursday, while the 30-year was at 3.15%. It will also share in the interchange fees that Mastercard (ticker: MA) receives when people use their debit cards.
Of course, if Robinhood can’t make money, this 3% deal could eventually evaporate. Like other checking and savings accounts, Robinhood rates can change based on changes in interest rates. Should rates fall, Robinhood could cut the amount of interest it offers to customers, though Bhatt says, “This is not a teaser rate.”
There are FDIC-insured bank accounts that pay decent rates, though not quite at this 3% level. The digital banking operation of Goldman Sachs (GS), Marcus, now offers a savings account that yields 2.05% <or like my credit union, .1%?!>. Those accounts are FDIC insured.
In a bond, you are buying an entity's debt, that they will pay you to do. (poor wording) Another way of saying it is that you're loaning money to an entity to buy an asset. It generally returns less than a stock because it isn't as risky, as the bond-owner has first dibs on the assets of the company if it goes bankrupt. The stock holder only gets the remainder of the assets.
An important factor in investing in a bond is its maturity, or the point in time that the amount loaned (the principal) must be repaid. Note: This is different than a house loan where the principal is repaid along with interest, however the expectation is still that the total amount will be repaid by maturity (“30-year mortgage”). In practice, the borrower can just re-issue more bonds to pay off the existing bonds when they come due and keep their total amount of debt the same. However, the maturity matters when you (the buyer of bonds) want to re-sell your bond on the open market before the maturity date.
to pay for an emergency that comes up.
How do they “make money”? In a stock, you get a share of the profits of the company. There's no “rights” to profits, other than promises from the company. These profits can be not returned (in the case of startups or Amazon) in which point you're hoping for a future larger return of money, returned via a dividends (kind of like interest) which *don't* change the stock price, or returned via stock buyback, which does increase the stock price (generally).
Where do they get a *very safe* interest from? An easy answer would be the Treasury's short term bonds