Robinhood has been somewhat of a phenomenon since it was introduced in 2013. A discount stock brokerage that offers commission-free trading, Robinhood has revolutionized an industry that had a reputation for being riddled with fees.
“We are not setting any accounts mimimums, which we think unlocks a market of investors who couldn’t do this before.”
– Baiju Bhatt, co-founder, at the Robinhood app launch in 2015.
How has that worked out? And can you trade using this platform? We’re here to answer those and more questions.
| Pros: | Cons | |
| Commissions-free trading | Limited range of products | |
| No account minimums | Limited trade analysis and research tools | |
| Fast account opening | Limited customer support | |
| User-friendly web and mobile app platforms |
Best for:
- Mobile-centric users
- Active day traders and margin traders
- Cryptocurrency traders
What is Robinhood?
Robinhood is an investment and trading platform that offers a commission-free model that allows investors to trade stocks, options, and cryptocurrency. It was launched in 2013.
When Vladimir Tenev and Bajiu Bhatt introduced the idea of a platform that offered commission-free stocks and exchange-traded funds (ETF) trading, many people did not take them seriously. This was, after all, in an industry where brokerages typically charged up to $10 per trade. They also required substantial account minimums.
But Robinhood’s co-founders were adamant and debuted the app to much fanfare. They both had previous experience building trading platforms for different financial institutions and were confident that they would snag the micro-investing market. They were not wrong.
In May 2020, Robinhood revealed that it had more than 13 million active users. As you would expect, that figure is significantly higher today. It has since raised more than $860 million in funding. As of 2020, the company was valued at $11.7 billion.
And Robinhood has acutely revolutionized the face of the industry. Today, free trades are almost the standard. Following what looked to be the success of its model to eradicate trading commissions, more companies began to emulate Robinhood. New fintech apps began to pop up offering their own no-fees trading.
And then even the largest firms capitulated and threw in the towel. Charles Schwab, TD Ameritrade, and ETrade began to offer commission-free trading to retail investors.
What Products Does Robinhood Offer?
When Robinhood came into the industry, it offered stocks and ETF trading. Those options are still on its line-up till today. Robinhood supports trading in more than 5000 stocks listed on the United States exchanges. It also offers trading in American Depositary Receipts (ADRs) for hundreds of companies.
It launched Robinhood Gold in 2016. Robinhood Gold is a subscription level that introduced high-level margin borrowing, larger instant deposits, and extended trading hours.
Robinhood has since diversified its product lineup. A year later, and it was into options trading. Like stock trading, options trading had a lot of fees attached. But Robinhood disrupted that with its no per-contract, no exercise, no commissions, and no assignment trading fees.
In 2018, Robinhood announced that the app would begin to trade cryptocurrency. The wait-list that was set up grew up to 1.25 million people in the first day alone. Like its stocks and ETF trading, trading in cryptocurrency on its app is entirely commission-free.
How Robinhood Makes Money
Robinhood toots a zero trading fees horn, so may be wondering if it makes any money. It is a business, after all. Well, it happens to be worth several billion dollars, so of course, it does make money somehow.
1. Payment for Order Flow
When investors place orders to purchase stocks, Robinhood sends the orders to entities known as market makers. These market makers in turn pay a fee to facilitate the orders on their platforms. Payment for order flow (PFOF) has been around for ages and makes a significant portion of Robinhood’s revenues.
It is a simple four-step process:
- The investor places trade orders on the app
- Robinhood passes trade order to the market maker
- The market maker pays Robinhood for the order
- Then the market maker executes the trade
What Robinhood earns per trade may seem insignificant on the surface (bare fractions of a cent). But considering how many traders use the app and the volatility in the market, it adds up pretty quickly. The market maker itself makes money through the disparity in the bid-ask spread.
Payment for order flow was introduced by a now-disgraced investment broker, Bernie Madoff. According to reports, Robinhood makes more than 50% of its revenues from this system. That is significantly more than competitors like Charles Schwab, ETrade, and TD Ameritrade.
Although it is controversial, it is entirely legal and is approved by the SEC.
Robinhood Gold
The second primary source of the company’s revenue is Robinhood Gold. It is a subscription-based service that was introduced in 2016.
This update comes with a lot of perks for the subscribers. Unlike the freemium version, subscribers are allowed to make large instant deposits without having to wait for the period it takes for free users. Large deposits from free users take anywhere from two to three days to be verified.
Robinhood Gold has a 30-day free trial. Once the free trial is over, Robinhood charges Gold uses $5 every month. It also extends the pre-market and after-market sessions for Gold subscribers. They get access to research and analysis reports and can trade on margins at a 2.5% annual rate.
Margin Lending
Robinhood Gold subscribers who have up to $2000 minimum balance in their accounts can trade on margins. In essence, this means that one can borrow money from the brokerage itself and then trade on securities.
Since margins are loans by nature, they come with interests. Robinhood makes money off the interest payments for margins.
Interest from cash deposits
Just like banks, Robinhood generates revenue from the idle cash in its clients’ accounts. It deposits this idle uninvested cash in interest-bearing bank accounts. The resulting interest accrues goes to the investment platform.
Revenue
| Year | Revenue |
| 2015 | $2.9 million |
| 2016 | $9.3 million |
| 2017 | $21 million |
| 2018 | $69 million |
| 2019 | $111 million |
| 2020 | $862 million |
Valuation
| Year | Valuation |
| 2017 | $1.3 billion |
| 2018 | $5.6 billion |
| 2019 | $7 billion |
| 2020 | $11.7 billion |
Pros and Cons of Robinhood
That brought a lot of disruption to the Investment industry. A lot of that has been good, but there have also been some downsides to Robinhood.
Pros
1. Zero-Commission Trading
Robinhood has disrupted the way the investment market works in terms of commissions and fees for trading. Before the company launched its app in 2015, investment brokerages charged investors anywhere from between $5 to $10 per trade. As you can imagine, that added up to quite a lot of money for active traders.
Robinhood does things differently. Stocks, ETFs, and cryptocurrency are all traded for absolutely no commissions. That revolutionalized the market, and now most brokerage firms offer free trading.
But what sets Robinhood apart from most brokerage firms is free options trading. Launched in 2017, it now presents an excellent choice for options investors looking to get into the market.
Other fees like per-contract, assignment, and exercise fees are not paid on Robinhood.
2. Account Minimum
Robin Hood eliminated the need for substantial amounts of money before investors can trade. With this brokerage firm, you can open $0 accounts. Freemium subscribers enjoy this perk. Robinhood Gold requires that subscribers have a minimum of $2000 to open accounts, which is the regulatory minimum.
3. High-yield Savings
Robinhood investors can take advantage of a cash management account offering that pays 0.30%. This feature is available to customers to make it easy for them to access their own invested cash. It combines features from checking accounts and interest-bearing savings accounts.
With the Robinhood Cash Management Account feature, users can have their paychecks deposited directly into their cash management balance. There are no monthly maintenance fees charged on the account, and there are no foreign transaction fees or transfer fees.
Additionally, users can pay their bills using the Robinhood app and enjoy the APY which is set at 0.30%. While it is not as high as you can earn from some of the best online saving accounts, it is still significantly higher than you will get from regular checking accounts.
4. Easy-to-use Web and App Platforms
With many of Robin Hood’s users being millennials and Gen Z demographic, Robinhood’s online platforms present an easy-to-use interface.
The sign-up and account verification processes are easy and almost instant. All that is required from you is your personal information such as your credit card information, phone number, and contact details.
Small deposits less than $1000 are processed very quickly. Large deposits take a few business days, but Robinhood Gold subscribers can have their large deposits processed instantly.
5. Fractional Shares
Fractional shares are an investment vehicle that allows you to invest in a company even if you cannot afford the full value of its stock. It is a small increment of the equity of a stock or exchange-traded fund.
Fractional shares mean that financial reasons can no longer limit investors from buying shares in companies. Instead, investors can buy fractional shares of stocks and ETFs for as little as $1.
Cons
1. Limited Range of Products
You can only trade in stock, ETFs, options, and cryptocurrency on Robinhood’s platform. Mutual funds, IRAs, 401(k) accounts, shorting stocks, futures trading, and bonds are not available on Robinhood.
2. Limited Research and Analysis Tools
Robinhood only offers rudimentary research and analysis tools. Granted, it has taken strides in improving in this area recently, but its resource base for technical and fundamental trade analysis is still very limited. It has candlestick charts and watch lists that are not very customizable and don’t offer a lot of information.
So far, Robinhood offers a collections feature that organizes stocks and funds based on the industry or certain features like upcoming earning reports. It also has an online educational Centre called Robinhood Learn, where users and the general public and find helpful articles that are relevant to trading.
Robinhood Gold subscribers, on the other hand, have access to a wider array of research and analysis tools.
3. Limited Customer Support
Robinhood’s customer support leaves a lot to be desired. Users can only contact the firm by submitting a complaint form. You can access the complaints form in the contact section of the website or mobile app. Robinhood does not have phone support or live chat channels.
Consequently, traders who have urgent complaints or inquiries must submit a complaint and wait indefinitely for a reply.
FAQs
Q: Is Robinhood completely free?
Yes, for most users. Robinhood has a subscription version called Robinhood Gold that requires subscribers to pay $5 a month. All other traders and investors do not have to pay any fees to use the brokerage. However, there is a $75 flat fee if you decide to transfer your portfolio from Robinhood to another brokerage company.
Q: How long do I have to wait after opening my account to trade?
Robinhood notifies new users as soon as their applications have been approved. As soon as you receive such a notification, you can make a bank transfer to your trading account. Account approval usually takes about an hour.
If you make a transfer of $1000 or less, it will be verified instantly, depending on your bank. You can trade with the money immediately. On the other hand, larger deposits can take up to five working days to be verified, unless you are a Robinhood Gold subscriber.
Q: Is Robinhood regulated by the SEC?
Yes. Like every other brokerage firm, the Securities and Exchange Commission (SEC) regulates Robinhood. SEC oversees the entire securities market. It has a mission to protect investors by maintaining a fair, orderly, and efficient market.
Q: Is my deposit protected?
Yes. Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA). It is also a member of the Securities Investor Protection Corporation (SIPC). The SIPC protects the securities of its members up to $500,000.