Robinhood investing + How does Robinhood make money?

Robinhood is an investing app launched in 2013. Robinhood offers commission-free stock, options and ETF trading, and cryptocurrency trading. Robinhood has been called a disruptor in the world of brokerages. It earned this name because of its user-friendly interface and zero commission fees. Learn how you can trade and invest through the app and how does Robinhood make money.

Robinhood login

To login into the Robinhood app, first you have to download it. Here are the links for it: App Store, Google Play.

After you download the app, you have to register for an account. The process for creating an account is straightforward and fairly simple.

First, you have to enter basic contact details such as your name and email.

Next, you’ll proceed with identity verification. You’ll have to enter details about your home address and SSN.

Lastly, you’ll have to verify your bank account. Most banks and credit unions operating in USA are accepted.

After verifying your identity, you’ll have to make a transfer from your bank account to start trading.

Robinhood investing review

Robinhood app is good choice for casual traders who don’t need sophisticated platforms for financial analysis. If a trader is just going to make under 10 trades per month on blue chip stocks or ETFs, then Robinhood is the right choice.

The application has a user-friendly interface. Robinhood app is easy to use, and the users don’t have to dig deep into the app to find the functions they need.

The sidebar lets users easily select the function they want to use. The main screen offers an overview of the portfolio of the trader.

The main disadvantages of using Robinhood instead of traditional brokerages, is its customer support and the limited availability of trading options. Users complain that Robinhood support is hard to access, and that it takes days for them to reply. In October of 2018, Robinhood offers these trading options: stocks, ETFs, options trading, cryptocurrencies.

For a first time trader with minimal experience in trading, Robinhood can be a good choice. For traders with more experience, the zero commission fees may be tempting. However, the lack of more advanced trading options, analysis software and traditional customer support are reasons why experienced traders haven’t made the move to Robinhood.

Robinhood ETF

An ETF (exchange traded fund) is a way to make a conservative investment. A great explanation of what ETF is can be found here.

To simplify, owning an ETF is like owning a small part of stocks of many companies. Since an ETF is made up of many stocks, even if some of the stocks’ value drops, the total value of the ETF won’t likely drop.

Why? Because an ETF is composed from many stocks. Even if some drop in value, others may increase or stay the same, hence the value of an ETF staying the same.

A simple how to on how to buy an ETF through Robinhood:

  1. Open the Robinhood app on your phone;
  2. Search for an ETF you want to buy;
  3. Select the ETF you want to buy from the search results;
  4. Tap Trade;
  5. Tap Buy;
  6. Enter the quantity of ETF units you want to buy;
  7. Check the price you are willing to pay for the ETF;
  8. Proceed with the transaction;
  9. Wait a few minutes until the transaction is processed;
  10. Now you own a unit(s) of ETF. Congratulations!

Robinhood day trading

Warning: according to FINRA (Financial Industry Regulatory Authority), a pattern day trader, defined as “any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period” has to have a margin of $25,000 in order to trade. A day trade is defined as a trade of a security that is opened and closed on the same day (The American Heritage® Dictionary of the English Language, 4th Edition).

Otherwise, if you manage to gain pattern day trader status without being able to supply $25,000 for margin, your trading account will be locked for 90 days.

If you are able to supply $25,000 for day trading, then you can day trade on Robinhood or any other investing platform.

Robinhood day trading is done in the same way as in other trading platforms. One disadvantage of Robinhood is that the platform is only accessible through mobile apps. While trading on the go is great, when you’re day trading, you’ll likely want to have an access to a desktop platform. Since most desktop platforms offer deeper analysis capabilities, day trading is easier on them. However, you can use financial analysis websites for doing your reasearch, and just use Robinhood to day trade.

Be aware that Robinhood does not have customer services like traditional brokers have. A traditional broker will have dedicated phone numbers and website sections for accessing customer service. Customer service on Robinhood is only accessed through email. That means, if you’ll have a problem that requires a live conversation, you’ll only have emails to communicate with your broker.

That’s the cost of commission-free trading. It’s up to every trader to make the choice if they’re willing to sacrifice extensive customer support for zero trading fees.

How does Robinhood make money?

Robinhood offer three type of accounts: Cash account, Robinhood Standard and Robinhood Gold. Robinhood Gold costs $10 per month and is one of the main sources of revenue. Also, Robinhood lends money for traders. The company makes money off of the interest traders pay.

The last way the company behind the app makes money is by selling their customers’ trades to high-frequency traders. To simplify, Robinhood does not execute their customers’ trades. They sell them to other traders, who execute them. The problem is, that this practice allegedly hurts Robinhood customers. That’s because the traders who execute the trade do not have to seek or offer the best price to the customers.

Alternatives to Robinhood

Differences between trading platforms. Banks, brokerages, disruptors.
Differences between trading platforms. Copyright: Money Bear Club.

Robinhood is only available in USA. For European traders, the only zero commission option available in October 2018 is Other European brokers charge their traders commission fees.

Well-known brokerages such as Degiro, Interactive Brokers and Swissquote have attractive online trading platforms and their own benefits and disadvantages. Just a simple search for “best brokerages” or “best trading platforms” will help an aspiring trader to choose the platform that best suits their needs.

However, Robinhood also has a desktop platform. It follows the similar and easy to use design from its app.

Update, November 2018:

Robinhood Forex trading: is it possible to trade Forex on Robinhood?

Forex, or the foreign exchange market is gaining traction. More investors are signing up on Forex platforms. However, Robinhood Forex trading is not possible at the current time.

Robinhood was founded as an affordable stock market trading company. Although it offers the ability to trade cryptocurrencies, it is not possible to trade currencies of different countries on Robinhood. Hence, Robinhood Forex trading does not exist.

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5 thoughts on “Robinhood investing + How does Robinhood make money?

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