Whether you’re a hobby trader, a pro investor, or you’re someone who follows the news closely, you’ve probably heard of Robinhood — an online trading platform that’s popular among newbie investors and those with self-directed portfolios.
What is Robinhood?
Founded by two Stanford grads on a mission to provide more access to investing and to “democratize finance for all,” Robinhood provides stock trading, cryptocurrency investing, EFTs, and options.
How does Robinhood work?
To use Robinhood, users create an account on the iOS or Android app. To begin trading, you apply by entering in all of your information — email, name, address, phone number, date of birth, and Social Security number — all of the typical info you’d need to create an account with a brokerage. Once you create an account and it gets approved, you fund your account and you can begin investing. The sign-up process is similar to that of other online brokerages. There may be a few-day waiting period between the time you sign up and when you can begin trading.
On the Robinhood app, you can see data about different stocks like pricing info, news stories, and analysts ratings. You can use this info, coupled with other published information and your own trading strategies, to make investing decisions. You can buy stocks in shares or even fractional shares (as small as (1/1,000,000 of a share). This allows you to invest in pricier shares without such a large investment. You can also purchase stock by the dollar amount instead of by the number of shares. More advanced traders can also take advantage of other strategies like options trading and margin.
Does Robinhood have fees?
Robinhood offers “commission free trading” like some other self-directed platforms, but this doesn’t mean you always pay nothing to trade. You may incur regulatory fees and other non-commission fees. You also pay interest on margin at a rate of 2.5% annual interest of the settled margin above $1,000 (if you use that service).
How does Robinhood make money?
Robinhood makes money through rebates, margin interest, stock loans, uninvested cash, and cash management. Here’s a brief rundown of each revenue stream:
- Rebates: Market makers help make securities more liquid so orders go through more quickly and easily. These firms (usually banks or financial institutions) may offer rebates to brokerages, and Robinhood makes some revenue off of these rebates.
- Margin interest: Margin is money you borrow from a brokerage’s clearinghouse to purchase more investments. Robinhood makes money off of the interest they charge for letting people borrow this money. Robinhood’s clearinghouse may also lend margin securities to counterparts and make money from those transactions.
- Uninvested cash: Robinhood may place uninvested cash in interest-bearing accounts and make money off of that.
- Cash management: Products like the Robinhood Debit card and other money management products can also generate revenue for the platform.
Is Robinhood safe?
With any trading platform, you face the risk of serious financial losses if you make a high-risk investment. As a brokerage firm, Robinhood is regulated by the SEC (Securities and Exchange Commission), which is designed to ensure fair practices. This doesn’t mean Robinhood can never do anything wrong, but it should mean unfair practices should not be able to continue for any significant length of time. Robinhood has faced scrutiny for some of its practices, particularly removing stocks or blocking trading on certain stocks.
Personally, as a longtime hobby trader, I choose not to use Robinhood. I prefer other platforms like TD Ameritrade and Ally Invest.
Is Robinhood FDIC insured?
Robinhood itself is not a bank, but if you opt into Cash Management, your uninvested funds go to a network of banks. According to Robinhood’s site, “through Cash Management, cash deposited at these banks is eligible for FDIC insurance up to a total maximum of $1.25 million (up to $250,000 per program bank, inclusive of deposits you may already hold at the bank in the same ownership capacity) … Robinhood Financial LLC is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org.”
Is Robinhood legitimate?
Yes, Robinhood is a legitimate trading platform.
Is Robinhood Gold worth it?
It depends on your trading activity. Robinhood Gold is a $5-per-month subscription that gives you access to perks like higher instant transfers and professional market data. If you value additional data and the ability to instantly transfer larger sums of money, it might be worth it to you.
