Is Robinhood the most revolutionary trading app out there?
Robinhood has changed the game when it comes to investing apps. Being able to trade stocks, options, cryptocurrency, and exchange-traded funds without paying a penny in commissions or any hidden fees.
The free-trading app Robinhood opens the door for beginners, or even experienced investors for that matter, if you’re looking to jump head first into the game you can now do it without losing money before you even begin.
Before we dive into all the jargon you should read Every stock market term you will ever need to know!
Robinhood - the cheapest most revolutionary investing app
Robinhood is known as the app that created commission-free trading. They have revolutionised the game by offering commission-free trades on cryptocurrency and options trades. This platform is designed with beginners at its forefront. It is meant to be the most straightforward trading platform out there.
Often, people will call Robinhood groundbreaking. This is a fair statement. Robinhood started the new industry of free trades. Before that, you had to pay hard-earned money to place trades. There was no such thing as a commission-free trading app. We consider Robinhood to be both one of the cheapest options out there and also revolutionary being the first of its kind to offer this!
If you're a beginner looking for the best trading platform you can check out our reviews of Webull vs eToro vs M1 Finance: The best free trading platforms!
The History Of Robinhood
Ten years ago, two friends and aspiring finance wizards at Stanford University launched Robinhood. Following graduation, they headed to New York City, where they had great success building two finance companies selling trading software to hedge funds.
Along the way, as they gained familiarity with the systems used in the world of finance, they realised that big Wall Street firms pay almost nothing to trade stocks, while most Americans must pay up to $10 for every trade.
They made it their mission to find a way to give everyone, even people without significant wealth, access to get into the financial markets. Two years later, they headed back to California and established Robinhood, a company that leverages technology to encourage everyone to participate in the broader financial system.
How To Open An Account
It’s amazingly simple to open a Robinhood account, you can even do it right on your smartphone. Just plug in a few answers, like your contact info and how you’ll fund your account, and in less than an hour, approval notification will be sent to you by Robinhood. Then it’s onto the next step: launching your soon to be profitable investments.
Don’t have the cash to open a big account? No worries. Robinhood doesn’t have a purchase minimum, which means investors can get started right away. Of course, to invest, you’ll need enough to purchase the investment you have your eye on. But you can start small, then gain momentum as you go along and become more confident and acquire more know-how.
It sounds too good to be true, but you really can open an account with a $0 minimum and $0 trading commission. Thanks to Robinhood, the stock market is now more accessible than ever before. You used to need a few hundred if not a few thousand to open a trading account. Now, you could do so with as little as $1!
Before you open a brokerage account anywhere you need to be aware of the risks of investing and how it all works, please do your own research and check out our beginners guide to Understanding the stock market.
Clearing By Robinhood
To offer this platform for free, Robinhood had to figure out how to operate as cheaply as possible. Clearing by Robinhood was a massive step in cutting service fees. Now, Robinhood operates its clearing system, chipping away at many of the service’s account fees. How does this benefit you? You used to pay $10 for broker-assisted phone trades, that fee is now zero. What’s more, Robinhood whittled down any bank reversal fees to $9 from $30. Remember, every dollar you save means more cash you can funnel back into your trading account.
How Is Robinhood Free?
How does Robinhood make its profit? We have an answer for that. Robinhood is leveraging technology and operating a paperless business to be able to offer investors a commission-free and fee-free investing experience. Instead of charging a commission on trades like a traditional brokerage, they make money in a few different ways:
- They earn interest on the uninvested cash held within brokerage accounts.
- They offer Robinhood Gold, a paid subscription.
- By lending shares to short-sellers, they can earn interest in the process.
- By directing order flow, they can earn a fraction of a cent on each trade placed.
- They offer margin trading, allowing them to earn margin interest.
Instead of following the old school business model of charging customers fees and commissions, they have found a more creative way to make money. They have a lean business model and can make a few pennies here and there from each customer.
What Is Robinhood Gold?
Robinhood Gold gives investors who can tolerate more risk the ability to trade on margin, which is also known as borrowed money. You must opt into the service, which has a flat monthly fee based on margin, Robinhood refers to this as buying power, as well as your account size. If you’re new to investing you need to be aware of the risk when taking margin as it is basically a loan against your account, and you do not want to go over your limit, so on a 50-to-1 margin if you trade using $1 Robinhood will lend you the other $49, but if you lose it they will ask you for it. We say think twice about this option for now until you’re familiar with all the ins-and-outs.
Many online stock apps offer up-to-the-minute education and valuable advice in much the same way a stockbroker would do. So, do your homework ahead of time. The most successful Robinhood users do the research and are totally informed about where they want to invest. Trades can be executed in a flash, as Robinhood handles market orders, stop orders, limit orders, and stop-limit orders.
But enhanced information for users is in research and development at Robinhood, as they now offer analyst ratings from an independent investment research company. You can also scour lists of the top movers and earnings calendars. Want to know how other investors are doing? You can take a look at the most popular purchases, as well as how many got in on the deal and how much each investor paid per individual share.
Robinhood uses instant verification with many major banks. Bank transfers of up to $1,000 are available immediately for investing, and the same goes for profits of up to $1,000 from selling stocks. Deposits more substantial than $1,000 will take around five business days to process. If you want to invest in a schedule you can set up automatic deposits out of your bank account weekly, biweekly, monthly or quarterly.
Get a FREE Stock on Arrival
There’s even a way to get free stock. All you need to do is open a brand new account, and Robinhood will add one share of free stock to your account when they approve your brokerage application. You’ll be able to keep the stock or sell it after two trading days.
How does Robinhood choose which stock you get? They select the shares of free stock randomly from their inventory of settled shares. The keyword here is random. Because the shares are chosen randomly, you may not receive the same stock as others who open accounts at the same time as you do so don’t get annoyed if it turns out to be a loser.
The value of the share you receive may be anywhere between $2.50 and $200 and fluctuates based on market movements. Robinhood selects companies based on the price of each share, from the most popular and highest total value companies on Robinhood.
Basics: Robinhood Features
- Zero Commissions
- Robinhood allows users to trade stocks, ETFs, options, and cryptocurrency completely free. There are no strings attached or hidden fees of any kind.
- Simple App Design
- They have the most straightforward user interface of any investing app we have tested. We can 100% say that Robinhood is a beginner-friendly app.
- Robinhood Gold
Robinhood Gold allows you to take advantage of several different features. First of all, you can increase your buying power by trading on margin. Robinhood extends you a loan to purchase stocks relative to your account value. You need to have at least $2,000 in your account to open a margin account. It also allows you to have instant deposits from your bank and professional research reports from Morningstar.
Robinhood Fee Structure
This is a 100% free trading platform. They do not charge any hidden fees, and there are no strings attached. There is no minimum balance to open an account; however, you do need to have $2,000 to open a margin account.
Where Robinhood Shines
- Easy to use, beginner-friendly platform.
- Ability to trade stocks, ETFs, cryptos, and options.
- Access to margin through Robinhood Gold.
- Free pre-market and extended-hours trading.
Robinhood paved the way for commission-free trading and continues to live up to its reputation, one satisfied client at a time. Dare we say Robinhood is revolutionary? Yep. If it weren’t for them, millions of investors would be dumping money into commissions and fees. They have changed the game forever. While there is a variety of free investing apps out there now that piggybacked off this business model, we have to give them credit for being the first. This is one of the cheapest ways to get started with investing because you can’t beat free.
Controversy For Order Flow
A Wall Street Journal article stated that Robinhood “appears to be taking more cash for orders than rivals”, by upto a 60-to-1 ratio, according to regulatory filings. Find the article here.
Bloomberg News reported in October 2018 that Robinhood receives almost half of its revenue from payment for order flow. The company later confirmed this on its corporate website when asked by CNBC.
The revenue Robinhood gets from a controversial practice of selling customer trades to high frequency trading firms is skyrocketing, according to new research. But the so-called “payment for order flow” practice remains opaque and controversial. But it’s common among other Wall Street broker dealers like TD Ameritrade, Schwab and E*Trade.
Security Risk July 2019:
In July 2019, Robinhood admitted to saving customer passwords in cleartext and in readable form across their internal systems, according to emails it sent to affected customers. Robinhood declined to say how many customers were affected by the error and the spokesperson claims that the company did not find any evidence of abuse.
Breakdown of what you need to know
When it comes to free trades, you won’t get what you’re not paying for. Most online brokers charge a fee that ranges from $1 to about $7 per transaction, and they offer an abundance of research, news, charting, and educational resources alongside the trading engine. Robinhood’s marketing message implies that a brokerage commission is a ripoff and that the research provided by other brokers is overrated. But keep in mind that if you are not paying a commission, you’re not the customer – you’re the product, and your trades are sent to market makers who pay Robinhood for that business, which means you may not get a quality fill on your order.
Robinhood disputes this opinion about their order routing practices. Vice President of Product Josh Elman says, "We send your orders to the market maker that’s most likely to give you the best execution quality, which includes price improvement." The price improvement statistics reported to us for this survey were much lower than the industry average, however.
Overall I would recommend Robinhood to beginners and intermediate traders, once you have a solid portfolio and have established a research technique you might find it time to move away.
Do make sure to do your own research when it comes to investing. I am not an advisor, this is just my opinion based on extensive research and experience with the platform, investing can be very risky and you need to be aware of these risks before you dive into the market.