Did you ever think you could trade stocks for free? Before the dawn of the Internet, it might have cost $50 or $100 to trade a stock through a human broker over the phone. As the Internet took off, we saw the evolution of “$7 online trades” and instant quotes.
Now a technology company, Robinhood, is not only reducing stock transaction costs, but eliminating them altogether.
Catering to the tech-savvy millennial crowd, Robinhood broadens access to the U.S. financial markets for everybody by offering an investment platform that runs on smartphones and innovative applications. With their mobile app, investors can buy and sell individual stocks straight from their smartphones with only three clicks. Meanwhile, the company is targeting bargain hunters and convenience-hungry consumers by offering free trading and no minimum balance requirements.
Sounds like a great deal for investors — but can a brokerage company really survive using this model? Let’s take a look at how it all works.
Robinhood at a Glance
Robinhood is a technology-driven brokerage firm that is poised to become a disruptive force in the online investing world. By cutting their overhead and charging no commissions on trades through their smartphone app, Robinhood hopes to “democratize access to the financial markets.” So far, they have secured over $66 million in venture capital, allowing the company to focus on creating a flawless user experience rather than trying to drum up short-term profits.
Types of Accounts Supported
- Cash accounts
- Margin accounts (in testing phase)
- IRA accounts (coming soon)
- Custodial accounts (coming soon)
- Joint accounts (coming soon)
- No commissions
- No minimum balance requirement
- Available on Apple iPhone, iPad, and Apple Watch
- Available on Android devices
- Supports market orders, limit orders, stop limit orders, and stop loss orders
At the moment, use of the Robinhood app is completely free. While it may be hard to believe, they aren’t currently charging customers anything to make a trade.
That’s right; Robinhood doesn’t charge any fees for opening an account or funding it with a linked checking or savings account. And if you choose to receive electronic statements and trade confirmations, you can avoid fees altogether. If you prefer paper statements, on the other hand, you can pay just $5 and $2 per month for statements and confirmations, respectively. Robinhood charges $10 for broker-assisted trades made over the phone, but that service is optional.
How Robinhood Makes Money
With revenue from fees limited, how does Robinhood expect to make money? Most likely, it will be two ways: margin and float.
According to Robinhood’s founders, the company will be making margin accounts available to the public in late 2015. In simple terms, margin accounts allow investors to borrow money from the brokerage firm. Once investors invest the money they borrow, they are charged an interest rate for the loan, just like they would at any bank.
Once Robinhood makes their margin accounts available, the interest rate could be between 3.5% and 5%, according to Barron’s. Keep in mind, however, that this interest rate applies only to margin accounts and won’t affect cash accounts.
Robinhood also makes money through the uninvested cash balances of their customers, or the “float.” Unlike many brokerages that pay investors interest on these balances, Robinhood invests this money into federal Treasury securities at the “risk-free” rate, earning a small return on investors’ money when it’s not in use.
Since the firm is clearly targeting investors with small starting balances, most investors will not have enough cash on hand to earn much interest anyway — but add it all up, and Robinhood can make a bit of money on those uninvested balances.
Like all brokerage firms in the United States, Robinhood is a registered broker-dealer with FINRA & SIPC. APEX Clearing Corp. handles the trade confirmation, settlement, and securities delivery for Robinhood. They are also registered members of FINRA & SIPC.
What is Robinhood?
Robinhood is a U.S.-based stock brokerage firm that allows investors to buy and sell U.S. stocks and ETFs listed on U.S. markets with their smartphones. The company has been built with efficiency in mind, eliminating high overhead costs like storefronts, manual account management, and expensive advertising. Because of this, Robinhood is able to keep costs low with no commission fees on all trades.
Robinhood is not a financial advisor. Instead, they are merely a brokerage firm. All trades and transactions are user-directed through the Robinhood app.
Robinhood’s Main Features
Trade for Free
Yes, it is true. With Robinhood, you will never pay a commission fee for making trades. Ever. By default, this makes Robinhood the cheapest brokerage in the online marketplace for individual investors by far. Do note, however, that the U.S. Securities and Exchange Commission and FINRA charge a $0.002-per-share fee on all trades. Those fees are passed through Robinhood to the regulatory agencies, but Robinhood does not gain any financial benefit.
No Minimum Balance Requirements
In addition to commission-free trades, Robinhood woos bargain hunters and frugal investors with no minimum balance requirements. Because of this, investors can open a cash account for free without any obligation to keep their cash balance above a certain threshold.
While this is a great feature for those starting out with small balances, this is also beneficial for new investors who want to dabble in day trading.
The Robinhood App
Investors wanting to trade through Robinhood will need to download the Robinhood mobile app. The app is easy to use and is available on both Apple- and Android-supported devices.
With just three clicks, investors can buy or sell securities directly from the app. Customers can also sign up to receive important notifications regarding their account balance or current trade details. Thanks to Robinhood’s app, you can buy, sell, or trade stocks from anywhere — as long as you have an Internet or cell connection.
Real-Time Market Data
While other brokerages may delay quotes, Robinhood is able to supply their customers with market data in real time. Like almost everything else with this app, access to real-time data is free. The company also claims to have built a “low-latency trading system” that executes trades quickly so you don’t miss out on rapidly changing market conditions.
While Robinhood is only servicing cash accounts at the moment, they have plans to offer more features and investing options in the very near future.
By the end of 2015, Robinhood hopes to have its margin accounts open to the public. (They are currently in the beta testing stage.) Meanwhile, the company has also announced its intention to add custodial, joint, and IRA account support in the future.
What Robinhood Lacks
No Physical Location
Branch locations can be a huge cost to any brokerage firm, which is part of the reason Robinhood has taken these out of the equation. This is obviously a huge benefit, since low overhead is part of the reason Robinhood can offer no-commission trades. On the other hand, it also means that beginning or struggling investors won’t be able to walk into a branch to get advice on their investment strategy. With Robinhood, you’re on your own, which is definitely something to keep in mind.
Basic, No-Frills Website
Another way Robinhood is able to keep costs down is through their platform. Currently, the firm does not offer a full-service website. Because of this, all transactions must be completed through the app itself, and Robinhood is unable to provide detailed charts, graphs, or analysis. Essentially, this means Robinhood investors must do their research elsewhere before making trades through the app.
No News Feeds
The Robinhood app also steers clear of the latest Wall Street news, which presents a huge downside for many investors. While this may not be a deal-breaker — and in fact, ignoring the financial media hysteria can be beneficial to long-term investors — it shows you are truly on your own when it comes to researching stock market trends and figuring out which moves to make.
Who Would Benefit From Using Robinhood?
- Day traders and other high-volume traders. Investors who enjoy making multiple trades a day can save a lot of money by taking advantage of Robinhood’s commission-free trading structure. Over the course of a few weeks, this could add up to hundreds (if not thousands) of dollars in commission savings for investors who make a lot of transactions.
- Millennials and other tech-savvy investors. Robinhood is clearly targeting young investors. The app is geared toward demographic groups who not only know how to use the technology, but also those who are comfortable making large purchases and transactions online or with their phones. If you want to buy and sell securities directly from your mobile device, Robinhood may be your best option.
- Investors with low cash balances or those looking to dabble in individual stocks. For investors who may not have a lot of cash on hand, Robinhood is a great place to get started. Customers will enjoy no minimum balance requirements, which is another enticing option for the 18-29 crowd. The no-minimum-balance requirement is also attractive for investors who just want to dip their toe into investing in individual stocks.
Who Is Robinhood Not Good For?
- Investors who want to fund their retirement accounts. At the moment, Robinhood does not support individual retirement accounts of any kind. While they plan to offer this service in the future, the company currently only supports cash accounts and the soon-to-be-released margin accounts.
- People who want investing advice. Robinhood is a brokerage firm, but not a financial advisor. If you are looking for financial planning advice, you should look elsewhere. There are plenty of online financial advisors available, and we have reviewed quite a few of them already, such as Personal Capital, Wealthfront, and Betterment.
- Hands-off investors. The beauty of Robinhood is the fact that it doesn’t charge individuals for their trades. While it is a great resource for do-it-yourself day traders, investors who need some help might be better off using a firm that offers assistance and advice to its investors. Furthermore, Robinhood requires you to make all trades yourself. So, if you like to keep your hands free from the mechanics of trading, Robinhood may not be for you.
Getting Started With Robinhood
Registering your account with Robinhood is easy. Just head to Robinhood.com and click the green “Sign up” button in the top right corner of the page. Then:
- Create your profile.
- Enter your contact info.
- Use your Social Security number to verify your identity.
- Add funds to your new account.
With only a handful of steps to complete, the entire registration process should take less than 10 minutes.
Wrapping Up With Robinhood
Will Robinhood be able to survive and thrive with their current pricing model? Only time will tell. With that being said, it might make sense to try the service if you’re young, tech-savvy, and planned to invest anyway.
Personally, I look forward to exploring how it compares to other day trading sites on my own, and finding out how it’s no-fee structure might affect the industry overall. Once again, we’ll have to wait and see.
Had you heard of Robinhood? What do you think about no-fee investing? Is it sustainable?