Why Robinhood Is Not Free
Robinhood offers investors to make commission-free trades through its mobile app and website. Until October 2018, the company was generating half of its revenue from payments for order flow.
This is how a few thousands retail daytraders on Robinhood move the market: RH sells their orderflow to HFT algos who frontrun the trades and massively accentuate the momentum https://t.co/hlFBs8dEaL pic.twitter.com/HtT8OHHYZ0— zerohedge (@zerohedge) June 13, 2020
It was a controversial practice because the company receives compensations and other benefits when they direct orders to different parties, especially high frequency traders for the execution of the trade to build momentum.
For small retail trades, compensation is almost negligible because the company can earn substantial money by directing billions of dollars in trades to trade makers.
The main source of income of Robinhood is from
- Rebates from trading venues and market makers
- Moreover, Robinhood charges $5 fee for optional membership to Robinhood Gold, lending stocks purchased on margin, fees on the purchase when the company’s credit card is used, and interest on uninvested cash.
According to Robinhood co-CEO Vlad Tenev:
“Robinhood earns $0.00026 in rebates per dollar traded. That means if you buy a stock for $100, Robinhood earns 2.6 cents from the market maker.”
Why Robinhood is not free? Because it is still trying to make money. It is almost free as it offers commission-free trades, but it generates most of its revenue from rebates and interests. So, you can’t say it is completely free.
Full Review of Robinhood
It is a free-trading app that allows investors and traders to trade options, cryptocurrency, stocks, and exchange-traded funds without any fees or commission.
Recently, Robinhood stood as the only broker offering free trades. By the end of 2019, lots of big companies have started to offer free trades, and it has decreased the popularity of Robinhood a little. Robinhood is still a solid and preferred choice of traders because it offers you ease to trade cryptocurrency. You can trade via using their website or mobile app. Some traders are not satisfied with the mobile app because they think it lacks the account options and range of tradable securities.
Robinhood Is Best For?
- Individual taxable accounts
- Margin accounts
- Mobile users
- Computer or laptop holders
Why Should Robinhood Be Preferred Choice?
There are lots of areas where Robinhood shines; some of the major areas are given below:
When you have the facility to make commission-free trades, then what else can be better than this? It offers you the opportunity to make 100% commission-free trades in options, cryptocurrency, stock, ETF, and saving for investors. Every single dollar that you save in terms of commission is automatically added to your returns. Nowadays, lots of other brokers are also offering free trades, so it makes sense to look out for features before picking a broker.
Robinhood is committed to keeping other investor’s costs low. It has its own service clearing system so that you can save the service’s account fees as well. The biggest fee that Robinhood charges are the transfer fee when you want to transfer your investment to another broker and that fee is $75. One thing should be clear that there is no fee for selling your investments and when the money is transferred into your bank account via ACH.
Some brokers have set account limits, which means when you want to open your account, you will have to deposit that amount. But in the case of Robinhood, it is not required. When you want to purchase something, then definitely, you will have to make an investment. When it comes to portfolio balance, it is similar to other brokers, and you will be required to have $2000 for the opening of a margin account. It is the regulation of the Financial Industry Regulatory Authority (FINRA).
Like some other famous brokers, Robinhood has also introduced fractional shares. It means you can pay only $1 for a portion of a share, even the full price of a share is in hundreds of dollars. So, this feature allows you to build a diversified portfolio. You can still buy shares of many more companies even you don’t have lots of money to invest.
By the end of 2019, Robinhood started to offer a cash management account, and it pays 0.30%. You can collect this amount from more than 75000 ATM’s, and you need to have a debit card. It has agreements with many banks and offers up to $1.25 million of FDIC insurance.
If you are a mobile user and you have a smartphone, then you can easily enjoy the benefits of this broker app. You will notice that the sign-up and account funding process is quick. You will have to answer some basic questions about personal information, security number, contact details, and means of account funding. You will be able to set up your account within minutes. You will be notified within an hour about your account approval, and you can start bank transfers.
Robinhood has a proper system of verification with major banks, and users will have to make micro-deposits to verify their information, and it will happen within a few minutes. For investing, bank deposits up to $1000 are instantly available, but for deposits more than $1000, you will have to wait for 4 to 5 business days. It offers you ease to set up a deposit’s schedule on a weekly, biweekly, monthly, and quarterly schedule.
It can be the negative point of Robinhood because it doesn’t offer all the bells and whistles of a typical online stockbroker. It is ideal for those investors who know what they want. Robinhood is the platform where they can quickly execute their trades. Robinhood supports limit orders, stop-limit orders, market orders, and stop orders. The platforms, web, and mobile app offer a unique feature known as a collection in which stocks are organized by category or sector. On the web interface, collections are sortable, and investors can compare stocks side by side. On the mobile app, it offers a tab bar that includes watch lists, account statements, transaction history, and portfolio values, and you have quick access to all of these features.
Robinhood was a pretty good and solid choice for traders because it offers commission-free trades until 2018. Now, lots of online brokers have started the same thing, and it has lost some popularity. So, you will have to look and compare for the features before choosing any broker.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.