Robinhood: Commission-Free Stock Trading and Investing App
Robinhood is a commission-free investing and trading platform. Robinhood's users can buy and sell stocks and cryptocurrency through their iOS and Android mobile trading apps.
The company was founded in 2013 as a discount brokerage with the mission of revolutionizing investing and making it accessible to everyone. When most brokerage firms charged $10 or more for trade, trades through Robinhood were commission-free.
Robinhood's commission-free trading has been so popular that it forced larger brokerages to reduce their commissions or cut them to zero.
Pros and Cons of Robinhood
- No trading or commission fees.
- No subscription or account maintenance fees.
- No account minimums.
- No fee to trade cryptocurrency.
- Ability to buy partial stock or ETF shares.
- Easy to use.
The app is incredibly user-friendly and makes buying and selling stocks not more difficult than playing a mobile game. This doesn't sound like a con, however, the app's one-click trading and gamified approach to investing makes it too easy to trade. As a result, Robinhood's users trade frequently and make decisions quickly. According to a study, investors who use Robinhood trade several times more often than investors who use traditional brokerages.
Ease of use and instant access to your investments can provoke impulsive trading. For example, when you just need to make a few taps on your phone screen to make a trade, it's easy to react to market volatility or jump on the latest "hot" stock. However, emotional investing is an approach that rarely pays off. Read about how emotional investing can cost you.
Multiple studies have shown that passive investing, a strategy centered on buying and holding assets for the long term, yields far better results than frequent trading in response to short-term fluctuations in the market.
For that reason, for some investors, Robinhood's ease of trading may be a con, especially for those who are new to investing and don't have a solid investment strategy.
Investments Available on Robinhood
Robinhood offers stocks, ETFs, options, and cryptocurrency trading.
How Does Robinhood Make Money?
Robinhood makes money from premium membership fees, interest on uninvested cash, stock loans, Robinhood's debit card fees, and some other revenue streams. But most of Robinhood's revenue comes from the practice called payment for order flow.
Payment-for-order-flow (PFOF) is the compensation for sending trades for execution to a high-frequency trading firm. These firms are also known as market makers.
This is how it works - a person places an order to buy or sell investments through Robinhood. Robinhood bundles all received orders and sends them to another firm that executes trades at high volumes. The firm executes trades on the terms that are most beneficial to them and then compensates Robinhood for sending orders.
This revenue model has received some criticism as payment-for-order flow is seen as controversial. This model may incentivize Robinhood to hold onto orders and wait for a market maker that will offer the highest compensation, rather than sending orders quickly to market makers that will execute the trades in the best interest of investors.
Others acknowledge that this business model has made trading considerably cheaper and more efficient than in the past, and more firms have turned to payment-for-order flow.
Who Is Robinhood Best For?
With zero trading and commission fees, no account minimums, or account maintenance fees, Robinhood appeals to new investors who don't have much money and want to start investing in individual stocks.
Robinhood may also be an option for people who want to invest in cryptocurrency with little money. Although Robinhood lacks some of the more advanced features of large cryptocurrency exchanges, the account minimums, zero commission fees, and ease of trading may make the app a better choice.
How to Start Investing with Robinhood
Opening an account with Robinhood is all it takes to start investing. You must be 18 years old or older, have a valid Social Security number, and live in the United States.
Sign Up for a Robinhood Brokerage Account
So is Robinhood good? Robinhood is merely a platform that allows investing in the stock market and cryptocurrencies. Regardless of platform or brokerage, new investors should understand that any investment involves risk. If the motivation is only to make some quick cash, then it's unlikely that any investing app will be the right choice. But with the right approach, Robinhood can help new investors to start their trading journey without financial commitments.