How is Robinhood Making Investing More Investor Friendly

Robinhood Investment Platform

When it comes to stock investors, they are mainly looking for two main things – an easy and a cheap way to invest. In this article, we are going to talk about a company which changed a lot of things in the stock broking space.

We will discuss a US-based company named Robinhood. Some six years ago when it was launched with $3 million of venture capital, very few industry experts thought that the startup would fundamentally change the financial services industry as we now know it. More than 100,000 people signed up for the app in less than a month and currently, they have over 6 million accounts registered with them.

Robinhood, launched in 2013, is an online investment and trading app which helps investors’ trade stocks, ETFs, options, and even cryptocurrency without paying commissions. Until recently, it was the only company that offered free trades and so it stood out from its competitors but now many big players have come up with similar features. Yet, Robinhood stands out from its competitors. It is one amongst the few brokers who give the option to investors to trade cryptocurrency.

Robinhood is estimated to have around $1,000 to $5,000 in average assets per account and according to the company as of May 2018, they have allegedly saved customers over $1 billion in commission fees. 

If you know how to use a smartphone you will have no difficulty accessing Robinhood. Inside the app, you’re treated to a bare-bones interface that emphasizes real-time market data. The interface is very easy to use and user-friendly. As an investor, you will see your investments and returns, how much your portfolio has gone up or down on a particular day, or zoom out to see price changes over the last week, month, three months, year, or the entire history of your account.Investing via Robinhood application

Though the trading is free with Robinhood, you can upgrade to some of their free/paid services to get in some additional features on your account –

Robinhood Instant – is a free upgrade to your account which allows you to use deposited funds instantly. You don’t have to wait for bank transfer to complete and settle to your sales. Basically, with this upgrade you turn your brokerage account into a limited margin account meaning Robinhood is fronting you the money and there is no fee or interest associated with the loan.

Robinhood Gold – is a paid upgrade service that turns your account into a margin account which means you are offered a line of credit for trading stocks and ETFs. It is important to know that margin account is an inherently risky strategy where you could end losing more than just your money. Robinhood Gold also gives you access to the same instant deposits as Robinhood Instant, plus access to pre-market and after-hours trading. You must have a minimum of $2000 in your account – as cash or as held securities – to upgrade to Robinhood Gold. Robinhood Gold currently starts at $6 per month for an extra $1000 of buying power.

Some areas where Robinhood stands out from its competitors are –

Free trading with no account minimum – Without any doubt, these are the top two reasons for using Robinhood. By lowering the entry level to literally zero, Robinhood gives the option to investors to play around with a small amount of cash. For experienced traders, the platform is even better since it gives them free trades and every penny saved in brokerage fee is investor’s profit.

Clean UI – The Robinhood’s mobile app is easy to use and navigate through. Unlike other companies, Robinhood was designed to be first on the mobile platform. While other company’s apps are mostly messy, overstuffed and outdated since they have moved from desktop to mobile. When you first use the app you will be amazed to see everything happens within the app in a matter of minutes, with just a few quick questions that gather your personal information, contact details, Social Security number and means of funding your account your account is created.

Robinhood uses instant verification with many major banks, sparing users the hassle of reporting micro-deposits to an account to verify the information.

Fractional shares – Robinhood is among a few brokers which gives the option of fractional shares. This means you can pay as little as a dollar for a portion of a share even though the share comes in hundreds of dollars. This is a huge advantage especially for investors who are just starting and they want to invest small but in large caps/quality stocks only. As an investor, you can build a diversified portfolio – you can buy more companies even with a small investment.

Improved research offering – The company has made strides to increase the tools and research available for customers over the past couple of years. They offer analyst ratings, earning calendars, a list of top movers, and links to earning calls. On the mobile device, you can access candlestick charts. They have also introduced some interesting and unique features like – investors can view popular stocks as well as ‘People Also brought’ on the lines of Amazon’s suggestion.

We have been re-iterating on the point that Robinhood is not charging its customers for trading. So the next question is – how is it making money?

Interest – A large portion of its money comes from the interest made by lending out the investor’s idle cash. They make money from the interest received from the customers stocks and the deposited cash just like banks collect interest on cash deposits. They also make money from rebates from market makers and trading values. They also make money from paid services like live broker trading via phone and also from foreign stock transactions.

Money from orders – According to the Wall Street Journal published in 2018, Robinhood makes money via orders also. For example, if a customer buys 100 shares of Google at $200 per share which is a total trade of $20,000, Robinhood will get up to $5.20 for routing that order to electronic giant Citadel Securities LLC.

Premium Account – Through its Premium account ‘Robinhood Gold’ it allows investors up to $1000 of margin, which allows them to trade more than the amount they have in their trading account.

Marginal Interest and Margin Lending – This is their major source of income. They provide a margin trading service which starts at $6 a month. The margin account’s minimum portfolio value has to be $2000. If you want additional margin loans, you can pay $6 a month and get an additional $1000 and continue borrowing money in a similar fashion. The margin will be 50% of your account balance. For a $200/month Gold tier, you’ll receive a charge for a 5% margin fee. For customers borrowing over $50,000, there’s an interest rate of 5% APR.

High Frequency Trading & order flow – Robinhood makes around 40% of its revenue from high-frequency trading and payment for order flow. They send your orders to market makers that allow you to receive better execution quality and better prices. According to Robinhood, they use market makers Citadel Securities, Wolverine, Two Sigma, and Virtu. The company has disclosed the names of market makers due to SEC Rule 606.

Rebates – Robinhood make some money from rebates though the percentage from rebates is considerably minimal.  Robinhood earns ~$0.00026 in rebates per dollar traded on its platform. That means if you buy a stock for $100, Robinhood earns 2.6 cents from the market maker.

The best thing about this company is that it is trying different things and methods to have an edge over its competitors. For example, in December the company announced that it would introduce “Robinhood Checking & Savings,” a product that would have a 3 percent interest rate for idle cash sitting in the customer’s account. 

If you are still wondering to use the Robinhood service or not let us make it a bit simple for you. Robinhood is a solid choice, if you are looking for a streamlined trading platform and the ability to trade cryptocurrency is important to you.

Let us know some of the best features your brokerage company provides to you.

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