Robinhood app for traders is gaining in popularity due to its commission-free structure. Anyone who has been trading for a while knows that the aggregate commission can sum up to a substantial amount. Robinhood removes the commission system making stocks cheaper for the investor. For every trade, the average commission ranges between $3.95-19.99. Hence, for someone who’s an active trader, the amount can sum up to nearly $200. To part with such a huge sum of money as the commission can eat a portion of your earning. No doubt, traders are delighted with the Robinhood app.
Pros of Robinhood App
For an active trader that makes a minimum of 10 trades per day, trading firms like E*TRADE or Ameritrade would cost nearly $200; whereas, the same service would cost nothing using Robinhood. If you aggregate the entire amount of commission you have to pay to the broker it’s nearly $52K per year.
Besides offering no-commission trade, there are other things that make Robinhood such as catch, their mobile app is highly intuitive, perfect for any new broker. It offers a lot of content for new investors to hone their skills.
Robinhood has no account minimum and quick funding, which makes it super-friendly for investors. You will still require to maintain a minimum of $2000, which is set by the Financial Industry Regulatory Authority. The company also streamlines the hassle to get the money to your account. As soon as you open the account, you can get up to $1000 into your account and start trading at the earliest.
Like some other companies in the market, Robinhood also provides fractional trading. What is fractional trading? Suppose you have $1 to invest, but the share costs $100, you could still buy 1/100th of the share through Fractional Trading. This allows small investors to create a diverse profile with a small amount of money.
For a flat monthly fee of $5, you could get the Robinhood Gold membership that allows you to trade on margins. This basically means that you can trade with the money borrowed from the broker. Investors who are new should be wary as they could end up losing a lot of money before they realize.
If you want to trade in cryptocurrencies, Robinhood provides you the option with no fees. The company also offers a lot of tools that make research and comparisons easy making it incredibly friendly for trading.
Where Robinhood Lacks
Although the Robinhood app seems attractive, it lacks a lot of key features essential for day trading. You do not get Time & Sale or a Level 2 window.
There are limited securities on offer, you cannot invest in mutual funds and bonds. The app also does not support the dividend reinvestment program, meaning your dividends get transferred to your account rather than getting reinvested in stocks. However, Robinhood has announced that this would be a feature they would include in the near future.
You can also invest only via the individual taxable accounts, which might not be the best option for some investors. Another aspect of the app, which improvement is required is the lack of customer support. Almost all support provided by Robinhood is through emails. You cannot even find a phone number on the app or elsewhere.
Although several other players do this, it’s another caveat of Robinhood and a so-called secret, the company sells your order flow. This is the reason they can offer free trade. Well, not the only reason – one of the reasons. The company sells your order flow to traders so they can anticipate the market and obtain good money for the trade they make. This should not be an issue for a casual investor, but it’s a big no for any long term investor.
Here is how Robinhood makes a profit.
How Robinhood Makes Profit?
With so many benefits, a curious mind would wonder how is the company making money. Here are all the ways Robinhood makes money.
The company lends money from your account. This is idle cash not used by the investor and is lying in their account. Lending the money constitutes a large portion of Robinhood’s income. It’s similar to how banks make their profit from the money you deposit in your account. Robinhood also charges fees for some of the services it offers such as live broker trading via phone and foreign stock transactions. The cost of such transactions can range be $10 for live broker trading and $35-$50 for foreign stock transactions.
Robinhood provides Gold membership at a flat rate of $5 per month. This allows investors to trade in margins or in order words take up to $1000 loan for investing.
Marginal Interest and Lending
Beyond a certain limit of a margin loan, investors have to pay interest to Robinhood. That’s a major source of income for the company. If the investor wishes to switch broker, they need to pay a fee of $75 to the company.
High-Frequency Trading & Order Flow
This source of income is something Robinhood does not want you to know. According to reports, the company obtains more than 40% of its income from high-frequency trading and order flow.
These are the major sources of income of Robinhood.
So, the ultimate question – is Robinhood the right trading partner for you? From the time the app launched, there have been a lot of improvements from the design, intuitiveness, and ease of usage. The company also promises to include some much-needed features to the app in the coming future. However, for most investors like day traders, the app might not be right due to no hotkey. Casual investors can benefit from the app, but for others, the best option is finding a low-commission broker.