Some links in this post are affiliate posts so I get a little kickback if you sign up after reading this. If you do thanks for the support.
There are plenty of reviews about Robinhood but I wanted to share my experience with the Robinhood app.
I first heard about Robinhood on CNBC when they reported that a new startup was looking to disrupt the stockbroker industry. They were offering users the ability to buy and sell trades for free. This was a game changer for me. I had never considered buying stocks because of how much it cost (usually $4-$8) to buy and sell.
I was hooked. I did a little research to make sure they were legit, downloaded the app and tossed $100 bucks in there (what’s the worst that could happen right?) I was blown away by the user interface, how easy it was, and how much I enjoyed using the app. It really was the catalyst for me getting into stocks.
This blog post will answer all the questions I had before using Robinhood and a few resources for you to check out. I will save my experience with the app for another post so this one isn’t epically long.
How Robinhood makes money
If it sounds too good to be true…you know the rest. But with Robinhood, there really is no catch. The company website has this to say about how they earn revenue.
With Robinhood Gold, you get up to 2x your buying power and access to after hours trading for as little as $6 per month. This is the only product Robinhood charges you for, and is completely optional. Trading is still commission free.
Additionally, Robinhood earns revenue by collecting interest on the cash and securities in Robinhood accounts, much like a bank collects interest on cash deposits.
So if you aren’t using Robinhood Gold (more on that later) and you invest the money you have in your account, it’s as close to free as you can get. You must understand that Robinhood is a Fintech (finance tech) company and has a considerable amount of backing from venture capitalists. This allows them the ability to build a product and market it without worrying a ton about the revenue in the first couple of years. To me, it seems their biggest goal right now is market penetration and adoption. If they can get millions of users in their ecosystem they have the ability to make money in a lot of different ways (ads, premium features, higher interest on uninvested cash, etc.).
What happens if Robinhood goes out of business?
I just said that Robinhood was a startup and had a bunch of cash from investors, you hear about these companies going under all the time. So what would happen if Robinhood went out of business? Would you lose your money? Do your stocks disappear?
The simple answer is no.
Again, from the Robinhood website it states…
Robinhood Financial is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org.
So if you have less than $500k in your account you will have protection. In the event, you plan on investing more than $500k I would strongly recommend you NOT using Robinhood. I will go into details later on but the short of it is that you will likely be better suited with a more traditional brokerage who offers a bunch of options and bigger insurance or you can spread your money into multiple accounts to hedge your bets and losses.
It’s important to understand what Robinhood is actually doing with your money and how they buy stocks on your behalf. Robinhood (and many other Fintech companies) use something called a clearinghouse. In this case, Robinhood uses Apex Clearing. Essentially Robinhood sends your request to Apex who executes the trade and informs Robinhood when the transaction is complete. Because Robinhood does so much volume with Apex they get a fixed rate bill for transactions. Robinhood pays that for us and then charges us in different ways to make money.
In the event, Robinhood failed your stocks still exist on the market and you could have another service claim them in your new account. So rest assured investing with Robinhood is legit.
What makes investing in stocks with the Robinhood app so appealing?
Aside from the fact you can make FREE trades…
The first point to make here is that the app is beautiful. It’s really simple (but in a good way). It’s easy to understand things like…
- How much money you have to invest
- Which stocks you have bought
- Changes in the stocks price in the last 24 hours, 7 days, etc.
- Follow stocks you might want to buy
- News on the stocks you follow
You can do all of these things in every other stock buying app on the market but I just like how clean it is and easy to understand. Most people who use Robinhood (like myself) have never bought or sold a stock before so it’s a big benefit when the app makes it dead simple.
The key features of Robinhood
I will talk more about this later but there are some features missing from Robinhood that a lot of full-time serious investors would need to do their job effectively. What you sacrifice in features (for instance buying options, buying on exchanges outside the US, and other more exotic trading methods) you get free trades and a simple interface.
So what can you do with Robinhood?
You can easily buy and sell stocks. Duh.
But you can put limit buys and limit sells on your stocks.
Here is how it works. You can tell the Robinhood app that you want to buy a share of Apple when it hits a certain amount like $120.24.
Or on the other side of the coin, you can tell Robinhood you want to sell Apple when it hits $113.12.
This allows you to set up some rules so you don’t have to watch the stock all day and can unload your position if you want to make sure you don’t lose money.
Robinhood also offers a referral program which is awesome. If you signed up with my affiliate link here then we would both get a random stock in our accounts for free. It could be a share of Apple.
There is a premium account upgrade you can make in Robinhood that charges you a flat fee to get access to features that the free account does not have.
The two biggest features are you can trade on margin. Basically, you borrow the money from Robinhood to make trades and then have to be able to front it if they need it back or call you to pay up. I would never suggest this to anyone unless you trade full time or are able to pay back the money. Why would someone do that? If they want to move fast on a stock and are willing to cover it later.
The other feature is that you can trade during extended hours which could help you squeeze some more profits out of a stock.
I think now is a good time to talk about pattern day trading. You will get warnings in your Robinhood account if you attempt to buy and sell the same stock on the same day. This is not allowed unless you meet certain account requirements.
Here is the official explanation from the Robinhood website.
Simply put, we define a Day Trade as the purchase and sale of the same security on the same trading day. If you sell and then buy a security, or buy and then sell a security in the same day, you’ve executed one day trade (we’ve listed examples at the bottom of the page). Unless you have an equity balance of at least $25,000 in your account, your Robinhood Instant or Robinhood Gold account is limited to no more than three day trades in a sliding five trading day window. Exceeding the three day trade limit will restrict your account from placing further day trades for 90 days. This limit applies to margin accounts (Robinhood Instant and Robinhood Gold), but not to cash accounts.
What can you invest in with Robinhood?
You can trade over 5,000 securities on Robinhood, including most U.S. equities and exchange trade funds (ETFs) listed on major U.S. exchanges.
What can’t investors trade on Robinhood?
I alluded to this above but for some millennial investor, Robinhood won’t work for them because of the things you cannot do (yet) in the app.
- Foreign domiciled securities*
- OTC equities
- Preferred Stocks
- Tracking Stocks
- Mutual Funds
- Bonds and fixed income trading
- Foreign Exchange
*Certain foreign domiciled securities are tradable on Robinhood. These include the securities of companies domiciled in Canada and Israel that trade above $5.
Some securities and ETFs that trade on Robinhood may be considered low-priced securities. Low-priced securities or “penny stocks” generally refer to securities issued by very small companies that trade at less than $5 per share.
But I wouldn’t worry too much about what you can’t do unless you are very experienced. For most millennials who want to own a few shares of companies they love it’s a great app.
The positives about Robinhood
Obviously, I am biased towards recommending the Robinhood app. It really is a great way for millennial investors to get their start in the stock market. This app makes it incredibly easy to buy your first shares of a company. In my humble opinion, the biggest barrier to entry with young investors getting into the market is not having access to a tool that allows them to do it. I remember feeling hesitant from going to a traditional broker and opening an account because I didn’t know what I was doing and didn’t want to be taken advantage of.
Robinhood takes back the control of your investments and puts you in the driver seat.
The negatives about Robinhood
Here is one thing that you should be keenly aware of. A lot of millennials who use Robinhood treat it like a gambling app. Because it is so easy to buy and sell stocks they do very little research and lose a lot of money in the markets buying stocks. They hear about some new development in the biotech industry and snap up a bunch of shares of the company without due diligence.
Because Robinhood makes it so easy it can almost feel like a game and not real money. Don’t be a ding-dong, do your research.
You must understand that you aren’t going to be able to execute trades as quickly as the big guys on Wall Street. This isn’t specific to Robinhood app but all apps that allow you to buy and trade stocks. I would be remiss for not at least mentioning it. Robinhood batches your orders. That means that you might want to buy a stock for $45.00 but by the time Robinhood puts in the order on your behalf the price could be up to $45.90. There is no way around this. There are high volume traders who pay a lot of money to execute quicker than us (the general public).
There are occasional glitches with Robinhood’s graphs where it will report incorrect information or calculations. Don’t worry the development team is awesome and will usually fix them in a couple hours or days.
Some people really want Robinhood on their desktop. It’s coming. The company currently has a waiting list for people to get access to their desktop app so that won’t be a negative for much longer.
There is a lot of information in this post. But before I wrap this up I want to give you a few resources I have used to help me make the most of my time with Robinhood.
The first is Stockflare.com which is a great tool for finding and researching stocks you want to buy. The app does a great job of comparing stocks within their industries so you can see how a company like Visa stacks up against Mastercard in terms of earnings, revenue, dividends, etc.
The other resources I use are the Robinhood subreddit on Reddit.com I frequent this subreddit to learn about new things happening in Robinhood and get a pulse for what other millennials are investing in. I rarely take advice on which stocks to buy but it’s always good to see what other users are experiencing.
Finally, have you ever thought to yourself, I wonder what some of the biggest investors are investing in? I know I have. So I set out to find investors who publish what stocks they own. I was surprised when I found this is a thing and a lot of people (really successful people) are willing to share that with the public. Openfolio is a site that you can search investors and see their stock holdings (not how much they paid but how many shares they own). I highly recommend you look at it when determining how to diversify your holdings.
Wrapping it up
There are a few things I didn’t cover in this post but it’s long enough. If you like what you see with the Robinhood app, please consider using my affiliate link to sign up. It encourages me to keep sharing this type of content and to create more of it.
Finally, if you have any questions about Robinhood, the app, my experience using it or anything related to buying and selling stocks just leave a comment below and I will make sure to follow up with you.