Anyone taking an interest in the financial sector has likely heard of Robinhood. For those who don’t know, Robinhood is a California-based financial services company known for its commission-free trading app.
The Robinhood app has become very popular over the last decade with new investors and experienced users. It has roughly 16 million monthly active users and soon plans to launch in the U.K. in early 2024.
Praised for being user-friendly and newbie-friendly, Robinhood is a good choice of app for those looking to take control of their investments. We have prepared a guide to 5 things you should know about the trading app before diving in.
What Is the Robinhood Origin Story?
Robinhood was co-founded in April 2013 by Baiju Bhatt and Vladimir Tenev, who were Stanford classmates and roommates. They shared a common goal to “democratize finance for all” and make it easier for anyone to start investing.
The founders had previously built high-volume trading platforms for financial institutions in New York City. However, they were disenchanted in the way executing a trade cost brokers a fraction of a penny, but they would still charge a fee ($5 to $10) for the trade and require a minimum account holding anywhere from $500 to $5,000.
In the sense of Robin Hood, who stole from the rich to give to the poor, Bhatt and Tenev wanted to make sure that even people who weren’t wealthy still had access to the financial markets, hence the name Robinhood.
The app officially launched in March 2015.
What Can You Do with Robinhood?
Like with most apps, users can download Robinhood and create their account by providing personal information to verify their identity, including their social security number. Once approved, you will be able to start by funding your account and begin investing and trading. You could even start investing with amounts as small as $1.
The bread and butter of Robinhood was always commission-free trading with stocks, exchange-traded funds (ETFs), and options. Users had easy access to buy and sell individual stocks from thousands of public companies that are on the major stock exchanges, including the New York Stock Exchange (NYSE) and NASDAQ. With ETFs, users can trade these investment funds that offer diversified assets, including stocks, bonds, or commodities.
Robinhood users can also purchase fractional shares of stocks and ETFs where you only get a portion of a share rather than having to buy the whole share. This can aid you in portfolio building and diversification.
Starting in 2018, Robinhood introduced commission-free cryptocurrency trading. It started with just Bitcoin and Ethereum trading in select states. By 2021, every state except for Hawaii and Nevada had crypto on Robinhood, and they allowed for more types such as Dogecoin, Bitcoin Cash, and Litecoin.
Since March 2022, the app offers a Robinhood Cash Card to users, which is a debit card where you can get your paycheck up to 2 days early with direct deposit, earn 2% cash back on eligible gas and grocery purchases, and earn cash back on offers from participating brands. You can automatically invest in stocks and crypto when using the card to spend money.
With an easy-to-use interface on the app, you can track market performance with real-time data, charts, and financial news to keep you updated and aid your decision-making. You can also create watchlists to track certain stocks, ETFs or cryptocurrencies.
$HOOD – Most aren’t aware that Robinhood now allows crypto deposits and withdrawals, integrated with Metamask, cheaper fees than Coinbase, and BETTER security. Plus 3% IRA match, INSTANT deposits (none of this 7 day waiting), options, stocks, and all 11 $BTC ETFS. $HOOD > $COIN pic.twitter.com/CKoDT0muKy
— Income Sharks Alt (@IncomeSharksAlt) February 10, 2024
Robinhood also launched retirement accounts starting in 2023 with IRAs and Roth IRAs. Users who subscribe to Robinhood Gold can earn a 3% match on every dollar contributed to your IRA. Robinhood Gold members also earn 5% on uninvested cash and can get bigger instant deposits.
Is Robinhood Free or Are There Fees?
Robinhood is a free app to download and create an account. There are no fees for closing an account or keeping it open. There is also no minimum amount of money that you must keep in your account.
While Robinhood is known for its commission-free trading, that does not mean every trade is completely free. There can be regulatory fees and non-commission fees on trades.
Users who trade on margin – borrowing money from a broker to boost buying power – will be expected to pay interest on the money borrowed. Those rates can vary.
With the Robinhood Cash Card, the company does not charge any fees for foreign transactions or transfers. There is no overdraft fee, though be sure to check your limit as any transaction that overdrafts your account is likely to get declined.
To use Robinhood Gold after its 30-day free trial, users will be charged $5 per month for that subscription.
How Does Robinhood Make Money?
The majority of income made by Robinhood is through payment for order flow. When an investor makes a move on a stock, ETF, or option, that is carried out by a market maker through Robinhood, which gets a kickback. The market maker offers a rebate to the brokerage, which is Robinhood in this case. The crypto trading on Robinhood also has volume rebates that produce income for the company.
Another way for Robinhood to make money is by collecting interest from users who do margin trading. That is when you borrow money from a brokerage to increase your buying power to get more stocks. There is interest on the borrowed money that must be paid back.
Robinhood also can make revenue through sales of the Robinhood Gold subscription for premium users and through typical debit card fees associated with their money management products like the Robinhood Cash Card.
If a user has uninvested cash in their account, Robinhood can earn money by investing that cash into interest-bearing bank accounts.
Is Robinhood Safe to Use?
Robinhood is considered a safe app to use for investors for multiple reasons:
- It is a member of the Securities Investor Protection Corporation (SIPC), which means any loss of a Robinhood investor’s securities and cash is protected up to $500,000 in the event the broker fails or goes out of business. This does not extend to include protection for market shifts or investment decisions that backfire on the investor.
- Robinhood is regulated by the Securities and Exchange Commission (SEC).
- Robinhood offers 24/7 customer support, including phone support.
Now like with any app these days, users must be aware of the potential risk of data breaches and personal information being compromised in a hack. Also, investing in the stock market is akin to gambling, so users need to be responsible with the amount of money they are investing, as a bad outcome in the market is not something Robinhood is liable for.
