Formally known as Robinhood Financial, LLC, the Robinhood app takes from the rich and gives to the poor. Well, no it doesn’t do that; it just allows you to make stock trades for free. Robinhood is a no-frills stock broker with no minimum deposit.
To access the service you need to install an app on your iPhone, iPad, Apple Watch or Android smartphone. A web-based interface is something that’s planned in the future but currently has no ETA.
Based on the limitations and focus, Robinhood is obviously catering to the Millennial crowd, with their smartphone being their primary computing device. Millennials typically do not want any of the additional bells or whistles that come with a traditional discount broker.
What is Robinhood?
Right now, it appears Robinhood is targeting bread-and-butter stock trades only, with the eventual rollout of more advanced trades and security types. They do not yet support trading of options, OTC securities, warrants or mutual funds.
A press release last year stated, “Collectively, the community has saved over $22 million in trading commissions.” If I’m to assume $10 a trade, Robinhood has processed over 2.2 million trades since inception, though Robinhood is still a relatively new brokerage house.
Robinhood’s trades are not self-clearing and use Apex for any trades made. Robinhood is registered with the SEC, a member of FINRA and has Securities Investor Protection Corporation (SIPC) insurance.
The founders of Robinhood have made a few rounds of the venture capital circuit (with currently $66 million in funding). They are funded by some well-known players in the industry such as Index Ventures, Ribbit Capital, Google Ventures, and Andreessen Horowitz.
|Mobile App||Yes — Apple iOS, Apple Watch and Google Android|
- Scheduled Deposits – You can schedule automatic transfers on a weekly, biweekly, monthly, or quarterly basis.
- Advanced Order Support – Robinhood supports market orders, limit orders, stop limit orders, and stop orders. Certain orders may be entered as good for the day or good till canceled (GTC).
- Robinhood Instant – Instant access to deposits (under $1,000) and immediate access to your funds after selling stocks. You don’t have to wait the typical three business days.
- Robinhood Gold (New) – This features introduces: after-hours trading, line of credit, and larger amounts of instant deposits.
How Does Robinhood Make Money?
The primary question remains how will Robinhood make money if trades are free? In their FAQ they state they will make money through margin lending interest and interest on any uninvested customer cash deposits. See below as they recently introduced Robinhood Gold subscription service.
Will they be able to pull the free service off? As a reviewer of various brokerages, I’m not so sure. Keep in mind, this hasn’t been the first time a stock broker has tried this idea. Zecco was a recent brokerage firm who tried the freemium model. During their existence, Zecco changed their pricing structure several times. And eventually, Zecco determined their business model wasn’t successful and merged with TradeKing.
Currently there are two other firms which are following the freemium model: LOYAL3 and WiseBanyan. Robinhood and LOYAL3 are just straight up stock brokers, whereas WiseBanyan offers robo-advisor services.
Robinhood is much more flexible than LOYAL3 in that they allow you to trade any of the 5,000+ stocks and ETFs listed on the US stock exchanges. With LOYAL3, you can choose from only 70 stocks at this time. Some of the more traditional brokers will offer free trades if you have a minimum deposit, like Merrill Edge’s $25,000 minimum.
The signup process happens via their iPhone or Android app or on their website. Trading is limited to their mobile app.
They do ask for personal information like your Social Security number, but it’s the same information needed by any stock broker. Robinhood is available for the U.S. market and soon for Australia.
Once you gain access, the user interface is pretty easy to use, but also very simplistic. If you have one of the newer iPhones, you log in to the app via your fingerprint.
To link your bank account, it’s all done within the app. Bar none, it is the easiest way I’ve found to transfer money into a brokerage account. At least with my Chase bank account, there’s no need to enter a bank routing number or wait a few days while Robinhood uses micro-deposits to validate your account. This simplified verification is a neat feature all financial services should model.
Robinhood Gold (New)
A new premium service that introduces a monthly fee to the once previously free service. Similar to the also recently introduced Motif BLUE service these low cost brokerage firms are hoping to make up on the lost revenue via monthly subscription fees.
Robinhood Gold introduces functionality that’s really for the advanced/active trader:
- After-Hours Trading — Robinhood will extend trading 30 minutes before the market opens and two hours after it closes. The purpose is for this functionality is many companies announce earnings reports usually after the market closes. Do keep in mind though liquidity is usually less during after-hour sessions so the bid/ask spread will be higher.
- Credit Line — Otherwise known as a margin account but Robinhood does not charge any interest when it is used. Instead, it is covered in the monthly fee. Because of regulations, you must have at least $2,000 to qualify for any line of credit. The amount of the line of credit will depend upon a number of factors such as your investing experience. Best case situation is you’ll have double the amount of cash you have at Robinhood. This is no different than other brokerage firms. Just like other firms with margin, it is possible to get a margin call when using this service.
- Larger Instant Deposits — A previously introduced feature where money deposited is instantly available for investing. Previously it was limited to $1,000 and with Robinhood Gold it has been pushed to $2,000 or more depending upon your account size.
It took me awhile to figure this out, but the three-tiered pricing for Robinhood Gold depends upon the amount you have deposited within Robinhood. The more deposited the more the monthly pricing will be. All tiers get access to the after-hours trading and instant deposits. You can cancel at any time.
So think of it as a margin account you get charged monthly regardless if you use it and get some additional features as well.
- Free Trades — Zero, zip, nada, naught, zilch for any trade.
- Easy To Use — The service was easy to sign up for and use when making trades.
- Stock and ETF Trading Only — You currently cannot trade options, OTC securities, warrants or mutual funds.
- No Retirement Accounts — Currently only individual taxable accounts are available. Joint or custodial accounts aren't available either.
- No ACAT Transfers — Currently there is no way to transfer existing brokerage assets into Robinhood.
On the positive, we think the service is easy to use, and is a cheap (free) way to invest in individual stocks or ETFs. For traders wanting more advanced trading options and features, you’ll have to look elsewhere. No formal testing was done, but I suspect Robinhood has to sacrifice trade execution speed, which affects price spreads, in order to work within their free trade parameter.
The other concern I have is their business model and whether it’s sustainable. Only time will tell. With the many negatives, especially the inability to transfer an existing brokerage account, I suspect most users of Robinhood will be kicking the tires and testing their service, but this limitation will restrict the ability to put serious money into Robinhood.
Disclosure: For purpose of testing I have opened an account with Robinhood and invested $100 with their service.