Understanding all the features of an investment platform is crucial to finding the right brokerage for you. Sometimes just boiling it down to how a platform actually works makes it easier to make the right decision.
We receive many questions about the Robinhood platform. Especially because Robinhood is the first step in many beginning investors' journeys. With their widespread popularity and simple interface, this is for good reason.
So how does Robinhood work? In this review, we will cover the highlights of Robinhood as well as the features that make them shine.
To make a complicated question simple, Robinhood works like just about any other investment platform just without the need to pay fees. You can buy and sell stocks as you please and follow any investing strategy you would like.
One of the best features of Robinhood is the instant deposits. When you fund your account, you will have instant access to up to $1,000 without waiting for the money to transfer in. This means you can get started with investing as soon as your account clears. With other online brokers, it can take up to 5 days just for your funds to arrive!
If you have never traded stocks before it can be overwhelming even with their emphasis on being beginner-friendly. When you break it down, you just search for the stocks, tap the trade button and select the buy or sell option. It's really that simple.
Though Robinhood does offer some different ways to buy stocks and options, getting your feet wet and learning investing basics could not be simpler.
Robinhood launched in April of 2013 as the first-ever completely free investment platform.
Their impact on the investment industry has not been small, they even have a term for it called the “Robinhood Effect."
Robinhood revolutionized the brokerage industry by offering commission-free trading. Countless other brokerages have followed suit as a result, including industry titans like Charles Schwab. Robinhood truly transformed the brokerage industry forever.
Their focus on an easy to use beginner-friendly platform has drawn in many beginner investors. This is not coincidental, as this is the target audience for the Robinhood app.
With Robinhood, you can trade stocks, ETFs, REITs, Options and Cryptocurrencies all with no commission fees that you need to payout. The only fees you pay are the expense ratios associated with ETFs and nominal regulatory fees.
If you want access to more features, you can subscribe to the Robinhood Gold program. This is an upgraded account that gives you access to a variety of features we will cover below.
It is no surprise that this company has grown to be one of the biggest broker-dealers in the online investing space. And it doesn’t look like they’re going to be slowing down anytime soon.
The best part is, you get a free stock when you sign up for an account with them! Then, you can earn more free stocks by referring friends.
Robinhood offers a variety of features, we’ll go over some of them that have made them the investing giant that they are today.
You can certainly keep it simple and just trade stocks commission-free. Or, if you choose to, feel free to explore some of the additional offerings.
The ability to invest in options is not something that comes with every investment platform out there, but it does come with Robinhood Options.
You will have to get approval in order to trade options through gaining experience in trading stocks, but once you do, you will have access to this feature. Just like the rest of their platform, there is no fee involved with trading options. It is normal for a lot of brokerages to charge as much as $6 per option contract.
Keep in mind, options are risky and they are certainly not beginner-friendly. Depending on the options strategies you use, you may have the potential to lose more money than you invested which makes these dangerous for complete beginners.
If you want to get into assets outside of stocks, Robinhood offers cryptocurrency trading too.
The following are offered:
However, keep in mind that these cryptos are not covered by SIPC insurance and you cannot transfer them to an external wallet. If you are a serious crypto investor, you're probably better off opting for a crypto-specific service like Coinbase for your crypto trading.
With gold, you get access to 4 features that aren’t offered on their free tier. The Robinhood Gold subscription starts out with a monthly fee of $5.
Here's what you will get:
Margin investing allows you to borrow additional cash from Robinhood to invest with. This will allow you to both magnify your returns as well as your losses. You'll also have to pay interest on your borrowed funds so this has the potential to eat into your returns.
While a beginner investor may not have a need for some of these features, as you gain more experience you will find that having them is better than not.
One of the drawbacks to Robinhood is its lack of analytics and tools that seasoned investors will come to miss. Their Gold tier is a step in the right direction offering more valuable tools to investors. Their competitor Webull has a lot more features for research and functionality when it comes to short-term traders.
Another common complaint about Robinhood is the lack of customer service. Most issues are handled with FAQs or email support. Other brokerages often have phone support available, some even offering it 24/7.
While a more seasoned investor might miss all of the things that come with other investment platforms, beginners may appreciate the simplicity. The platform is clearly tailored towards longer-term investors, so if you're in search of lots of technical data and research, you'll be better off with an app like Webull or Moomoo.
There isn’t much to distract you from your goal with Robinhood. Their platform doesn’t make you feel like you need three of four computer screens in order to suck in all the information offered.
Buying a stock on Robinhood is possibly the most streamlined process of any investment app, and their user interface will guide you through the entire process even if you don't have a clue.
Unless you subscribe to Robinhood Gold, there will never be a dime paid to use their trading system. The only money that will go in will be what you use to invest in your securities.
In addition to this, they also have no account minimum.
While this is now standard across the industry, it was Robinhood who pioneered this idea.
A lot of brokerages don’t allow their users to purchase fractional shares, but that isn’t the case with Robinhood.
If you want to invest in a stock that is currently valued at $1,000, most of the time you have to pony up a full $1,000. But with Robinhood, you can invest as little as $1 at a time in stocks that trade for hundreds if not thousands per share.
This is great for newer investors and people who want a more diversified portfolio. It means you can be fully invested at all times.
One of the most requested features from Robinhood early on was a dividend reinvestment plan or "DRIP". A DRIP allows investors to choose whether to take their dividends as cash or to reinvest them back into more shares of the underlying stock.
By choosing to reinvest your dividends, you're able to take advantage of compound interest and increase the growth rate of your portfolio over time.
As a platform that tailors to longer-term investors, it's important to have access to a DRIP because many investors want to keep as much of their money working for them as possible. When you take your dividends as cash, they just sit there and don't grow for you, this is not desirable for many investors.
Traditionally, IPOs have been reserved for institutions and high net worth individuals. Today however, Robinhood has created a capability to allow anyone to participate.
When a company goes public, they begin with an IPO, or initial public offering. This is organized by an underwriter, usually a large financial institution or bank. While Robinhood is not the underwriter during an IPO, they partner with these banks to allocate some of the shares offered in the IPO to Robinhood account holders.
Robinhood members can then request these shares in order to participate. Because the number of shares are limited, not everyone will be able to purchase them. Robinhood uses a random selection to choose who will actually have the opportunity to purchase the shares.
Want to learn more about Robinhood IPO Investing?
For those looking to build up an emergency fund, Robinhood also offers a product for this.
Robinhood Cash Management is a high interest, FDIC insured online savings account. This includes a debit card and checking account as well where you are able to earn an above-average interest rate on your cash.
In addition to earning interest on your uninvested cash, you'll also be able to keep your cash readily available on the sidelines because you can transfer money instantly between your Cash Management account and your investing account.
This account will come with no minimum balance requirement and FDIC insurance up to $1.25 million.
This is a question that everyone is going to ask sooner or later. And the most basic answer we can give you is yes, Robinhood is a safe investment platform.
This, of course, does not mean there are no risks. If you trade at a loss, you are still going to lose money. But when we mention safety, we are referring to the platform itself.
Robinhood is regulated, like every other securities broker in the US, by the SEC. In addition to this, FINRA regulates them. These institutions help to ensure no malpractice is taking place with their investor’s money.
They are also a member of the SIPC. This means that your securities are insured for up to $500,000 and your cash funds for up to $250,000. It should lend you some peace of mind knowing your account has protection.
Robinhood has also taken steps to prevent any outside interference since they are an online service. They use the most current security methods along with encryption in order to maintain the integrity of their system.
Since Robinhood offers a completely free service it can be difficult to understand how the company actually makes money. There are many ways they accrue revenue but we’ll go over the two big ones here.
Here's our full article on how Robinhood makes money.
Their premium tier of Robinhood Gold is a very popular feature amongst its users. In order to gain access to all of its features, they charge a fee starting at $5 per month.
They don’t give an exact number, but the estimation is that a large portion of the Robinhood user base takes advantage of their premium level of service.
Another revenue driver for Robinhood is the process of Order Flow. According to them, this process contributed to 40% of the company’s total revenue in 2018.
Order Flow means that market makers pay Robinhood so that they will send them their orders instead of going to someone else.
A lot of brokerages do this and Robinhood, in particular, makes a lot of trades in a single day so it makes sense that they make a lot of money at it.
When you break it down, Robinhood is pretty simple in the way that it works. It is actually much simpler than a lot of other investment platforms that are out there on the market today.
Starting out with Robinhood takes just a few minutes and once you get in you will notice their user interface is very welcoming to both new and seasoned investors.
While Robinhood is free, they do earn revenue through various means including their Robinhood Gold subscription and Order Flow as their largest drivers.
Robinhood is safe by investment platform standards and is regulated by FINRA and the SEC. Your investments are also insured by the SIPC up to $500,000.
The platform offers a good amount of features that aim to make beginner investor experience as easy and painless as it can be. Though they are taking steps to make seasoned investors feel more at home there as well.