The rise of retail trading is here, and several online brokerage services are vying for your attention by highlighting their services to eager investors like you.
With a flood of new users logging on to access these user-friendly platforms, news has spread like wildfire about what makes these apps flexible and potentially profitable for you.
Robinhood, a US-based online broker, has a mobile app and website for every investor to get into the coveted public markets.
In this review, we will take a deep dive into the features of Robinhood so you will see for yourself why it's such a popular online broker and whether it makes sense for you.
Summary
Robinhood is a commission-free stock, ETF, option, and cryptocurrency trading platform. Users can open a Robinhood brokerage account with $0 and start trading for free.
Robinhood caters to beginner investors who are looking to trade in taxable brokerage accounts with limited fees.
Many users also find Robinhood a great platform for options trading due to the $0 trading fees.
Pros
Cons
Robinhood is a US-based financial services company headquartered in Menlo Park, California. The company has low-cost ways to invest in stocks, ETFs, options, and crypto through its easy-to-use mobile application and website.
Robinhood currently has a growing active user base of 13 million. It's a very popular option for younger investors because it is pretty simple to use. Robinhood has been deemed revolutionary based on the fact that they pioneered commission-free trading.
Vladimir Teneve and Baiju Bhatt launched the company in April, 2013. Previously, they had gained significant experience in New York City creating high-frequency trading platforms. The highly acclaimed and award-winning app was first showcased publicly at LA Hacks and eventually made its debut in March of 2015.
Robinhood’s mission is to give everyone, regardless of economic background, a way to get into financial markets.
Robinhood accomplishes this by keeping costs for traders low and driving revenue through high-volume trading. Refer to our “How Does Robinhood Make Money” article to learn more.
Robinhood shines when compared to other apps because it gives investors a low-cost way of executing trades. For example, it offers commission-free execution of trades for its users on stocks, ETFs, options, and cryptocurrency, shaving off excess costs of investing.
Beyond that, Robinhood offers you real-time quotes for free so you have a better idea what assets are trading for before making a decision.
When you buy a stock, you are gaining partial ownership of a company and a right to the future cash flows of it. Companies that have a steady cash flow are solid investments because shareholders will get a slice of that cash.
Keep in mind, when you buy a stock, you are buying an underlying company. If the company tunes up its business operations and performs better, shareholders should make money.
Robinhood offers 1000’s of different companies for you to choose to in. Users can navigate to the “100 Most Popular” stock section on the website to get a sharper picture of these companies.
In this section, you can check out the company name, symbol, price, market capitalization, popularity, and analyst consensus ratings.
While it is not generally recommended by experts, you can trade penny stocks on Robinhood as well.
Exchange Traded Funds (ETFs) are a basket of underlying securities that track an underlying index, industry, sector, or subsector of the market. ETFs are highly diversified and therefore may be a great option if you are new to investing and are looking to get your hands in several pots.
Robinhood offers hundreds of different ETFs for you to choose from to build a highly diversified investment portfolio.
Some examples may include the “SPY,” an ETF that tracks the performance of the S&P 500 Index, the “XLH” which tracks the performance of the Healthcare Sector, or the “XLK” which tracks the performance of the Technology Sector. Sound interesting to you?
Other online brokers may charge underlying fees when you buy ETFs, because they are highly diversified and generally less profitable for brokers when compared to their proprietary mutual funds. With Robinhood, these excess costs are diminished, making it a great choice for you if you want to keep costs low.
Options give buyers the right, but not the obligation, to buy or sell a stock at a specified strike price before or on the day of expiration. These financial instruments are highly complex and are pretty much reserved for people who are more experienced with financial markets.
If you are savvy in financial markets, or are looking for a thrill ride, Robinhood offers options trading with no commissions to buy or sell.
Options come in the form of “contracts” offered through the Robinhood trading platform. These contracts present additional leverage which brings with it the potential for larger gains as well as the potential for larger losses.
Before you will have access to options trading, you will have to request access from Robinhood and will be approved for level 1, level 2, or level 3 options trading.
Cryptocurrency is a digital asset meant to work as a common means of exchange in online transactions.
Robinhood users can buy cryptocurrency like Bitcoin and Ethereum and sell 24/7 with zero commission. Unlike the stock market, the crypto markets never sleep.
Robinhood allows fractional purchasing for small investors who looking to dip their toes into cryptocurrency. Fractional coins are a good idea because many of these cryptocurrencies come with high price tags.
Robinhood has a zero account minimum policy. Users can fund their accounts with whatever sum of money they wish and invest as they please.
Robinhood offers its mobile app on both the Apple store and Google Play store. It has garnered honorable awards including the Google Play Award in 2015 for its user-friendly interface and easy-to-use features. They believe investing should be quick, easy, and seamless, and pioneering app design makes this possible.
Robinhood’s Cash Management feature lets people earn on uninvested cash in a brokerage account. Robinhood offers better than average APY, meaning you get the best bang for your buck.
By taking advantage of a cash management account, you're also able to get around waiting for your funds to settle. Typically, when you move funds into your Robinhood account, you'll have to wait 3-5 business days. Moving money from your cash management to your investment account, on the other hand, is instantaneous.
Robinhood is insured by the Federal Deposit Insurance Corporation that backs up and secures Robinhood cash management accounts up to $1.25 million.
Robinhood investment accounts on the other hand are insured by the SIPC up to $500,000.
This makes Robinhood a safe investment in terms of protecting your deposits. If Robinhood went out of business, there are multiple layers of protection in place.
It is important to note that Robinhood Crypto accounts do not hold the same level of protection as cash management and investment accounts. There is no federal insurance on your crypto and there is the potential for loss if Robinhood were to get hacked.
While they do keep most of their crypto in cold storage and disconnected from the internet and insured, there is still the potential for loss.
On the Robinhood Crypto platform, you are currently able to trade 7 different cryptos including Bitcoin and Ethereum, and receive real-time price quotes on 10 other cryptos.
It's important to note that any crypto purchased on the Robinhood Crypto platform cannot be transferred off of the platform. This means that you cannot move Robinhood Crypto to an external crypto wallet.
Robinhood has this rule in place for two reasons.
One, this is to protect newer investors from sending their crypto to a scammer or accidentally sending it to the wrong wallet. With crypto, there is nothing you can do if you accidentally send your coins to the wrong address, they are gone for good.
The second reason is that Robinhood needs to keep track of your cost basis so that they can report your crypto gains to the IRS. You are legally required to pay taxes on your cryptocurrency gains and Robinhood is legally required to keep track of those for you.
If you are looking for a platform that will allow you to move your crypto, your best bet will likely be looking into a platform like Coinbase that specializes in crypto.
3-Step Process:
Keep track of important docs on Robinhood, such as the Form 1099 document, including information on the 1099-DIV, 1099-MISC-INT, and the 1099-B.
Most of Robinhood’s customer support comes from its extensive FAQ page on its main website. Dozens of common questions are on the page, along with detailed answers. Live representatives are also available, but Robinhood has often been known as “hard to reach.” Visit the “Contact” section of the Robinhood Website to speak in person with a rep.
Robinhood’s Fractional Shares lets people buy fractional pieces or percentages of companies to help them pinpoint resources and make expensive stocks more affordable. It's just one more example of how Robinhood is tearing down the barriers for smaller investors to jump in the game.
The Fractional Shares feature is available for all Robinhood’s securities it offers except options, which trade at a per-contract value, making them difficult to fractionalize.
Fractional share orders can be executed in dollar amounts or share or share amounts. All of these orders will be rounded to the nearest penny. Robinhood lets fractional shares be traded through good-for-day (GFD) orders. Right now, Robinhood users are not allowed to trade fractional shares in extended-hours trading.
The supported stocks through Robinhood’s Fractional Shares feature must be worth over $1.00 and have a market capitalization of over $25,000,000. Robinhood will let you know if the company you're looking at does not meet both standards.
Dividends will be paid in proportion of the fractional ownership of the stock. For example, if Company A is paying a $1.00 dividend per share, and you own 50% of one share, I will receive a $0.50 dividend.
If you are wondering, here's what happens when you earn dividends on Robinhood.
Like the proportional value of dividends with Fractional Shares, you'll get the relevant number of fractional shares if a stock has a forward stock split or a reverse stock split.
If you own 2.5 shares of Company A valued at $10 per share, and Company A does a 2 for 1 (2:1) forward stock split, you will now own 5 shares of Company A valued $5 per share.
For every new friend who uses your referral code to sign up for a Robinhood brokerage account, both accounts will be credited with a free stock. In each calendar year, an account can receive up to $500 in free stocks.
Robinhood randomly selects shares of free stock from its extensive inventory of settled shares. However, since it is random, it's likely you and your friend will receive completely different stocks.
You get a free stock when you sign up with our link too!
The value of the stocks vary because of the unpredictable nature of stocks, making it tough to put an exact dollar amount on a referral. According to the website, the shares may be valued anywhere between $2.50 and $200, but there's a 98% chance the stock bonus be worth $2.50-$10.00.
The Robinhood app uses the “Top 100 Stocks” website section to pick the free stocks, so they are highly variable based on what is currently popular on that particular day.
Robinhood uses this page to credit its users with popular, relevant info on companies viewed by the market and its users as solid investments.
Yes, the stock can be liquidated immediately, and your individual brokerage account will be credited based on the sale value.
Robinhood will count any gains on the stock as capital gains. These will show up on a 1099 tax form. However, if the stock is sold at the same price that it flows into your brokerage account, the value the stock is sold at will be counted as “other income” and won't carry income taxes.
With Robinhood’s Free Stock Referral Program, there are no gimmicks or catches. There are no strings attached - the stock is truly free.
Users can get some skin in the game and see what it feels like to own stock before making their first purchase.
Here's our full article explaining more about the free stock incentive on Robinhood.
This is Robinhood’s standard taxable brokerage account. You can buy and sell stocks, ETFs, options, and cryptocurrency through online and mobile platforms. This account is completely free to open and the first $1,000 deposited will appear in your account instantly.
Robinhood Cash gives all of its users access to Robinhood Instant features such as unlimited instant deposits and withdrawals.
If you're a Gold member, you will be given access to several features that are different than Robinhood’s standard account.
Here's our full review of Robinhood Gold and whether or not it is worth the money.
Gold members receive access to margin investing, so you can borrow money to buy stocks. As a member, you must pay interest on the “leverage” that Robinhood lets you access. You can magnify both losses and gains by investing on margin.
Remember, a golden rule of investing is to never invest with more margin than you can pay back (including interest).
Robinhood Gold Members get key info like industry-wide research from topnotch firms to help make smart investment decisions.
Members of Robinhood Gold also have access to extended hours trading. This lets you trade before and after the 9:30 AM EST opening of the NYSE and the 4:00 PM EST close of the NYSE.
Currently, Robinhood does not offer joint accounts, trusts, custodial accounts, and IRA products. This may be a door the company opens in the future, however.
Established by FINRA, the PDT rule requires pattern day traders to have a minimum of $25,000 in their brokerage accounts for unlimited day trade transactional capabilities. This rule holds true with Robinhood as well.
Accounts below the $25,000 minimum will only be allowed three day-trades (a buy and sell on the same day) per week.
So, the short answer is yes – Robinhood does let users day trade while abiding by the FINRA PDT rule. If you want to day trade on Robinhood, make sure your account has a minimum of $25,000 to be eligible.
Here's our full article about day trading on Robinhood.
A market order on a security is executed at the best available price on the market. The ask price is what a seller is the price a seller is willing to sell at. If you are buying with a market order, your order will execute at the highest ask price available.
Users can choose a specific price, called a limit order. This is the price at which that they want to buy or sell. The order will stay unfilled and idle until a buyer meets the seller’s request, or a seller meets the buyer’s request.
A stop order is an order to sell a stock at a specific price. It will turn into a market order and automatically be executed when the stop price is reached. Stop orders are very important for people looking to manage their risk properly and want to sell out of a security if it reaches a pre-set price considered risky.
A stop limit order combines a stop and limit order into one. A limit order is triggered if a security hits a stop price that you have set. They will set this limit order at a specified price that the seller has set. No worries; Robinhood will only execute the order when that price is fulfilled.
A trailing stop order lets you track the best price of a stock before triggering a market order. Trailing stop orders can help limit a maximum potential for losses, and help investors manage their risk.
Robinhood makes money through gaining interest on the margin that it lends to Robinhood Gold account holders. Note: the charges Robinhood sets on money it lends to customers is relatively high.
When Robinhood makes a purchase for its users, they wire it to a large financial intermediary to make the trade for the client.
The spread between the actual price that the intermediary executes the trade at, and the execution price you set creates a miniscule (fractions of pennies) margin for Robinhood to keep. Due to high volume, these fractions of pennies do add up!
Robinhood makes money from fees that Robinhood Gold members pay. You will pay $5/month for Robinhood Gold. The marginal interest section, described above, also carries additional fees.
Overall, Robinhood is a beginner-friendly, easy-to-use, low cost way to invest in the financial markets.
Robinhood has key incentives like its stock referral program. It also offers zero-commission on stocks, ETFs, options, and cryptocurrency. These make it easy to start on your path and flourish financially. Simply put, the company is revolutionizing the way retail traders participate in the markets.
If you're looking to get your feet wet in a beginner-friendly and simple way, this app may be for you. If you want a more complex platform with features beyond the world of investing, other apps may suit you better.
At the end of the day, the choice is up to you to find what will speed you along toward your financial goals. There are dozens of platforms to choose from by comparing features and complexities in the world of investments and personal finance. Robinhood could be the one for you!
If you are ready to get started, check out our step by step article on how Robinhood works as well as how to make money with Robinhood.
