Program Name: Robinhood
Sign-Up Website: Robinhood.com/sign-up
Type of business: Investing Brokerage
Price: $0 – you get one free stock for signing up!
Owner: Baiju Bhatt & Vladimir Tenev
Overall Rank: 3.5/5 Stars
If you’re young, looking to grow your money, and able to use a smartphone, then you’re in luck! The Robinhood stock app is an investing app that is user-friendly, neat, and FREE.
In this article, I will be going over Robinhood’s features, its methods for making money, its safety, and its pros & cons.
After you read this review, you’ll be able to make an educated decision on whether Robinhood is right for you.
So, is Robinhood a good app for you? Let’s find out!
What Is Robinhood?
Robinhood is an online broker where you can buy and sell stocks, ETFs, REITs, options, and cryptocurrencies completely commission-free. Normally, brokerages charge a commission fee for selling and buying securities.
While many brokerages have trailed behind Robinhood to make their investment transactions commission-free, Robinhood was the first to do it back in 2013 – this was when they first launched as a legal brokerage.
Due to this commission-free feature, Robinhood is a platform where beginners can start investing with as little as $1.00.
Robinhood offers you a free stock for signing up with them, and you don’t have to make an initial deposit into the account to get that stock. All you have to do is sign up. This is different from other brokerages where you have to deposit a certain amount of money into the account if you want to get their bonus.
While Robinhood has had great success in its short existence and normalized commission-free buying and selling of securities, they are not perfect.
How Does Robinhood Make Money?
As you already know, Robinhood doesn’t charge commissions on their transactions. So, that begs the question, how does Robinhood make money?
You see, Robinhood found that executing a stock trade did not actually cost a brokerage that much money, which means that brokerages were up-charging customers to make profits every time a customer bought or sold a security. Robinhood decided to take on that cost to make all transactions completely free.
Instead of making money through commission fees, Robinhood makes money through a variety of other means. These include the following:
- Interest on uninvested funds
- Robinhood Gold Premium subscriptions
- Marginal Interest and Margin Lending
- High-frequency trading and order flow
These allow your transactions to be completely commission-free, which has become a model that other brokerages have followed.
How Safe Is Robinhood?
As a legal securities brokerage, Robinhood is regulated by the Securities and Exchange Commission (SEC), and it is a member of the Financial Industry Regulatory Authority (FINRA). Robinhood is also protected by the Securities Investor Protection Corporation (SIPC), which protects up to $500,000 (or $250,000 for cash claims). SIPC insurance does not include cryptocurrency investments.
Aside from the legal protection, Robinhood also adds layers of verification protection for signing into your account, such as TouchID, FaceID, a custom pin code, or two-factor authentication.
As with any other legal broker, you will need to provide your social security number and link your bank account. Once verified by Robinhood, your banking credentials will never be accessed by them again. All these credentials and sensitive details are safely encrypted before being stored.
Like other brokerages, Robinhood has taken the necessary safety precautions to keep all of its customers’ information safe and away from scandalous activity.
Commission-Free: We explained this in the description, but since it is one of the features that made Robinhood so big, it is worth putting into the well-known pros of Robinhood. Since there are no commission fees for any transaction, it is of big significance to those who trade frequently.
Live listening to earnings calls: Robinhood allows its investors to listen live to earnings calls from companies that the investor chooses to invest in. You can turn on your push-notifications to alert you of when a company will be having an earnings call.
Factional Shares & DRIP: These features are relatively new to Robinhood, but they are very effective for those who either have no desire to manually buy their assets after getting dividends or manually buy an asset regularly.
DRIP stands for Dividend Re-Investment Plan, which simply means that you have the option to set up all your dividends to be automatically reinvested into the company which pays them to you.
Factional shares are simply what you have when you can buy a stock with as little as $1.00, regardless of the price of the stock. This means that if you want to buy a stock, and it is currently over $1,000, you can buy a fraction of that stock with your single dollar. This is also how your dividends are reinvested back into a stock.
Automated Recurring Investments: These are investments done for you. All you have to do is pick a stock, set up a schedule to buy a stock (weekly, biweekly, monthly, etc), and choose a dollar amount you want to invest. Due to the fractional share feature, you can buy into an investment with the dollar amount you set up, regardless of the stock’s price. Keep in mind, however, that recurring investments are not available for all securities on Robinhood. ETNs and ETFs are perfect examples of this.
Cash Management Account: Robinhood has a feature that allows your uninvested money to earn interest, this is known as their cash account. It can be treated as a regular checking account. They provide you with a debit card, direct deposit, the ability to pay bills with it and withdraw money from 75,000 ATMs across the U.S. The money in this account is FDIC insured up to $1.25 million thanks to its agreements with multiple banks. Currently (in 2020), the APY on Robinhood’s cash account is 0.30%. This percentage could move up or down and is largely dependant on what the Fed chooses to do with interest rates.
Data: Robinhood has made large moves to increase the research tools available for customers on the platform. They offer links to earnings calls (as described above), analyst ratings, earnings calendars, and lists of top movers. They also have access to data sources such as CNBC Business, Wallstreet Journal Markets, Barron’s, and Reuter’s. This data is superficial with a free Robinhood account.
Ease of use: Robinhood is one of the few investing brokers that makes everything within their app extremely user-friendly. The sign-up process is easy, and executing transactions is easy too, almost foolproof. Robinhood allows you to organize your list of stocks (whether you own them or not) into categories of your choice. This allows you to easily pull up and access data on specific stocks and compare them to other stocks on your lists quickly and easily.
Instant access to deposits: Whenever you deposit up to $1,000 into your Robinhood account, Robinhood makes it available to you instantly so that you don’t have to wait to buy a security until the funds settle in (a process that takes about 5 days for funds going in, and funds going out of Robinhood). Instead, you can make your security purchase instantly.
This is a benefit that very few brokerages offer. If you do this, make sure you actually have the money in your bank account before making a deposit, otherwise, you will be penalized and possibly banned from the instant deposit feature. Also, you can’t make cash withdrawals from instant deposits. They can only be used to buy securities on the platform.
It is also worth noting that if you sell your shares today, you can use those funds as soon as those stocks sell, rather than waiting 3 trading days for that cash to settle, as it is with other brokerages. Again, this does not work with withdrawals. This is only for securities within the platform.
Robinhood Gold: This is an optional service that costs the user $5 per month. The first 30 days are free to try out the service. Robinhood Gold has many added benefits such as:
- Morningstar Research Reports
- NASDAQ Level 2 Market Data: which are faster-updated quotations, these are more important if you’re looking at micro price moves within a security.
- Margin Trading: This is when you borrow money to invest, then pay back with interest (I’ve personally never liked margin trading). Margin trading gives you access to up to $1,000 completely interest-free, after the $1,000 limit, you are charged 5% yearly interest.
Like any other broker, Robinhood is not perfect. Although it is easy to use and gets beginners started with investing, it still has work to do.
Recurring Investments are not available with all securities: As mentioned above, only some securities have the recurring investment feature available. This limits people’s options in terms of what they can Dollar Cost Average (DCA) their money into if they have a busy life.
Superficial data: If you want more in-depth data, you need to be a part of Robinhood Gold for $5 a month. Keep in mind that although this data is useful, it is still very superficial in comparison to its competitors. It is advisable for the investor researching with Robinhood or Robinhood Gold to supplement their data with outside resources like Yahoo Finance. This is one of the reasons I don’t use Robinhood Gold, I will be going to outside resources anyway, so the extra $5 a month isn’t worth it for me.
Slow customer service: Customer service can only be reached via email. The customer service isn’t terribly slow. The last time I needed help with something on their platform, I got a response in about 24 hours. However, it still would be a lot easier to have a phone number to reach whenever a problem emerges. This is a common complaint among Robinhood users.
No tax-sheltered accounts: Robinhood does not offer any type of tax-sheltered accounts like a Roth IRA or a Traditional IRA. All transactions done within Robinhood are prone to taxation. If you want the most from your profits with the least amount of taxation within a Robinhood account, go for long-term capital gains; otherwise, seek a tax-sheltered account with another broker.
No access to Mutual Funds or Bonds: For those of you looking to invest using mutual funds or bonds, Robinhood is not the brokerage to use. The closest they can get to a mutual fund is an ETF, but as we know, those are not the same. You and your expertise are in charge of all the funds within Robinhood. No experienced professional has access to your money unless of course, you are one. In the case of bonds, you won’t be finding them or any bond indexes on Robinhood.
Cryptocurrency cannot be moved outside of Robinhood: If you buy cryptocurrency through Robinhood, please bear in mind that the cryptocurrency you buy through Robinhood can only be traded for dollars. You cannot transfer your cryptocurrency to a wallet of your own, nor can you use that cryptocurrency for other transactions unless you convert it to dollars first, AKA selling it. I personally don’t use Robinhood to buy cryptocurrency for the long-run.
Cannot link to certain banks: Robinhood can link to many banks but not all. If your bank is one of the ones they don’t link to, you’re out of luck. You’ll either have to link an alternative bank account or find a different brokerage that can link to yours. Don’t worry, there aren’t too many banks that they can’t link to, but even one bank that they cannot link to is a good reason to call this out.
Glitches: Although this doesn’t often occur, Robinhood has had a couple of outages in the past. The last one was in March 2020, during the last circuit breaker. Robinhood stated that it was the result of an infrastructure issue that didn’t allow for its computer systems to communicate with each other. Robinhood fixed the issue, and it has no longer reappeared.
Robinhood also had a past glitch where users were able to get ‘infinite money’ from their account. Robinhood has since then fixed this issue as well.
Who Is Robinhood Best For?
Robinhood is best for those who are wanting to get their feet wet with investing and for those who are intermediate investors. Does that mean that well-experienced investors don’t use this platform?
Several experienced investors also use Robinhood. They use it alongside other brokers that they like, but Robinhood continues to improve and grow. They have already proved themselves a worthy brokerage, and they continue to innovate for the better.
If you want to trade cryptocurrency, stocks, and hold margin accounts all on the same, easy-to-use platform on your phone, then Robinhood is great for you. Just remember, if you want to hold your cryptocurrency for the long-run, you probably want to look somewhere else. Otherwise, Robinhood is a good choice.
With all this being said, although Robinhood has had its ups and downs like many other brokerages, it is certainly a solid choice for any beginner to an intermediate investor. Experienced investors also speak highly about it and the benefits it brings.
You might wonder why even after seeing the cons or drawbacks that Robinhood has, I still gave it 3.5 out of 5 stars. The reason for this is that in the past two years that I have used Robinhood, I have not had any problems with it, despite those drawbacks. The only issue I’ve had is not being able to link one of my bank accounts to it, and it wasn’t a major issue. However, the common issues that I see others complain about are worth noting.
After conducting my research and reading feedback on Robinhood from its users, I see that for the most part, other people have similar experiences to mine. I would personally not use Robinhood to trade, but there are people out there that do, and they have had positive experiences with the platform (for the most part). This excludes the negative experiences of making a bad trade.
Some may find more luck with other brokers, but I personally have had a great experience with Robinhood. Feel free to leave any feedback on questions or experiences you’ve had with Robinhood, I’d be happy to learn about them!