By now, you’ve probably heard of Robinhood, an app-only stock trading platform that, according to their website, is working to make financial markets accessible to everyone in the world by providing the best financial tools in the most cost-effective way possible. For the purpose of testing out the app, I opened an account with Robinhood. Here’s my Robinhood review based on my experiences with the app.
What is Robinhood?
Robinhood is an app-based, no frills stock brokerage that offers free-trading with no minimum deposit requirements and no maintenance fees. The service is easy to use and easy to download. And best of all – it’s free!
Who is Robinhood For?
With its streamlined, easy-to-use interface, Robinhood appears to be targeting Millennials, but anyone looking for an alternative to full-service online trading could find Robinhood’s free service appealing. Here’s who would enjoy this platform most:
- Frequent stock or ETF traders (but not day traders)
- SmartPhone addicts and mobile device users
- Investing newbies who want an easy-to-use investing interface
- Anyone who wants free stock
With Commission Free Trading, How Does Robinhood Make Any Money?
In their FAQ, Robinhood explains that they generate revenue by collecting interest on uninvested customer cash deposits, much like a bank collects interest on cash deposits sitting idly in consumer bank accounts.
The company has also launched Robinhood Gold, their premium service that allows users to partake in after-hours trading and to trade on margin (a fancy investing term for borrowed money). The Robinhood Gold service carries a flat monthly fee based on margin – or as Robinhood refers to it, “buying power” – and account size. In general, this type of functionality is best suited for more experienced investors. In any event, the service is optional and trades remain commission free.
While the company touts its lean business model as one of the primary reasons it is able to pass along free trading to users, doubts remain as to whether Robinhood’s business model will be successful. This isn’t the first time that a brokerage tried out a freemium model. Several others tried a similar concept before determining that it wouldn’t last (see Zecco and LOYAL3).
Currently, there is only one other firm following the freemium model: WiseBanyan. Unlike Robinhood, which is a pure stock broker, WiseBanyan offers free robo-advisor services. But similar to Robinhood, they offer the cheapest service in their category which attracts questions about the sustainability of their business model.
Is Robinhood Legitimate? What Happens to My Money if the Company Fails?
Don’t worry, Robinhood is a legitimate stock broker.
Robinhood uses Apex Clearing Corporation to clear trades and is registered with the SEC to operate in all 50 states. Robinhood is also a member of Financial Industry Regulatory Authority (FINRA) and has Securities Investor Protection Corporation (SIPC) insurance, which protects your balance up to $500,000 (including a $250,000 limit for claims for cash).
In other words, if Robinhood goes under there is insurance. Keep in mind, this protects against fraud – not loss of value.
Getting Started with Robinhood
The sign-up process is easy. You can create your account via their iPhone or Android app on their website. The app is available through the Google Play or App store and is supported by Android and iOS. (Although you can sign up for a Robinhood account online, you can only access the account itself via app).
After you download the app, you’ll need to fill out a brief application. They’ll ask for personal information like your Social Security number, but it’s basically the same information necessary to open any brokerage account.
Next, you’ll be asked to link your bank account. You don’t have to link your account to sign up, but you’ll need one if you ever want to transfer funds into your account or withdraw funds.
New customers can start investing almost immediately with instant access to bank transfers of up to $1,000.
Robinhood’s Design and Interface
The stock market can be overwhelming, especially for beginners. One of the things that makes Robinhood special is their modern, purposefully simple design. Check out what Wired has to say about Robinhood’s app design:
The app’s simplicity is meant to be about more than style. Ease of access and understanding is meant to make Robinhood compulsively engaging for a new generation of investors that don’t find the stock market very accessible from the mobile screens at the center of their lives.
Robinhood’s design is clean, intuitive, and user-friendly. The app makes it easy to login using either a 4-digit PIN or the thumbprint Touch ID on newer iPhones. Once you’re logged in you can easily check the status of your portfolio, view historical graphs, and make real-time watch lists to track individual stocks.
Although the app doesn’t feature all the bells and whistles of a typical online stock trading platform, Robinhood makes it easy for users to execute trades, and supports market orders, limit orders, stop loss orders, and stop limit orders.
Commission Free Trades: Free? What’s not to like? Whether you’re a frequent trader or a little less active, saving up to $10 with each trade can really add up.
No Minimum Deposit: Unlike larger trading platforms, Robinhood doesn’t have a minimum deposit or require a minimum initial deposit to get started. Note: Investors must have at least $2,000 to open a margin account, per FINRA.
Ease of Use: Creating a new account is simple and the interface is extremely user-friendly.
Robinhood Instant: There’s a “feature” called Robinhood Instant. Typically when you sell a stock, the funds won’t reach your account for three days. This is what is known as “stock settlement.” Robinhood Instant eliminates the three-day waiting period and gives you instant access to those funds so you can execute another trade immediately.
Stock and ETF Trading Only: The app is for stock and EFT trading only and does not allow users to trade options, mutual funds, futures, bonds or other securities. This isn’t necessarily a problem if you are new to investing, but more experienced investors might want more trading options.
No Reinvestment (DRIP) Program: Currently, Robinhood does not feature an automatic dividend reinvestment program. That means that instead of automatically reinvesting dividends in the security that issued them, they will be credited to your account as cash.
No Retirement Accounts: For now, only individual taxable accounts are available.
No Broker Transfers: Robinhood does not support Automated Customer Account Transfers (ACAT), which allow customers to transfer existing brokerage assets into Robinhood. For $75, however, investors can transfer assets from Robinhood to another broker via ACAT.
Limited Research Tools and Resources: Robinhood doesn’t feature the type of research reports or analysis that is typically available on other trade platforms. That means you’ll have to do your trade research elsewhere.
Even though Robinhood lacks certain features, it’s a great tool to encourage people to invest. And anything that gets people investing and saving for their future is a good thing in my opinion.
Plus, it’s hard to complain about commission free trading and no minimum balance requirements. This is especially beneficial to newer, casual investors who want to dip their toe in the investing waters by investing small amounts. That type of approach just doesn’t work if fees eat up your principal.
Now if you’re an investor looking for more advanced features, you’ll have to look elsewhere. But that doesn’t mean you can’t do your research on another platform and execute trades on Robinhood.
Overall, we think the service is easy to use and a great way to invest in individual stocks or ETFs without all the costs that come with more traditional fee-based brokerage accounts.