We're going to answer a question that we get asked all the time: How does Robinhood work? Robinhood is a free, US-based stock trading app that allows 100% commission-free stock, options, cryptocurrency and ETF trades. This guide will teach you everything you need to know about Robinhood so you can trade effectively.
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The biggest reason why the RobinHood is so popular is because of their commission-free nature. In short, they don’t charge any trading fees and they have $0 account minimums. Which raises the question, how does Robinhood make money?
We’re going to answer this question and more in the coming sections. By the end of this guide, you’ll know exactly how Robinhood works and how to start trading.
In 2019 the RobinHood app managed to become the largest US-based online stockbroker, surpassing E-TRADE. Up until this year, E-TRADE was the largest broker-dealer in terms of the number of customers. Today, Robinhood is the most popular mobile trading app, with more than 6 million customers.
First, let’s start by answering the first basic question, what is the Robinhood?
What is Robinhood?
Robinhood is a broker-dealer app that allows users to trade stocks, options, and ETFs with zero commission fees. You can also buy and sell cryptocurrencies on Robinhood App. Robinhood allows users to trade cryptos like Bitcoin, Ethereum and Litecoin.
Because the Robinhood doesn’t charge any trading commissions, it’s much easier for a novice traders to learn how to make money. The second advantage you have is that there is no minimum deposit requirement to get started trading with Robinhood App.
You can start investing with Robinhood App with any amount of money.
The downside is, they don’t offer any tax-sheltered accounts like the IRAs or other types of retirement accounts. Another drawback of Robinhood is that right now they don’t offer automated trading features.
You can trade the following instruments on the RobinHood App:
RobinHood was the first brokerage account to introduce $0 commission trading. Normally, when you start trading stocks, a stockbroker will charge you between $5 and $15 to buy stocks. When you want to take profits and sell, the stockbroker will charge you another fee. This isn't the case with Robinhood.
The Robinhood App also allows its users margin trading through Robinhood Gold, their premium account tier. Their commission-free model and wide variety of tradable instruments made this app experience meteoric growth in 2019.
Let’s now answer another question that many new aspiring traders have:
Is Robinhood safe?
Is Robinhood Legit?
Is Robinhood legit? Is the Robinhood App safe? These are legitimate concerns that any individual investing in the stock market can have.
You can trade with peace of mind because your money on RobinHood is protected by the Securities Investor Protection Corporation (SIPC) up to $500k for securities and up to $250k for cash claims.
Additionally, Robinhood is also regulated by the Financial Industry Regulatory Authority (FINRA), which makes Robinhood safer to use. So, in terms of security, the investor’s money is very well protected.
Because Robinhood is a securities broker, it needs to be regulated by the financial regulatory authorities in the USA, namely the Securities and Exchange Commission (SEC). On top of being regulated by the SEC, Robinhood also has other safety procedures to protect your hard-earned money and your private data.
Even though opening an account with Robinhood is different than the traditional stock brokerage account, they are still required by law to collect certain information from their clients. This includes trading activities and tax information. To file information tax forms you need to give them your Social Security Number (SSN).
But the app doesn’t come without its dangers.
Trading on the go and being an inexperienced trader can be a recipe for disaster. This is really the only danger the RobinHood App posses. This is because it boasts itself as being the most loved investing app by millennials. And, we know many Millenials are still missing the financial literacy to become a successful stock trader.
The good news is the app itself is straightforward and easy to use, even for new stock traders.
Next, we’re going to give you a basic idea of how Robinhood works.
How Does Robinhood Work?
RobinHood works the same way as any other online stock and options broker. You follow the same standard process:
- First, you submit your application form to open an account with Robinhood.
- Secondly, you transfer your funds to the RobinHood account.
- As soon as the money hits your Robinhood account, you can start buying and selling stocks, options, ETFs and cryptocurrencies.
If you aren’t familiar with the sleek Robinhood interface, you should know that they offer different ways to buy stocks. In the next section, we'll show you an example of how to buy and sell stocks on Robinhood from the convenience of your smartphone.
Using an investing app can be intimidating and scary, but it's actually pretty easy
Buying and selling stocks on RobinHood up is as simple as following these 7 steps:
- Load up the RobinHood App.
- Search for your favorite stock, ETF or cryptocurrency.
- Tap the "Trade" button.
- The next page will give you the option to buy or sell. Tap the "Buy" button.
- Select your Order Type from the upper right order and the number of shares you want to buy.
- Confirm your order.
- Swipe Up to submit the order.
Pro Tip - To be as efficient as possible, you can create a watchlist for quick access to your favorite stocks.
Don't forget to read our guide where we broke down the general principles and the best way to pick stocks for day trading: Best Day Trading Stocks with Mountains of Cash.
Let’s now talk about something more controversial, which is how does Robinhood make money?
How Does Robinhood Make Money?
Can a stockbroker make money without charging a commission and offering stock trading for free?
It appears that RobinHood managed to be appealing to investors and still earn revenue from various sources of income. Moving forward, we’re going to outline how RobinHood can afford to offer you commission-free trading and still make money as a company.
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The way Robinhood makes money is actually very transparent. All the sources of revenue are listed on their website. RobinHood App doesn’t charge a trading fee like its competitors E*TRADE or TD Ameritrade. But Robinhood generates its profits from the following streams of income:
- Premium accounts. Robinhood Gold is a premium feature that allows margin trading and other benefits. RobinHood Gold starts at $5 per month.
- Margin Interest. Like any other stockbroker, RobinHood earns interest from customer cash, the same way banks collect interest on cash deposits.
- They charge $10 for any transaction made through a phone call.
- They can also assist in purchasing foreign stock for around $35 - $50.
- Payment for order flow. This is a common practice in this industry.
Again, There are no RobinHood hidden fees! Now, you can argue that selling order flow to high-frequency trading (HFT) can result in a delayed fill on your order. Your order to buy stocks might be passed on to these HFT firms before routing to the actual exchange. This, in turn, can lead to a worse fill on your order, thus it is seen as a hidden cost in trade execution.
But, everyone in this business is most likely to sell your order to these HFT firms before passing it on the exchange. So, there is no escaping this practice. You have to get used to it and accept it as a way of doing business.
If you want to learn how high-frequency trading works, check out our HFT guide HERE.
Since we’re followed by a wide variety of traders, let’s touch on another topic that we’re sure some of you will appreciate. Namely, we’re going to give you a quick guide on how to trade options on Robinhood.
How to Trade Options on Robinhood
Before you buy and sell options on RobinHood make sure options trading is unlocked on your Robinhood account. Depending on your level of experience you’re given a Level 2 designation if you’re a novice trader and if a Level 3 designation if you know how to execute more complex options strategies.
With a Level 2 designation you can execute the following options trades:
- Buying Call and Puts. Learn how to buy Put and Call options by following the step by step guide on How to Trade Stock Options for Beginners.
- Covered Calls. Become a smart options trader with this covered call strategy.
- Cash Covered Puts.
Opening an options trade on RobinHood is as easy as following these three simple steps:
- Tap the magnifying glass and search for your favorite stock you want to trade options on.
- Tap Trade in the bottom right corner of the stock’s Detail page.
- Tap Trade Options.
(Click on the picture to enlarge)
Please check out the different options trading strategies in our Options Investing Strategies Guide.
Final Words – How to Make Money on RobinHood
For a certain type of stock traders, the RobinHood App can be the best stock trading app. However, just because the barrier to open a RobinHood account is so low, you still need to do your own research if you don’t want to end up losing your hard-earned money. Before you hit the buy button follow our guide on how does Robinhood work?
While we have already given you some reason why is RobinHood legit this doesn’t guarantee that you’ll always make money. But you know that your funds are secured and you trade stocks through a reliable trading platform.
If you have no issue with how does Robinhood make money? and you like the convenience of trading through your smartphone go ahead and take your free stock trades today.
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