Are Stocks Bought Thru Robinhood's App Really Free? A look at Robinhood's platform and business model.
Robinhood - Zero Commission Trading
Robinhood is a pioneer is equity trading and opening stock, option and cryptocurrency markets to individual investors. They introduced zero commission trading and changed the industry. Their model forced industry giants like TD Ameritrade, Charles Schwab and more to alter their models to compete with this startup.
Robinhood has become incredibly popular among younger investors. There are a lot of reasons for it’s popularity, but it’s certainly made its mark through the zero commissions on trades. They’re working to pioneer similar offerings in cryptocurrencies and more. They are focused on investments in public markets, so they are not in the pre-IPO equity space, yet.
In this post, I’ll go through the platform and some of the features available. While zero commission trading is great, there is no such thing as a free lunch. So, I’ll also cover into some of the ways Robinhood makes money and what it means for investors.
To be completely honest, I opened my Robinhood account prior to TD Ameritrade and others offering zero commission trades. Once the major platforms matched Robinhood, I moved back to TD Ameritrade, my preferred platform. To show all the features of Robinhood, I’ve deposited $1000. That will allow me to make some stocks and options trades to demonstrate some of the features.
One of the best features of Robinhood, besides the zero commission trades, is the instant deposit.Your funds, up to $1000, are available instantly for trading. Most platforms provide instant availability for stock trades, but not for options. I typically wait about 5 business days to trade options on TD Ameritrade. While not a long time, it can be frustrating when the market is making large moves.
Zero Commission Stock Trading
Robinhood stock trading is very simple. When you login to your account, you’ll see a search box at the top of the screen. Just enter the company name and select the stock symbol you are interested in buying. For our example, I selected a market favorite – Apple.
After selecting Apple, I’m taken to the stock screen. Here, I can view stock price, a historical price chart, company info, news, analysts ratings and earnings info. This is far less than the information available on older brokerage sites, but it works for what we need.
Once I’ve decided to buy Apple, all I need to do is enter the amount I would like to invest. Here, I’ve input $500. Notice that Robinhood has calculated a partial stock amount. This is because they allow for fractional stock purchases. To verify this, I invested $100 in Apple at $114.45. I received 0.873591 of Apple stock in my account. Pretty easy.
Zero Commission Option Trading
Most retail investors dabble in stocks, especially the popular ones like Apple, Microsoft, Tesla and so on. For those interested in hedging against losses, generating revenue or taking high risk positions, options trading provides an avenue to accomplish some of these goals.
When you navigate to the stock screen, you’ll see a box below the stock information that says “Trade AAPL Options.” Select this box to open the options screen. The image above is the Call option section for Apple. It provides the current stock price and the prices for call options at different strikes for the expiration selected. The buttons at the top allow you to switch between calls and puts.
Besides the type of option and the strike prices, the expiration is another important option. To view expiration dates available, simply click the box and select the expiration from the drop down. The options prices will change based upon your selection.
Once you’ve decided on the type of option, the strike price and the expiration date, click the + symbol to add the option to your order screen. Unlike the stock purchase screen, fraction purchases are not available for option. So, enter the number of contracts you’d like to buy. Remember, each contract is worth 100 shares so the cost will be the option price * 100.
Zero Commission Trading - Is Robinhood Really Free?
Robinhood is a very successful early stage company. The have multiple companies tied to a parent company. Here, I’ll quickly cover the financials for Robinhood Securities, LLC the registered broker/dealer arm of Robinhood. This is the entity that process all of your orders.
First, note that Robinhood Securities has over $3 BILLION in assets. A large portion of that ($2.4B) is cash held for users and other broker/dealers. So, it’s not really Robinhood’s. But, once it’s removed the still have around $1 billion in assets. Safe to say, they’re doing well.
Next, let’s look at receivable from users. The receivable from users represents “margin” loans provided by Robinhood to users. This allows users to buy stock and options on credit in return for a pre-determined interest rate. Robinhood currently has $658 million in loans to users.
Now, let’s turn to the Securities Loaned. It is common practice for brokerages to lend stock held by clients to other institutions. This is primarily so that the second firm’s clients can “short” the stock. That is, they borrow from Robinhood, sell it in the market and hope to buy it back cheaper to return to Robinhood. Some brokerages share this income with their clients, Robinhood does not. They are essentially helping you buy stocks to then lend to other firms to bet against your position.
The last major piece is the Receivable from Brokers… This represents the amount due from brokers for routing users’ orders for execution, receivables for securities not delivered by the Company to the counterparties by the settlement date (“securities failed to deliver”), and interest receivable on securities borrowed. This is the income Robinhood generates. It’s difficult to know how much exactly, but a portion of this $20 million is a fee paid by brokers to have access to users orders. Other firms are paying Robinhood for the right to fill orders placed by their users. It could be that they need the volume, or that they are prefer Robinhood’s typically unsophisticated users over more experienced traders. Robinhood says these fees are not taken into account when routing orders, but who knows for sure.
Do Your Homework
My blog is a great place to start, but I encourage you to conduct thorough due diligence prior to investing through Robinhood. To help you get started, I provided the links below to connect you to the Delaware Division of Corporations website, the SEC and CFPB.
Ready to Join Robinhood?
That’s great! There’s no reason to be turned off by Robinhood’s business model. After all, they are in business to make money and they do so by providing you and I with something of value. In this case, it’s simple, zero commission trading.
Us the “Open Account” button to get started. As a bonus for using this link, you get a free share of stock and I get a free share of stock. It’s a win-win!
The statements in this post are my opinion and reflect my personal experience investing through Robinhood. I cannot, and do not, guarantee that your results will be similar. Please, invest carefully and understand that your investment may lose value.
I do not receive compensation from Robinhood for writing or maintaining this post. However, I do receive a free stock if you use the link above to open an account to invest or borrow.
Questions? Contact Me