What is Robinhood, how does it make money, and is it safe?

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Robin Hood

Whether you’re a hobby trader, experienced investor, or someone who follows financial news, you’ve probably heard of Robinhood. This is an online trading platform that is popular among novice investors and those with independent portfolios who want to invest on their own.

What is Robinhood?

Founded by two Stanford graduates with a mission to provide more access to investments and “democratize finance for all,” Robin Hood provides a variety of financial features at your fingertips in a phone app.

You can trade stocks and options, invest in cryptocurrency, and even fund an IRA retirement plan. Robinhood also offers a debit card “cash card”. for direct purchases that offer a rewards program aimed at putting your money back into the investment.

How does Robinhood work?

To use Robinhood, you create an account on the iOS or Android app. To start trading, you register by entering all your information: email, name, address, phone number, date of birth, and Social Security number — all the general information you need to create an account with a broker. Once you create an account and are approved, you fund your account and can start investing. The registration process is similar to other online brokers. There may be a waiting period of several days between when you register and when you can start trading.

In the Robinhood app, you can view data about various stocks such as price info, news, and analyst ratings. You can use this information, coupled with other published information and your own trading strategy, to make investment decisions. You can buy shares in shares or even fractional shares (as small as (1/1,000,000 shares). This allows you to invest in more expensive companies without a large investment. You can also buy shares by dollar amounts instead of by dollar amounts shared.

More advanced traders can also utilize other strategies such as options and margin trading.

Does Robinhood have fees?

Robinhood offers “commission-free trading” like some other standalone platforms, but this doesn’t mean you always pay nothing to trade. You may incur regulatory fees and other non-commission fees as part of trading.

If you trade on margin (effectively borrowing money to increase your purchasing power in a trade), you will have to pay interest on the money you borrow. The rate you pay is based on a floating rate that changes periodically check the Robinhood FAQ for the latest information, but at the time of writing it is 12% — the Federal Funds Target Rate plus a base rate of 6.5%. This interest is paid daily on completed margin transactions.

If you have Robinhood Gold (its premium subscription), you get a discount on the interest you pay on margin. At the time of writing, the discount brings your interest rate down to 8%, a sizable savings.

Robinhood does not charge any fees for keeping an account open, account inactivity, or account closure. And unlike some banks, there’s no minimum amount you need to keep in your account.

Robinhood Cash Card (formerly known as Cash Management) does not charge foreign transaction fees, transfer fees, or card replacement fees. There are also no overdraft fees — even though it’s technically a debit card — Robinihood will usually decline transactions that would place an overdraft on your account.

Is Robinhood Gold worth it?

It depends on your trading activity. Robinhood Gold is a $5 per month subscription that gives you access to perks like higher instant transfer limits (up to $50,0000) and professional market data. On the hard money side, you pay a lower margin interest rate, earn interest on the uninvested money in your account, and get a 3% match on IRA contributions.

If you intend to use Robinhood regularly for trading and will keep a large amount of money in your account, the amount you save from margin interest and interest on money deposited will easily pay for the subscription fee.

How does Robinhood make money?

Robinhood makes money through rebates, margin interest, stock loans, uninvested cash, and cash management. Here’s a quick overview of each income stream:

  • Rebates: Market makers help make securities more liquid so orders can be processed more quickly and easily. These companies (usually banks or financial institutions) may offer rebates to brokers, and Robinhood earns some revenue from these rebates.
  • Margin interest: Margin is money you borrow from a broker to buy more investments. Robinhood makes money from the interest it charges for letting people borrow this money. Robinhood can also lend margin securities to counterparties and make money from those transactions.
  • Uninvested cash: Robinhood can place uninvested cash into an interest-bearing account and make money from it.
  • Cash management: Products like the Robinhood Cash Card and other money management products can also generate revenue for the platform.

Is Robinhood safe?

With any trading platform, you face the risk of financial loss if you make high-risk investments. It is important to make sure you understand all the details of any investment or trade you will make, whether on Robinhood or another platform.

As a brokerage firm, Robinhood is regulated by the Securities and Exchange Commission (SEC), which is designed to ensure fair practices. This doesn’t mean Robinhood shouldn’t make any mistakes, but it does mean unfair practices shouldn’t continue over a long period of time. Robinhood has faced intense scrutiny over some of its practices, particularly delisting stocks or blocking trading in certain stocks.

Is Robinhood FDIC insured?

Robinhood itself is not a bank, but if you sign up for a Cash Card, your uninvested funds will go into the bank’s network. Cash Cards are issued by Sutton Bank, which is insured by the Federal Deposit Insurance Corporation (FDIC). Important to note Where your funds, between your investments and your Cash Card, to understand which portion is insured.

Is Robinhood legit?

Yes, Robinhood is a legitimate trading platform.

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