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On a mission to democratize finance for everyone, Robinhood was born a decade ago with the desire to slash the cost of trading stocks for the American people. And so it did.
Nowadays, Robinhood became one of the most popular brokers among retail traders, albeit it takes clients only from the United States and (soon) the United Kingdom.
Still, the two developed countries are known for their large traders’ base (United States) and risk-takers (United Kingdom).
The recent health crisis, while damaging a lot of businesses, generated a lot of additional business for Robinhood – with the sporting industry closed and little or no sports events to bet for, people turned to Robinhood. With a great marketing strategy, the Robinhood grew in ten years as no other brokerage house did in the same period.
Not only that it democratized finance, it revolutionized the way retail traders access financial markets (i.e., stocks trading mainly). So what is it that makes Robinhood so special?
On Robinhood Secure Website
Minimum Deposit - $0
Robinhood is targeting the young generation while challenging the traditional brokerage industry. This is a brokerage house at the start of its journey, and already made waves in the industry. The traditional industry, while covering more markets, having more account types, lacks the ability to quickly respond to customer changes. Robinhood’s business model is built exactly on that – giving the customer the power to participate in the investing world while avoiding the bulk of the traditional industry.
As it grows, Robinhood will innovate further. The game is on – for the traditional brokerage houses to cope with the Robinhood pace, they will need to play catch-up or continue losing market share.
What is interesting is that most of Robinhood clients were not even considered part of the traditional industry market share. It tells much about the Robinhood’s ability to grow and makes one wonder what will happen when it caters for the traditional industry’s clients.
All in all, a new broker, new ideas, low cost, disruptive technology – this is Robinhood in the year 2020.
Robinhood Trading Products
Right from the start, Robinhood’s product differentiation is unique. The traditional investing industry is full of endless lists with what the brokerage house offers, but Robinhood keeps things simple – stocks and ETFs, options, and crypto. That is it!
However, it adds other traditional features as by-products – cash management or margin trading.
|Stocks and funds||Unlimited commission-free trades in stocks and funds|
|Options||Unlimited commission-free trades in options|
|Crypto||Unlimited commission-free trades when buying and selling cryptocurrencies with Robinhood crypto – 24/7 crypto trading|
Before continuing, we must point out what commission-free trading means at Robinhood. It does not mean there is absolutely nothing to pay for the middleman – otherwise, the broker will have to call its business differently. Instead, commission-free refers to $0 commission-trades placed on self-directed accounts, either on mobile devices or web. Obviously, other commissions apply, as presented in the next section.
Until then, one of the things Robinhood did that revolutionized stock market trading was to allow fractional trading. Effectively, one can trade thousands of stocks with as little as $1. Suddenly, stocks that retail trades did not afford to touch due to their high price are affordable.
With fractional shares, traders can choose the amount willing to invest in a company, and Robinhood automatically converts it in shares (or fractions of a share). While having the net advantages for the retail traders, fractional shares trading has some limitations too – for example, fractional shares are not recognized, marketable, nor liquid, outside of the Robinhood platform.
Robinhood Gold is an interesting product, although more of a package rather than a product to trade. On the one hand, it groups professional research reports, to give traders better tools to analyze financial markets. From this point of view, it is more of a research/educational product. On the other hand, trading on margin is possible only if the investor has a Robinhood Gold account – at $5/month.
Robinhood Commissions and Fees
Commission-free trading at Robinhood refers to self-directed accounts that trade US-listed and Over-the-Counter (OTC) securities and options via the app or website.
Fractional shares trading starts at $1. Below that amount, Robinhood does not accept purchases or sales. It also rounds holdings of fractional shares to the sixth decimal place.
Regulatory trading fees apply – $22.10 per $1000000 of principle and TAF no greater than $5.95. For Robinhood gold members, besides the $5 monthly subscription fee, a 5% margin rate applies on everything above $1000 borrowed. In other words, the $5/month fee gets you margin power up to $1000 – for anything extra, the 5% rule applies.
Wire transfer reversal fees do exist as well, together with all the other regular transfer fees for the industry – return check, domestic and international wire transfer, etc.
Only two types of accounts exist with Robinhood – the free account or the gold account. As mentioned earlier, the main advantage of the gold account is margin trading, albeit it comes at an additional cost of $5/month.
Regardless of the type of the account, Robinhood simplified the opening procedure to the max. The steps are similar up to one point, following a simple five-step procedure: login data, basic info, identity proof, funding, and submission for approval.
Robinhood Pros & Cons
Like any other broker, there are pros & cons for investors/traders. Here are the main benefits and drawbacks you should know before applying:
Simple and User Friendly
Everything at Robinhood is simple and easy to use. From pricing, app, education – the broker strives to keep things simple, and that is one of the main reasons for its success.
It does not overcomplicate things with useless information, something that appeals to many retail traders that often feel overwhelmed by the way financial markets are presented at traditional brokerage houses.
Low Trading Costs
Robinhood reduced the trading costs to the minimum possible. That may also be because it offers limited products when compared with other brokers, but the number of its users warrant the price war it started.
As a result, the big names in the industry began offering zero-commission trading to their clients, in an attempt to retain customers. But Robinhood goes beyond just offering a low price environment – it has a simple fee structure and a transparent way of charging its customers.
A major breakthrough for Robinhood and retail trading in general.
Fractional shares allow retail traders to invest any amount in a company, and Robinhood transforms that amount into the equivalent number of shares or just fractions of shares.
In other words, no price limitations for the retail sector anymore.
Easy to Open an Account
Simplified procedure for account opening, with quick response time and fast access to the Robinhood app. One caveat – US citizens only.
The cryptocurrency market, while not regulated, attracts a large number of investors from the retail community. The reasons vary, from strong believers that the crypto will replace the fiat system to just investors that want to diversify or to ones that do not want to miss a new opportunity.
In any case, it fits well with the overall client base, and further differentiate Robinhood from traditional brokerage houses.
Extensive, Easy to Understand Trading Education Section
This is a big plus for Robinhood.
It offers a huge trading education base, built mainly on articles using infographics so that the most complex financial terms are explained in a simple way so that everyone understands them.
Only Market Orders For Fractional Shares
When trading fractional shares with Robinhood, only market orders are accepted.
This limits the trading strategy, as, for example, one can not use limit orders to trade fractional shares.
Fractional Shares Illiquid Outside the Robinhood Platform
In other words, the investors become “prisoner” to the brokerage house because due to the inability to transfer the shares to a different broker, should he/she choose to do so.
Once again, this is either brilliant marketing to retain customers, or it has to do with other brokers unable to accept/offer fractional traders. In both cases, it represents a limitation for the investor and contributes a lot to the high customer retention rates Robinhood has.
Margin Trading Available on Robinhood Gold Accounts
The subscription fee for such an account ($5/month) is not an issue for Robinhood users, but the idea again imposes some limitations.
First, if ever though of using margin trading with Robinhood, this is the only way to do it – by having a gold account. Second, the monthly fee is arbitrary, and in the full control of the broker.
Later down the road, the broker may decide to charge more, and, once again, the trader is caught in a locked system with no way out except selling the shares, withdrawing the proceeds, and close the account.
Only US Clients
Robinhood takes, for the moment, only clients out of the United States.
Although plans do exist for expanding in other countries, regulatory issues keep the company at bay. One should imagine that by entering another market, Robinhood will easily disrupt it as its popularity and fame grew well beyond the US borders.
The next market to open is the United Kingdom, but discussions exist for further expansion.
Limited Account Types
No retirement accounts available or other types of accounts other than the classic stocks and options trading. This is a major limitation when compared with other brokerage houses, but it comes as the company’s decision to stick to its core competencies.
Let us not forget that the business is still in early growth stages and seeks to attract customers via low prices. Further down the road, after consolidation, it may be that it will provide other account types to attract other types of investors, but not in the present.
Robinhood Trading Platform
There is no trading platform other than an app and a web-based solution. Robinhood is proud of its exceptionally engineered systems and invested a lot in the infrastructure needed to support a large number of daily users.
It should come as no surprise that sometimes the financial media streams point to a crash in the Robinhood app, which is both a good and a bad thing at the same time. The bad part, obviously, refers to the traders’ inability to buy or sell securities due to the lack of access to the trading account.
The good part tells a different story – a popular, rising star in the brokerage industry, one that does business like no other, and attracts so many daily users that it crashes the system. Eventually, technological breakdowns will be fixed, but the danger for disrupting the traditional brokerage industry by attracting a huge number of clients remains.
Instead of investing in an in-house built trading platform, like many of traditional brokerage houses did, Robinhood chooses the easy road – catering to the younger generations (millennials, X-ers). If all they use is an app and smartphone, that is what Robinhood offers.
The only way to get in touch with Robinhood is by sending a message using the contact form. There is also a comprehensive FAQ that acts as a database for regular customer issues.
Visit the Robinhood homepage and click “Sign up”.
On the next page, type your names, email, and create a password, then click ”Continue.”
Then, verify your identity, by typing your social security number, date of birth and citizenship, then click “Continue.”
Now, indicate the investment experience you have in the investment field, and then click “Continue.”
Lastly, read through the information given in the next page.
When you are through, click on “Submit application.”
Presented as the Learn section, the trading education part at Robinhood comprises hundreds of articles crafted so to avoid complex terminology. It creates satisfaction among users (mostly younger generation) as it makes it easier to understand financial terms and brings traffic to the website and thus new potential clients.
The trading education section covers everything you can imaging for stock trading and trading in general. What is more important, the info is presented in an easy to understand way, with a lot of charts and infographics.
3 Great Alternative Brokers to Robinhood
Here are our 3 choices of brokers which can use as a great alternative to Robinhood:
Robo-advisory services increased in popularity in the last years. As digitalization takes over our lives, it conquered financial markets too.
Acorns services seem simple and intuitive. Compared with the traditional investing competitors, accessibility is the number one reason why investors choose to use Acorns instead of a traditional brokerage house. And yes, Acorns is a broker, as it intermediates the access to financial markets, albeit it does so for a ridiculously small fee due to extremely low operational costs. One cannot compare the costs of, say, Schwab, one of the largest brokerages in the United States, with Acorns. Hence, the difference in the costs is seen in the fees paid for accessing the market.
Besides accessibility given by the low entry costs, Acorns shines at the simplicity of its products. After all, there are only five portfolios to choose from, based on how much risk the investors are willing to take. By offering much more products to choose from (e.g. options trading, mutual funds), the traditional investment industry makes it difficult for individual investors to pick the right strategy for their portfolio.
Therefore, a robo-advisor like Acorns does not need to invest in trading education as it is its job to calibrate the portfolios and to allocate the investments accordingly – not the job of each individual client. This brings us to the biggest advantage of a robo-advisory firm in comparison with traditional investment services – there is no need to do anything, but send money in every day, week, or month. This is what attracts people scared of dealing with classic brokerage houses either due to lack of knowledge or to high costs.
An investment management firm with a worldwide reputation in funds’ management, Vanguard focuses less on the individual investor and more on institutional ones. It runs a huge financial advisory business and has over thirty million customers worldwide – a sign of a successful business that survived the test of time.
However, the individual investor still finds value in Vanguard services, albeit at higher costs than compared with the competition and at the expense of focusing more on the mutual funds industry and less on other markets like the derivatives one.
Interactive Brokers offers services for both retail and institutional investors. It stands out from the pack as a broker that is best for gaining access to the worldwide markets. Interactive
IB offers a complete brokerage service. It not only caters to individual clients, but prop traders, family offices, hedge funds, money managers, and small businesses. This makes Interactive suitable for global traders. The company recently aggressive campaigning to encourage retailer traders, who can benefit from the experience, background, and resources the company gained through big business dealings.
While it may not be the cheapest broker around, the access to global financial markets, competitive pricing, and premium technology make Interactive an interesting proposition. So, if you’re in need of a professional, regulated, global broker, who brings together institutional clients and retail traders for mutual benefit. Interactive is a solid choice.
Robinhood is Best For..
US stock market retail traders. This is a broker that accepts only US clients and built its reputation on attracting retail traders that otherwise would not think of participating in the stock market.
By introducing fractional shares, Robinhood caters to cost-sensitive traders, retailers that now can own shares in various US companies. Crypto-enthusiasts are welcomed as well, as Robinhood offers access to the crypto market too.