There has been a lot of talk lately about Robinhood, a stock trading app that claims to offer commission free trades for stocks and cryptocurrency and also claims to give people free stocks for signing up. Considering that these seem like some wild claims (and because I have a healthy curiosity about new personal finance apps), I decided to download Robinhood a few months ago and give it a test drive and see if it was legit or an outright scam. Admittedly, this may seem like a terrible thing to try to test out…but then someone’s got to do it, right? So here I am, your blogging crash test dummy, reporting my findings about the Robinhood app.
What is Robinhood?
According to the Robinhood website, this app lets you “Invest in stocks, ETFs, options, and cryptocurrencies, all commission-free, right from your phone or desktop.”
Hold up. Commission free?
Yes. Commission free. That’s what they claim. Now that does beg the question “how does Robinhood make money?” Well, I’m glad you asked (because honestly so did I).
As you probably know, whenever you purchase or sell stocks the brokerage charges a fee called a commission. I can’t really give you a comprehensive comparison at this time, but I do know that Fidelity usually charges about $7.99 per trade. So if you’re one of the people living paycheck to paycheck (like, you know, most of us non-Wall Street people), then it’s a barrier to entry into stock trading that makes you go “ewwww”.
Personally, I don’t have really any extra cash to put into investments (maybe some change here and there, but definitely not what I consider “investment level funds”) so using a more traditional brokerage isn’t on the radar. But who can pass up free money, right? So I decided to test Robinhood using free money.
How I Started Investing with Robinhood…for Free
First off, the Robinhood app costs nothing to download. It DOES prompt you for some personal information like your phone number, address, and social security number.
Okay, this part is important: I understand that it’s good to be skeptical about apps that might be trying to steal your personal information. You should always be skeptical. But after a quick Google search, I was able to confirm that this isn’t just normal, it’s mandatory for trading apps. And bank accounts. And things like that.
When you contact a broker, you may be surprised to find yourself answering questions you consider personal or private. The broker is not being nosy—he’s just complying with the law. What may seem to you like irrelevant or probing questions are actually required inquiries the broker must make before making any trades on your behalf.
According to the Securities and Exchange Commission (SEC), there are three main reasons why a broker will ask for personal information: suitability, record-keeping requirements and anti-terrorist/anti-money laundering laws.
Since the SEC demands that investors answer these questions, you’re going to have to give them this information if you want to use the Robinhood app, since it is a stock investment tool.
How I Got Money to Invest…for Free
As you may have guessed, I really like apps that have referral programs. And yes, Robinhood has a referral program.
And let me tell you…Robinhood’s referral program is pretty awesome!
When you refer a new user to Robinhood, both you AND the person you refer get a random share of stock.
I know, right? Free money! Sort of. You have to hold these stocks for 3 trading days before you can sell it, but that’s still a far shorter time period than most affiliate programs make you wait to get paid (I’m looking at you, Amazon, and your Net 60 wait times…I still love you though, Amazon…).
So I signed up for Robinhood, then referred one of my personal friends to them. Boom. I got a free share of Groupon, sat on it for the three day waiting period, watched it go up a few cents, then sold it. Then I threw it into some cryptocurrency because sometimes I just like to watch the world burn.
But the bottom line is…it worked great. I technically made money with ZERO cost to me.
How Does Robinhood Make Money if They Have Free Commissions?
That’s actually a great question, because it sounds a bit strange. And we all know that nothing is really free. So here’s how it works (also from Investopedia):
Robinhood, like other brokers, earns interest on uninvested cash in customer accounts. They also pass through any regulatory fees that are incurred when a trade is placed. These are typically fractions of a penny, but the firm rounds those fees up to the nearest penny. Robinhood charges $10 per transaction made on the phone with the aid of a live broker, and they also assist in some foreign stock transactions for $35-50.
Robinhood claims that they receive very little income from payment for order flow, according to a statement issued by Vlad Tenev, the firm’s co-CEO and co-founder, on October 12, 2018. According to Tenev, Robinhood earns ~$0.00026 in rebates per dollar traded, or 2.6 cents per $100 traded. Most brokers report payment for order flow on a per-share basis, but Robinhood does not follow that traditional method of communication, making it very difficult to compare how much they reap from market makers versus other brokers.
So is it actually free? Well, technically no, but unless you have fractions of a penny lying around, you probably won’t really notice the difference. I didn’t. But then, I’m also just tossing around the free money from referrals, so I haven’t really lost anything either way.
Is Robinhood a Scam?
No. Robinhood is a legit stock and cryptocurrency trading app that can let people invest basically for no startup cost on their part (outside of a little bit of effort generating referrals). Their platform is VERY easy to use, makes transfers in and out of your bank very simple, and outside of people wondering about how much money they really make seems to be a really, really good way to get started investing on your own on the cheap.
I do have ONE little complaint about Robinhood though…
Something I would REALLY love to see in the Robinhood app would be a dividend reinvestment plan. DRIPs are awesome because whenever a stock earns a dividend, that income would be reinvested directly back into the stock (I have to hand it to Fidelity…they’ve got this all done up nicely). I get that something like a DRIP could actually cut into Robinhood’s profit model, but hopefully down the road they will be a big enough player to make dividend reinvestment a thing in their app.
So overall…I really like Robinhood. It’s a great way to get started investing when you don’t have a lot of money, it’s easy to use, and it’s a LOT cheaper than traditional brokerages for basic trades. I recommend it for sure.
No, I don’t work for Robinhood, but I do get referral stocks when you sign up through my links…and you’ll get one as well. Also, I’m not a personal finance expert or anything…I only share the things I learn from experience, so you should totally put in your own research before doing anything I say. I’m just here to give my two cents on things. 🙂