In the past, it was difficult for the average investor to get into the stock market. If you send your money to the stock broker, you will have to pay fees for every trade you start. You needed to learn to understand the terms “bear market” and “margins”. Also, people are told that they need to make investments in order to get real wealth, but how can one start when there are so many obstacles in the way?
That’s what contributed to the rise of the online brokers. The very first of these online brokers that do not charge any fees on trading is Robinhood. Our post today is to give you a breakdown on our Robinhood Review in the year 2023, and our thought process going through this.
How Did Robinhood Get Started?
Robinhood was launched in 2013 specifically to provide a new model for retail investing. It is mostly a self-serve platform where you won’t find expert advice for your finances. What you are going to find, is an easy platform for young adults to get started with a diverse financial portfolio. The main aim of Robinhood is to empower retail investors to invest at their own time and own pace, on their own terms.
What Are the Main Features of Robinhood’s Service?
1) Invest in Stocks, ETFs, Options and Crypto at 0% Commission Fees
One of the most common reasons why investors like Robinhood is because of its 0% commission fees policy. Without incurring any charges on commission fees, investors are able to enter or exit their market positions without qualms. This is especially so for people who employ high frequency trading methods where they enter and exit their market positions frequently. This can really save them quite a fair bit of commission fees. Even for other investors who buy or sell less frequently, they may view the 0% commission fees as an advantage as they save some costs in the investing journey.
If you’re a discerning investor, then the question that begs to be answered is: How does Robinhood make money to support their operations in that case? That’s because the last thing we’d want is for the platform to go out of business and having to scramble to transfer our investments to another platform.
Robinhood makes their money using several methods. The first of which is a system known as Payment For Order Flow (PFOF) and it accounts for a majority of Robinhood’s revenue. This is arguably a very controversial practice and has been banned in countries such as the Britain, Canada and Australia.
In addition, Robinhood also makes money by taking the cash deposits from their users and investing it to get a higher rate of return than the interest rate given to their users. By doing that, they earn the difference between the rate of return they achieve vs the interest rate given to their users.
Last but not least, Robinhood rolled out a new program for their users in 2016 called “Robinhood Gold”. It is a monthly subscription-based program where their users get to enjoy preferential interest rates on deposits and margins, as well as access to additional market research.
2) Support Fractional Shares Purchase
Robinhood supports fractional shares purchase where you can decide how much is the exact amount you want to invest in a particular stock. This is useful for retail investors who want to start small and not purchase a full share of their favourite companies.
For example, Berkshire Hathaway (A Shares) (BRK.A) has the highest price of all stocks listed on the exchange at 468,290.00 USD per share today. To purchase a full share, an investor would have to invest 468,290.00 USD. However, with fractional shares purchase, an investor can just invest 10,000.00 USD into Berkshire Hathaway (A Shares). The benefit is that investors do not miss out on good investments even if the share price is high.
However, do note that purchasing fractional shares comes with its own disadvantages which Robinhood is not immune to. First of all, not every stock can be purchased fractionally, so choices are limited as well. Next, fractional shares can be less liquid than full shares as you’d need to wait for another fractional share buyer/seller to make up a full share before the transaction can move on.
3) Up to 3.75% Interest on Your Savings
With Robinhood, cash that is sitting uninvested in your brokerage account can also yield interest. With a Robinhood Gold subscription, the interest rate can go up to as high as 3.75% annual percentage yield (APY). Without the subscription, the interest rate given will be approximately 1.5% APY. This is a good interest rate which is higher than usual savings deposit rates.
4) Learning Platform for Retail Investors
Totally new to the world of investing? Robinhoon provides a learning platform which equips retail investors with some of the basic knowledge on how to start investing and trading. This helps in allowing investors to start dipping their toes into the world of investing and experience what it is like. However, for one to be very successful in investing, it may take more than just what is available on the learning platform.
5) The Robinhood Cash Card
For even greater convenience and to make investing an integral part of the lives of their users, Robinhood launched the Robinhood Cash Card in March 2022. This is a debit card, where cashback on your spending can be converted to stocks or crypto. Also, it allows for part of your monthly paycheck to be allocated for investing in specific stocks or crypto.
Can I Apply for a Robinhood Account?
In order to apply for a Robinhood account, you will need to be a citizen of the United States. You can be a US citizen and trade from overseas if you wish, but those without the citizenship are not going to be able to execute trades in this platform.
Other standard requirements would be to be above 18 years of age, and to have a valid Social Security Number. You can look at their website for the latest requirements for application.
Who Will Benefit the Most from Using Robinhood?
If you’re a retail investor who prefers to personally handle and have control over all your investments. Robinhood provides a good suite of services and good value proposition for you. Whether you are planning to invest smaller amounts or larger amounts, Robinhood will still be able to serve you well.
Also, if you’re looking to maximizing every dollar you have in investment, then the additional interest you will earn on the uninvested cash will be useful. On the other hand the lower interest rate in getting margin will come in handy when you need the extra liquidity to take advantage of any sudden market events that can generate you a good return.
Who Won’t Benefit from Using Robinhood?
If you’re an investor that prefer to have others’ manage your investments and concentrate on other important things in life, then Robinhood may not be a good fit for you.
Also, another group of investors who may not want to get on the Robinhood bandwagon would be those who are skeptical of brokers that get a majority of their revenue from Payment For Order Flow.
Our Final Verdict
Ever since its inception in 2013, Robinhood has been popular with retail investors and has been adding more and more to its suite of services to create value for their users. As a testament to its popularity, the number of users on its platform has grown from 0.5 million in 2014 to 22.9 million in 2022 as reported by Statista.
However, we do not recommend it for everyone as it greatly depends on your preferred style of investing and your personal view of whether their use of Payment For Order Flow is to your best advantage. As such, we would advice for each investor to do their own due diligence in coming to a decision on whether to use this broker. We hope our Robinhood Review has provided you with different angles to consider before using a broker.