Founded in 2013, Robinhood Markets, Inc. leads the way in reducing trading commissions, developing and easy-to-use interface, and seamless investing experience.
For investors just getting started or experienced investors looking to cut down on commissions, Robinhood may offer brokerage services to fit your individual scenario.
Free Trading and Investing
Unlike most brokerages, Robinhood does not charge any fees to open an account or to execute trades. Therefore, if you are looking to start your investing and only want to buy a few shares of your favorite companies or index funds, Robinhood has no account minimums and you will be able to buy shares of your favorite stock or funds commission-free.
By contrast, other discount brokerages typically charge between $4.95 to nearly $10 just to execute a trade. For new investors looking to buy a single share of a stock, these commissions can become a massive hurdle to overcome. After all, if you bought one share of a $10 stock with a $4.95 commission, you would have to wait until the stock nearly doubles to break even because of the initial fees to buy the share and the $4.95 fee again when the stock is sold. Robinhood completely eliminates these trading commissions.
Options Trading with Robinhood
For more advanced investors looking to trade options, Robinhood also allows for commission-free option trading. Other brokerage firms will charge a $4.95+ trading commission as well as an addition fee around $.60 per option contract that can greatly add to the cost of buying options. While the Robinhood option platform is fairly rudimentary and simply shows the option expiration date, strike prices, and the percentage increases or decreases to break even on the investment, the commission-free option trading offers a seamless experience.
Limited Account Options
While you will not pay anything to execute trades on stocks and basic call and put options, certain downfalls do exist with the platform.
Even though Robinhood is continuing to expand their offerings and services, they currently do not offer the ability to open any accounts other than individual brokerage accounts. For those looking to save for retirement in tax-advantaged accounts such as a Traditional or Roth IRA, you will have to look elsewhere to open these accounts.
If you currently have a Roth or Traditional IRA with another brokerage account, dealing with multiple investment platforms can become much more complicated that having a one-stop shop that houses all of your investment portfolio. Additionally, waiting on your Form-1099 and other tax forms from various brokerage houses can become time consuming and make tax time more complicated than dealing with a single investment platform.
No Dividend Reinvestment Program (DRIP)
Over the longer-term, one of the greatest contributors to building a massive portfolio comes from the reinvestment of dividends and interest. If you enroll your stocks’ cash dividends into a reinvestment program, this cash buys incrementally more shares each time. Over the decades, the compounding of rising dividend payments greatly enhances your portfolio’s return.
However, Robinhood also does not currently allow dividend reinvestment, so if you are looking to gain from the power of compounding over a longer time horizon, the inability to reinvest dividends can drastically hamper your overall returns from your stock and fund portfolio. Instead, dividends are paid in cash and are deposited in your cash balance with Robinhood.
No Interest on Your Idle Cash Balance
Speaking of cash, unlike many other brokerage firms, Robinhood does not pay interest on your cash balance.
Other platforms such as Fidelity, deposit your cash balance in FDIC-insured money market accounts or government bond funds where you are at least paid a small percentage in interest. If you have a large cash balance for liquidity, earning 0% on your money causes that portion of your portfolio to lose out to inflation. Even though the current market rates for money market funds are typically less than 2% due to low interest rates, you could miss out on hundreds of dollars depending upon the amount of cash you typically hold in your brokerage account.
Because Robinhood does not pay interest on your cash, the company is able to invest your cash balance themselves and earn a profit. Therefore, they leverage the float they receive from investors who delay buying stocks or do not have enough of a cash balance from dividends to buy stocks.
Instead of returning the interest to you, they purchase short-term, insured investments and capture the small amount of interest rather than remitting it to the account holder.
Order Execution Spread
From personal experience using the Robinhood platform, when initiating a market order, many times I did not get the best possible price.
Other platforms such as Fidelity offer price improvement programs. If you issue an order at a certain market price, they will purchase part or all of your order at the lowest possible price, ensuring you reap the rewards. While the executed market orders on Robinhood seem to only be pennies above the lowest price, this can add up if purchasing larger amounts of stock or funds. For single share or a small number of shares, paying a few cents more will not have a major impact on the investment’s return.
However, if not getting the best possible price represents a concern for your situation, instead of initiating a market order, select a limit order and the price you wish to purchase the stock.
Limited Research and Tools
Robinhood offers fairly basic to nonexistent research and tools compared to the indicators and research of other brokerage firms. By contrast, many of the top brokers will allow access to analyst research reports, proprietary research and opinions, as well as stock screeners and tools. Instead, Robinhood aggregates free research content from basic news sources such as Yahoo Finance or CNBC for the stocks the investor owns or has searched.
For those who enjoy researching new stocks via filters, screeners, and technical indicators, the Robinhood app and platform probably will not have what you need. Therefore, if you are looking to perform in-depth research, pour through and analyze analyst reports about the companies you follow, Robinhood may not be the best choice for your sole brokerage platform.
Robinhood Conclusion
Overall, Robinhood offers a great experience for individuals who do not yet have the money to buy larger quantities and amounts of stock or index funds.
The functionality of the mobile application is very user-friendly. If you are searching for a simple platform to buy or sell stocks for free, Robinhood represents a viable broker to use.
Especially for high-volume traders and new investors, the commission-free structure Robinhood allows will keep costs at $0, allowing you to keep all of your gains even on small blocks of shares. However, because the platform does not charge trading commissions, Robinhood must earn money to cover their overhead somehow. Therefore, they may earn a higher spread on executed trades as well as earn interest on your uninvested cash balance.
However, for investors who wish to open tax-advantaged accounts such as a 529 Plan, IRA, Health Savings Account, or other non-individual brokerage account, Robinhood does not yet allow for these types of accounts. Additionally, Robinhood does not currently allow for the reinvestment of dividends which will hamper the compounding of your portfolio over time.
Due to the easy to use platform and commission-free trading, Robinhood represents a compelling value proposition to house your “fun money” or to begin the investing journey.