Everything You Need to Know about Robinhood Platform

Over the years, Robinhood has emerged as a game-changing investment app that is hell-bent on redefining the financial space. Unlike traditional platforms that often levy fees on transactions, Robinhood’s allure lies in its commitment to offering a seamless trading experience without burdening its users with additional costs.

Robinhood is open for traders of all backgrounds, from seasoned investors to newcomers eager to venture into the financial markets, with no minimum deposit requirement. Despite the introduction of commission-free trading by other online brokers, Robinhood maintained its position as a leading choice, especially for cryptocurrency trading.

In this guide, we will discuss all that Robinhood entails and how it works, its commission-free model, user-friendly interfaces, and more.

What is Robinhood?

Robinhood is an American financial services company that is renowned for facilitating commission-free trades of stocks, ETFs, cryptocurrencies, and options. Its mobile app allows users to trade stocks, exchange-traded funds (ETFs), cryptocurrencies, and options without incurring commissions or hidden charges.

The platform operates as a FINRA-regulated broker-dealer, it is registered with the U.S. Securities and Exchange Commission (SEC) and is a member of the Securities Investor Protection Corporation.

The company generates revenue through various avenues, including interest earned on customers’ cash balances, selling order information to high-frequency traders, and margin lending.

Robinhood’s History

Robinhood was founded in 2013 by Vladimir Tenev and Baiju Bhatt to democratize finance by making stock investing accessible to all. Their mission led to a revolutionary approach of offering commission-free trades and free account setups. This model provided a basic service for free and charged for premium features while exploring additional revenue streams.

The company rapidly gained traction, raising significant venture funding and garnering attention from key investors like Sequoia Capital and DST Global. Robinhood’s user base primarily comprised millennials, with its mobile app launched in March 2015. By 2022, the platform had amassed an impressive 22.8 million funded accounts and 15.9 million monthly active users.

Notably, the company’s journey wasn’t without challenges. Regulatory fines, including a substantial penalty by Financial Industry Regulatory Authority (FINRA), marked its path. Robinhood’s initial public offering (IPO) on the Nasdaq in 2021, under the ticker symbol HOOD, brought both highs and lows. After an initial drop from the opening price of $38, the stock reached an all-time high before facing regulatory uncertainties, and a security breach.

Robinhood Trading Model

While Robinhood offers commission-free trading to democratize finance, it maintains its operations and makes its money through a diversified revenue model that encompasses several streams.

Robinhood’s financial results are categorized into transaction-based revenues, net interest revenues, and other revenues. Transaction-based revenues arise from routing users’ orders to market makers. Net interest revenues stem from securities lending transactions and margin loans. Other revenues encompass various sources, including Robinhood Gold membership fees, proxy rebates, and user fees.

One of the primary ways Robinhood generates revenue is through a practice called payment for order flow (PFOF). When users place trades, Robinhood routes their orders to market makers, who execute the trades. In return, these market makers compensate Robinhood at a fraction of a cent per share. This model enables Robinhood to offer commission-free trading while earning revenue from these transactions.

Additionally, Robinhood generates money by investing users’ cash deposits at a higher interest rate, thereby earning interest on those funds. This interest revenue is bolstered by income from margin loans to users and the interest expenses associated with the company’s revolving credit facilities.

Robinhood’s premium service, Robinhood Gold, also contributes to its revenue stream. Users who subscribe to Robinhood Gold gain access to premium features, such as instant access to deposits, professional research, market data, and margin investing. Fees from Robinhood Gold memberships constitute another source of income for the company.

Other revenue sources for Robinhood include proxy rebates and miscellaneous user fees. Proxy rebates refer to compensation received for voting on behalf of shareholders during corporate actions.

Robinhood Products and Services

Robinhood offers a range of products and services designed to cater to various investor needs which include the following:

• Rebates from Market Makers. This is a service provided by Robinhood which involves routing customer orders to market makers in exchange for rebates. This practice, while employed by various brokers, has been subject to scrutiny. Robinhood has been transparent about its payments for order flow policy, addressing concerns and ensuring customers are informed about its potential impact on their trading costs.
• Robinhood Gold. Introduced in September 2016, Robinhood Gold offers investors an exclusive subscription plan with premium-tier tools. For a monthly fee of $5, subscribers gain access to a host of features. These include larger instant deposit limits, Level II market data from NASDAQ, insightful research data from Morningstar, and the option for margin borrowing. Notably, the first 30 days of Robinhood Gold are free for users to test the waters. It’s important to mention that margin trading is an optional feature and is available only to eligible investors. For those who qualify, margin trading involves a 4.25% annual interest rate on borrowed funds exceeding $1,000. With its comprehensive offerings, Robinhood Gold proves to be a cost-effective choice, especially for active traders.
• Securities lending. In early 2022, Robinhood introduced a stock lending program that enables users to earn from the stocks they own. This feature allows Robinhood to lend users’ shares to other parties, such as financial institutions needing to cover deficits or facilitate trade settlements. The borrower pays interest on the loan, and a portion of that revenue is shared with Robinhood users.
• Cash Management. A recent addition to Robinhood’s offerings is Cash Management, allowing users to park their uninvested cash in an account that accrues interest. This money can be accessed using a Robinhood debit card. The company partners with FDIC-insured banks to hold customers’ uninvested cash, earning fees from the banks and a portion of interchange fees from debit card transactions.

Robinhood’s Advantages & Limits

Robinhood offers a list of advantages to its users. Firstly, Robinhood allows investors to buy and sell stocks, ETFs, cryptocurrencies, and options without incurring additional charges. Secondly, Robinhood allows new and existing investors to start trading with any amount they are comfortable with. Further, it features a user-friendly mobile app and desktop interface to make trading accessible and convenient for both beginners and experienced investors. Besides, it allows users to earn interest on uninvested cash and provides access through a Robinhood debit card.

With numerous benefits, there are things Robinhood still needs to improve. Some users may find the platform’s lack of sophisticated features and account options unsatisfactory. Besides, while Robinhood Gold offers margin trading, not all investors are eligible, and those who qualify must pay an annual interest rate on borrowed funds over $1,000. And of course, previous regulatory scrutiny and challenges faced by the company often lead to uncertainties and potential impacts on user experiences.

Final Thoughts

Robinhood’s user-friendly platform has simplified trading for numerous new investors, but some remain skeptical due to concerns about its legitimacy. However, there are two reassuring facts to consider.

Firstly, Robinhood is a member of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization authorized by the federal government. FINRA establishes ethical rules for brokers, ensures compliance, promotes transparency, and educates investors.

Also, Robinhood, like other brokerages, is regulated by SEC, which safeguards the US securities markets. The SEC mandates disclosures to investors and enforces operational restrictions. This ensures trades occur at fair prices and prevents practices like insider trading, safeguarding investors from fraud.

Nonetheless, investors should understand that brokerages like Robinhood might falter at times, inadvertently or intentionally. Hence, it is expected that investors exercise caution in the securities market and conduct thorough research before involving with any brokerage platform.