We’ll answer the question we get asked all the time: How does Robinhood work? Robinhood is an independent US-based stock trading application that enables 100% free stock, options, cryptocurrency and ETF trading. This guide will teach you everything you need to know about Robinhood so you can trade effectively.
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The biggest reason why RobinHood is so popular is because of their commission-free nature. In short, they charge no trading fees and they have a $0 account minimum. Which begs the question, how does Robinhood make money?
We will answer these questions and more in the coming sections. By the end of this guide, you will know exactly how Robinhood works and how to start trading.
In 2019, the RobinHood app managed to become the largest online stock broker in the US, surpassing E-TRADE. As of this year, E-TRADE is the largest broker-dealer in terms of number of clients. Today, Robinhood is the most popular mobile trading app, with more than 6 million customers.
First, let’s start by answering the first basic question, w hat is Robinhood?
Robinhood is a broker-dealer app that allows users to trade stocks, options, and ETFs with zero commission fees. You can also buy and sell cryptocurrencies on the Robinhood App. Robinhood allows users to trade cryptos such as Bitcoin, Ethereum and Litecoin.
Because Robinhood does not charge any trading commission, it is easier for new traders to learn how to make money. The second advantage you have is that there is no minimum deposit requirement to start trading with the Robinhood App.
You can start investing with Robinhood App with any amount of money.
The downside is that they don’t offer any tax-sheltered accounts like IRAs or other types of retirement accounts. Another disadvantage of Robinhood is that currently they do not offer automated trading features.
You can trade the following instruments on the RobinHood App:
- Shares
- ETFs
- REITs
- Options
- Cryptocurrencies
RobinHood was the first brokerage account to introduce $0 commission trading. Usually, when you start trading stocks, a stock broker will charge you between $5 and $15 to buy stocks. When you want to take profit and sell, the stock broker will charge another fee. This is not the case with Robinhood.
The Robinhood App also allows users to margin trade through Robinhood Gold, their premium account level. Their commission-free model and various tradable instruments made this app experience meteoric growth in 2019.
Now we answer another question that many aspiring new traders have:
Is Robinhood safe?
Is Robinhood Legit?
Is Robinhood legit? Is the Robinhood app secure? This is a valid concern that any individual investing in the stock market can have.
You can trade with peace of mind because your money at RobinHood is protected by the Securities Investor Protection Corporation (SIPC) up to $500k for securities and up to $250k for cash claims.
In addition, Robinhood is also regulated by the Financial Industry Regulatory Authority (FINRA), which makes Robinhood safer to use. Therefore, in terms of security, investors’ money is well protected.
Because Robinhood is a securities broker, it has to be regulated by the financial regulatory authority in the United States, namely the Securities and Exchange Commission (SEC). In addition to being regulated by the SEC, Robinhood also has other security procedures to protect your hard-earned money and your personal data.
Although opening an account with Robinhood is different from a traditional stockbroker account, they are still required by law to collect certain information from their customers. This includes trading activities and tax information. To file an information tax form, you need to give them your Social Security Number (SSN).
But the app doesn’t come without its dangers.
Trading anywhere and being an inexperienced trader can be a recipe for disaster. This is really the only danger that the RobinHood App has. This is because it offers itself as the most loved investment app by millennials. And, we know many Millennials still lack the financial literacy to become successful stock traders.
The good news is that the app itself is simple and easy to use, even for new stock traders.
Next, we’ll give you a basic idea of how Robinhood works.
How Does Robinhood Work?
RobinHood works in the same way as any other online stock and options broker. You follow the same standard process:
- First, you submit your application form to open an account with Robinhood.
- Second, you transfer your money to the RobinHood account.
- Once the money hits your Robinhood account, you can start buying and selling stocks, options, ETFs and cryptocurrencies.
If you’re not familiar with Robinhood’s sleek interface, you should know that they offer different ways to buy stocks. In the next section, we will show examples of how to buy and sell stocks on Robinhood from the convenience of your smartphone.
Using an investment app can be intimidating and intimidating, but it’s actually quite simple
Buying and selling stocks on RobinHood is as easy as following the following 7 steps:
- Load the RobinHood app.
- Find your favorite stocks, ETFs or cryptocurrencies.
- Tap the “Trade” button.
- The next page will give you the option to buy or sell. Tap the “Buy” button.
- Select your Order Type from the top right command and the number of shares you want to buy.
- Confirm your order.
- Swipe Until send order.
Pro Tip – To be as efficient as possible, you can create a watchlist for quick access to your favorite stocks.
Don’t forget to read our guide where we break down the general principles and the best way to pick stocks for day trading: The Best Day Trading Stocks with Mountains of Cash.
Now we talk about something more controversial, that is how Robinhood makes money ?
How Robinhood Make Money?
Can a stockbroker make money without charging commission and offering stock trading for free?
It seems that RobinHood has successfully attracted investors and is still earning from various sources of income. Moving forward, we will outline how RobinHood is willing to offer you commission-free trading and still make money as a company.
The way Robinhood makes money is actually very transparent. All sources of income are listed on their website. RobinHood App does not charge trading fees like its competitors E*TRADE or TD Ameritrade. But Robinhood generates its profits from the following revenue streams:
- Premium account. Robinhood Gold is a premium feature that enables margin trading and other benefits. RobinHood Gold starts at $5 per month.
- Margin Interest. Like any other stockbroker, RobinHood earns interest on customers’ cash, the same way banks collect interest on cash deposits.
- They charge $10 for any transaction made via phone call.
- They can also help buy foreign stocks around $35 – $50.
- Order flow payment. This is common practice in the industry.
Again, there are no hidden fees RobinHood! Now, you could argue that sell order flow to high frequency trading (HFT) can cause a delayed hold on your order. Your order to buy stocks may be forwarded to the HFT firm before ordering the actual exchange. This, in turn, can lead to worse filling of your order, therefore it is seen as a hidden cost in trade execution.
But, everyone in this business will most likely sell your order to this HFT firm before continuing it on the exchange. So, no one escapes this practice. You have to get used to it and accept it as a way of doing business.
If you want to know how high speed trading works, check out our HFT guide HERE.
Since we are followed by various traders, let’s touch on another topic that we are sure some of you will appreciate. That is, we will give you a simple guide on how to trade options on Robinhood.
See below:
How to Trade Options on Robinhood
Before you buy and sell options on RobinHood make sure options trading is unlocked on your Robinhood account. Depending on your level of experience, you are given a Level 2 rating if you are a beginner trader and a Level 3 designation if you know how to implement more complex options strategies.
With Level 2 marking, you can execute the following trading options:
- Buying Calls and Puts. Learn how to buy Put and Call options by following the step-by-step guide on How to Trade Stock Options for Beginners.
- Protected Calls. Become a smart options trader with this covered call strategy.
- Covering Cash.
Opening an options trade on RobinHood is as easy as following three simple steps:
- Tap the magnifying glass and find your favorite stock that you want to trade options on.
- Tap Trade in the lower right corner of the stock Details page.
- Tap Trade Options.
Please see different options trading strategies in our Investment Options Strategy Guide.
Final Word – How to Make Money on RobinHood
For certain types of stock traders, RobinHood App can be the best stock trading app. However, just because the barrier to opening a RobinHood account is so low, you still need to do your own research if you don’t want to end up losing your hard-earned money. Before you hit the buy button follow our guide on how does Robinhood work?
Get free Stocks with Robinhood
If you open a new account today, you can open one now and get free stock by opening an account with this link.
Although we have given you some reasons why RobinHood is illegal this does not guarantee that you will always make money. But you know that your funds are guaranteed and that you trade stocks through a reliable trading platform.
If you don’t have a problem with how Robinhood makes money? and you love the convenience of trading through your smartphone go ahead and take your free stock trades today.
Thank you for reading!
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