Commission-free trading is the holy grail of active traders. Frequent trades can cost a pretty penny in commissions, which can reach as high as $10 per trader at discount brokerages. Robinhood, however, offers zero-commission trades, as well as a $0 minimum account balance and easy sign-up. Once you fund your account, you can trade most U.S. stocks and exchange-traded funds (ETFs).
Robinhood’s revenue model includes these sources of income:
· Interest income on customer margin accounts, when offered
· Earned interest on investors’ uninvested cash balances
· Revenue from the Robinhood Gold account (see below)
· Fees for certain extra services
Apparently, Robinhood runs a lean-enough ship to turn a profit without commissions. The company is online only, with no brick-and-mortar locations. It also saves money by offering vanilla-only brokerage services.
To qualify for a Robinhood account, you must:
· be at least 18 years’ old
· have a valid Social Security Number
· have a legal U.S. residential address
· be a U.S. citizen or U.S. permanent resident or have a valid U.S. visa
Foreign investment accounts are not accepted.
Signup takes less than five minutes using the website or smartphone app. Just supply personal information (including Social Security number), contact details and bank account number(s). By linking your bank accounts, you get instant verification and are ready to go.
Robinhood offers three types of accounts:
1. Cash account: You can trade the cash in your account, which means you must wait for cash transfers and security sales to settle before you can use the money. Settlement takes up to three days.
2. Instant deposits: This is a limited margin account, in that it makes cash from transfers and security sales available immediately, without waiting for the money to clear. In some cases, involving the sale of penny stocks, leveraged ETFs and high-volatility stocks, you may have to wait until the following day to access the cash.
3. Robinhood Gold: This is a fee-based margin account that advances you buying power of up to 50 percent of your gold account minimum balance. Buying power lets you purchase stocks/ETFs with money borrowed from Robinhood once you’ve exhausted your cash and instant deposits. The monthly fee is based on the amount of your buying power. For example, if your account size is in the $3,000 to $6,000 tier, the cost for $3,000 in buying power is $15 a month.
· Cost: It’s commission free for all accounts, which is great news for frequent traders. Robinhood Gold requires monthly fees ranging from $6 for a $2,000 account to $200 for accounts exceeding $50,000. If you are a pattern day trader (at least four trades per week), this cost structure can be quite attractive.
· Minimums: There are no minimum cash balances except for Robinhood Gold. You will, of course, need money if you want to trade. The free, instant-deposit feature lets you trade more often with less cash, since you don’t have to wait three days for the proceeds of your last trade to hit your account.
· Ease of use: The website and app are simple and streamlined. Normally, you just sign on and enter a trade. Robinhood supports the usual trade types such as limit, market, good till cancelled and good for the day. Market on open/close orders are not currently supported.
· Gold account: The Robinhood Gold account allows for margin trading with a minimum account balance of $2,000. Fees for this account range from 5 to 6 percent per year, depending on the account size. In light of commission-free trading, this can be a real bargain for day traders.
· Choices: You can trade only U.S. stocks and ETFs. You cannot short or borrow stocks, and cannot (as yet) trade options, bonds, mutual funds, OTC equities, warrants, preferred stocks, tracking stocks, foreign exchange or foreign domiciled securities. Robinhood doesn’t offer other types of accounts, such as annuities, nor does it sell other financial products, such as life insurance.
· Minimal services: This can be a pro or con, depending on whether you prefer saving money or receiving extra services. Many customers would assume that even a free brokerage would offer little goodies like dividend reinvestment or access to research. Portfolio management tools are rudimentary, and forget about advanced tools used in technical analysis. It wouldn’t cost Robinhood much to put up educational resources to help novices learn about the stock market.
· No retirement account: Most brokers offer IRA’s and Solo 401(k) accounts, but not Robinhood. However, it promises to add IRAs, custodial accounts and joint accounts in the future.
· No account transfers: You are currently out of luck if you wish to transfer in securities from outside accounts. For example, if you own 100 shares of XYZ stock and want to move them to your Robinhood account, you’ll have to sell the stock at your old brokerage, transfers the money to Robinhood and then repurchase the XYZ shares. Note that if you sell the shares at your old brokerage for a loss, you will have to observe wash sale rules if you buy the shares back at Robinhood within 30 days.
If your needs are simple and money is tight, Robinhood appears to be an excellent choice, provided that you don’t need advice or research. Robinhood’s prices can’t be beat, there is no minimum account balance on the basic accounts, and the ability to trade shares on your smartphone is certainly convenient. Robinhood promises to add many new features in the future. It will be interesting to see if they do so and how that it will affect its price structure.