Robinhood is a stock brokerage that hopes to bring commission free trades of stocks to the masses. (and to a big degree, they’ve succeeded)
It’s an app-only brokerage that offers $0 commission trades on stocks – no minimums, no maintenance fees, and a streamlined interface that is intuitive to use.
When they first came on the scene, I immediately thought of Zecco. Zecco was a brokerage founded in 2006 that promised commission-free trades too. The free trades got more and more restrictive. At the start, everyone had free trades. Then you had to have a minimum account balance of $25,000. Eventually, there were limits on how often you could trade until TradeKing acquired them in 2012.
It felt like the business model of free trades was defying the laws of mathematics.
So how is Robinhood different? Zecco was trying to be a full brokerage – you could trade stocks, options, mutual funds, and bonds. They would offer Forex, gold, and silver too. They had a multitude of tools and analysis. Zecco was trying to be a full brokerage but charge nothing.
Robinhood isn’t doing that. They’re doing one thing – buying and selling stocks – and skipping the bells and whistles.
Table of Contents
Is Robinhood Legit or a Scam?
You know the adage: “If it sounds too good to be true…” in this particular case, it’s true.
They use Apex Clearing Corporation to clear trades and they are registered with the SEC to operate in all 50 states (and 2 territories).
They are a member of Financial Industry Regulatory Authority (FINRA – check their broker listing) and have Securities Investor Protection Corporation (SIPC) insurance, so your balance is protected up to $500,000 (with a $250,000 limit on cash). This is to protect against fraud, not the loss of value.
They are not a scam.
Robinhood Free Stock Offer
For a limited time, they’re offering a free share of stock (valued between $5 – $200) for new accounts if you sign up through a link on our site. No deposit required, no maintenance fees to worry about.
You can also get cash too based on how much you deposit – up to $600!
Click this link to use my referral and enjoy your completely free share of stock!
How does Robinhood make money???
This is the billion-dollar question – how can a company giving away free trades make money?
The answer lies in their FAQ answer on the subject! They plan to collect interest from customers who upgrade to a margin account, which is currently in beta. They will also earn interest from customers’ uninvested cash balances.
They also offer Robinhood Gold – which gives you 2x the buying power and after-hours trading at a cost of as little as $10 a month. It’s optional and trading is still commission free.
In the future, they could make money off order flow – which is a rebate that exchanges give for providing liquidity. It’s not something they do now since they go through a clearing partner, but they can jump into it once they have the volume.
OK – so far so good.
How is the service?
Signing Up for an Account
I signed up on my computer, rather than on my phone because I’d rather not type in a bunch of account information on a tiny keyboard. The sign-up process takes about 5-10 minutes and you’ll need to provide some basic information – name, address, Social Security, birthday, and some other demographic information.
You’ll also be prompted to link up your bank account and transfer in funds. They have support for a lot of major banks (nearly 20) and you’ll be able to log in directly from Robinhood and transfer funds.
Once you sign up, you just need to download the app, log in, and you’re off to the races.
Is Robinhood Safe?
That’s probably one of the biggest questions, especially with a relatively new investing platform.
Since it is a broker, it’s regulated by the SEC (Securities and Exchange Commission) and is required to have safety measures similar to other brokers. For example, they have SIPC insurance of up to $500,000 for securities and $250,000 on cash.
Also as a broker, they are regulated by FINRA. You can look them up on BrokerCheck under CRD# 287900. If you do, you’ll see they’ve been approved since 10/13/2017 and currently have two disclosures.
They also have implemented several security measures to ensure your data is secure. Your password is hashed using the BCrypt hashing algorithm. Sensitive information like your Social is encrypted before storage. Communications are encrypted using Transport Layer Security protocol (TLS) and once you authenticate your banking credentials, they don’t store them. They are stored as access token through third-party integration.
Lastly, there is an optional two-factor authentication on the app.
What I Like About Robinhood
Robinhood is free but it doesn’t feel completely bare-bones — which is very important.
You get free trades and free trades are great. You can set market, limit, stop loss, and stop-limit orders. You are, however, limited to U.S. stocks and ETFs. That’s a fair trade. No short sales.
They offer a cash management account so your cash is earning 1.50% APY when it’s not invested. A lot of other brokers will pay you a pittance for uninvested cash in a sweep account – but Robinhood hooks you up with a competitive rate.
No account minimum and no maintenance fees unless you want paper statements ($5) or paper confirmations ($2). You don’t need paper statements and those fee rates are consistent with others I’ve seen. These are all good but they should be there, it’s pretty standard nowadays.
You can get access to some pre-IPO stocks. When you have an account, Robinhood will email you with an opportunity to invest in pre-IPO stocks. It will be a small selection of stocks and it won’t be every company that will IPO, but it’s better than nothing. These will be limit orders too so there’s also no guarantee that you get shares but at least you get a shot at it. (technically these are offers at the open, so not technically “pre-IPO” but pretty close)
Dashboard is sleek and minimalist. When you log in, you’re greeted with your account value, some historical charts, and relevant stories in a slider at the bottom. Green if you’re up, red if you’re down.
Robinhood Instant: There’s a “feature” called Robinhood Instant. Normally when you sell a stock, you have to wait about three days for the funds to make it to your account. It’s known as “Stock Settlement” and it’s because of how the clearinghouses work (If you trade individual stocks infrequently, this will never come up). Instant would take away that three days wait. (another benefit is instant access of up to $1,000 on deposits to Robinhood)
What I Don’t Like About Robinhood
Placing a trade is… somewhat cumbersome. If you want a market order, it’s a fine interface… but you should never put a market order. If you want to place a limit order, you need to enter a price on a separate screen. Once you select a price, you pick how long to keep it open (Good for Day or Good till Cancelled), then it goes back to the order screen and you complete your order.
After you place the trade, it could be executed immediately or some time into the future. If you want to see your order, you have to go to History. You can’t edit the order, you have to cancel it and then re-enter the order (most places will let you “edit,” but functionally they cancel and enter in a new order… they just save you the work).
If you aren’t making a free trade, it gets expensive. Listed foreign securities are $50 a trade, Euroclear is $35 a trade, Canadian is $35 a trade, and all broker-assisted phone trades are $10 (the last one isn’t bad). You can see their full fee schedule here.
No analysis. They don’t have any reports and they don’t have any analysis tools. There are news notifications and historical price charts but that’s about the only thing outside of executing transactions. Though, to be honest, I wouldn’t expect any considering the transactions are free.
You are limited to one account type – taxable. Sorry, no retirement accounts (and their paperwork requirements, which is probably why they’re not provided yet).
No broker transfers. If you want to move brokerages, you can usually do an ACAT (automated customer account transfer) and it moves your assets over for something like $50 or $100. The ACAT process lets you move your account without selling securities (and realizing gains). Robinhood doesn’t offer that. (Ally Invest offers up to $75 in reimbursement on ACATs, which are charged by the originating brokerage, of $2,500 — to give you a sense of how much an ACAT costs)
No automatic dividend reinvestment, yet. If you get a cash dividend, it’s deposited into your account. They don’t have automatic dividend reinvestment but a support post says they hope to offer it in the future. Though when the trades are free, you could manually reinvest it at no cost as long as you have the cash since Robinhood doesn’t offer fractional shares (very few places do).
No short selling. For most, not a big deal but short selling is part of the market and you won’t be able to do it on Robinhood.
No API, so no integration with Personal Capital. Not unexpected and certainly minor, but I can’t link this account in my Personal Capital dashboard. 🙁
Parting Thoughts
I’m impressed. The Robinhood app is straightforward (love the green on the black color palette when the market is closed, green on white when it’s open) and streamlined, it was easy to navigate for someone familiar with smartphones, and when transaction cost is the main differentiation in this space, you really can’t beat it.
It delivers exactly what it promises – free stock trades. What more can you ask for?
I trade stocks very infrequently. When I do, it’s usually a dividend stock and I hold it for years. Saving a few bucks each time isn’t something that excites me but the free stock is nice and I will treat the account as a fun money account. 🙂
This post is also available as a Web Story – “How do I get Free Stock from Robinhood?“
Robinhood
FREE
Strengths
- Commission free trades!
- No account minimum
- Beautiful design and interface
- Smart notifications
Weaknesses
- iOS/Android App Access Only
- No stock analysis
- No short selling
Dominique says
Nice review Jim. I actually just started using Robinhood earlier this month and I really like it. It’s definitely not the app for more “seasoned” investors but for people that want to get introduced to stocks I think the simplicity is nice.
The simplicity is elegant!
Millennial Moola says
Love hearing that they are finally allowing limit orders. The only thing that makes me reluctant is their size and ability to cover errors and mistakes. SIPC protection isn’t enough to make them your sole brokerage I think but play money for sure heck yeah, hope these guys thrive
Jaris says
Hey Jim.
I just started using robinhood about a month ago. I had the aap downloaded for a while but never used it as it requires too much personal information.
Little to my understanding and no background in Finance and Stock market I find this aap an opportunity to learn the market at my own pace.
In my case I set aside an amount and started playing with it on Robinhood. For a beginner who knows nothing about market I think this is a very intuitive aap.
It IS a stock trading app, so you would have to offer a lot of information. 🙂
If you know very little about investing, I recommend studying up before using any app. Or consider a roboadvisor.
Ram says
I have been using Robinhood application since 2015. The plus is the zero brokerage and you got what you pay for. Now I have submitted my request to close the account May 2017, and all my holdings have not been transferred to the new broker account. Email to the support team , we get automated response but not reply to the issue that we are facing. Still following to get all
my shares transferred.
Kelly says
Try to move your funds to another company or close your account out. I have been trying for 4 months and I have been told that all the information that they took and then asked for additional documents is all of a sudden not verifiable. I have even offered to 3 way call these organizations with so that they can get the info needed they said oh that is not necessary but they are going to not allow me to have my money because they can’t verify the information they asked for. This company is very shady and there are not above board. no customer service phone number only automated response from the support email address. No one contacted me until I started leaving reviews that were negative. Honestly, they can keep the money if you stealing from me then you must be desperate and need money really bad. After doing research they have mass complaints with BBB, FTC, and SEC. Not sure how long they gonna be around but we all know corrupt companies seem to prevail.