How Does Robinhood Make Money?

There are many questions people want to know about Robinhood like “How does Robinhood work, How Does Robinhood Make Money, Is Robinhood really free or does it charge any fee? And the most important How can you make money on Robinhood?”

The year 2008 saw something of a revolution in America’s financial system. Till that time, Americans wanting to invest on stocks, foreign currency, commodities and other instruments had to go through fairly expensive trading platforms. The entry of Robinhood, an online trading account and platform changed it all for good.

The Birth of Robinhood

Robinhood came into the financial market of USA to make stocks and other such investments more accessible to the millennial generation and encourage the otherwise economically weaker segment of the society to enter mainstream of the economy.

Maybe you’ll recall that year 2008 also saw a severe downturn of the American economy, triggered by the country’s engagement on two war fronts- Iraq and Afghanistan and need to sustain the war against terror.

The name for this app, Robinhood isn’t exactly right. Maybe you know that Robin Hood is a legendary character from English folklore, known to rob the wealthy and feed the poor. The Robinhood app doesn’t do anything of this sort.

Instead, it uses various ways to make money. If you wish to know how Robinhood make money, read further.

How Does Robinhood Make Money?

How Does Robinhood Make Money?

Let’s start by looking at some of the features of Robinhood that make it very attractive. Anyone above legal age-18 years- can download Robinhood app and invest as low as $5 on the American stock market, commodities market, foreign currencies and bonds. And Robinhood doesn’t charge commissions.

So, where does its money come from?

Hefty Income from Interest

Robinhood has more than 10 million users in America, making it the single largest free online trading and investment platform of the world. In stark contrast, its nearest rival Zerodha Kite of India has just about a million users. Robinhood is free to download and use and offers commission free trading. Its Indian counterpart charges about $6.65 as annual fee and bout 26 Cents for a trade that includes buying and selling.

As a result, Robinhood has average $5,000 lying in each of its account, finds a 2018 report by JMP Securities. And Robinhood loans out this money in various forms for a good interest. This interest is one of the main sources of income for the app, which offers commission free trading. With 10 million accounts averaging at $5,000 each, it’s easy to imagine the amount of money Robinhood owners are loaning at interest and the income.

High Frequency Trading & Order Routing

Trade routing, high frequency trading and order flow is another way Robinhood makes money. For example, if a user buys or sells 100 shares of Pepsi, the trade will be routed through specific channels such as Citadel Securities LLP for high frequency trading. This means, the trade passes through what’s commonly known on Wall Street as the “black pool” and is less transparent. Robinhood gets a commission for this routing.

In fact, Robinhood’s dealings with Citadel Securities landed both the companies in controversy in 2018. Though routing a trade is common practice on Wall Street for high frequency trading, using the black pool is something that reputed companies such as Schwab and TD Ameritrade avoid.

More than 50 percent of Robinhood’s revenues came from trade routing through controversial high frequency traders in 2018. The company claims it has cut down on such trades, but there’re no signs that it’s eliminated this practice altogether.

Premium Accounts & Services

Robinhood also offers a slew of premium accounts and services. If you use services of a financial advisor on phone to execute a trade, you’ll be instantly charged $10 as fee. This means, the overall value of your investment drops down drastically. Unless you’re investing a very large amount of money and the margin would far more than cover the $10 setback.

Additionally, Robinhood Gold is a premium service that the company offer for a fee. Robinhood Gold subscribers can use up to $1,000 as credit on their trading account. The money is adjusted when the user transfers more cash or sells a holding.

For such trades and credit, Robinhood charges a fee. This overdraft is tempting for most users when the market is volatile and investors eager to make a quick buck. And they don’t have to deposit the $1,000 instantly. Here Robinhood earns by means of interest and fees.

Commissions on Forex Trade

And when Robinhood users trade in foreign currencies, the company gets a little more than 0.2 percent of the transaction value as its commission. Though the customer doesn’t lose anything, this is also one of the way Robinhood makes money.

Is Robinhood Legit?

A lot of organizations and financial institutions remain divided whether Robinhood’s revenue model is legit or not. However, the Securities & Exchanges Commission (SEC) doesn’t find anything wrong in Robinhood’s operations.

Therefore, as customer there’s nothing to worry about Robinhood’s legitimacy. It is definitely not a scam. Despite its controversial methods of making money, Robinhood is known for opening the stock markets to a millennial that can’t invest in thousands or millions. It has made investing a lot simpler for the common people.

Robinhood & Cryptocurrencies

Robinhood is also a trading app that’s brought cryptocurrency trading and investment to common people. That’s because investors don’t need to really buy a full cryptocurrency unit such as one full Bitcoin. Instead, they can invest money on a few fractions of the cryptocurrency such as the Satoshi, the fraction of a Bitcoin.

There’s a small charge when investors trade on Bitcoin and other cryptocurrencies, which is also one of the ways Robinhood makes money. Though Bitcoin and cryptocurrency transactions are meant to be secret, the flipside is that an investor’s identity gets disclosed when they invest with Robinhood.

Types of Investments on Robinhood

If you wish to see the list of investments a user can make using Robinhood, check my list below. On each of these trades results in some profits for Robinhood.

  • American and select foreign stocks
  • Exchange Traded Funds
  • Foreign Currencies
  • Cryptocurrencies
  • Bonds & Company Instruments

The first four are the highest revenue earners for Robinhood, besides its interest based lending and trade order routing.

In Conclusion

This review is based on news reports from various reliable sources. Though Robinhood makes some money, the app and trading platform are worth it because they open doors to riches for an ordinary American. Most other apps and trading platforms are high value and charge hefty commissions for a single order.

This puts small investors at severe disadvantage since they’re unable to afford these commissions and other fees. In stark contrast, Robinhood eliminates them effectively. Therefore, it remains the fastest growing online trading and investment platform in America till date.

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