Saturday, July 13, 2024
Mobile news

What is Robinhood, how does it make money, and is it safe?


Robinhood app investing home page.
Robinhood

Whether you’re a hobby trader, a more seasoned investor, or someone who follows financial news, you’ve probably heard of Robinhood. It’s an online trading platform that’s popular among newbie investors and those with self-directed portfolios who want to take investing into their own hands.

What is Robinhood?

Founded by two Stanford grads on a mission to provide more access to investing and to “democratize finance for all,” Robinhood provides various financial features at your fingertips in a phone app.

You can trade stocks and options, invest in cryptocurrency, and even fund an IRA retirement plan. Robinhood also offers a “cash card” debit card for in-person purchases that offers a rewards program aimed at sending your cash back into investments.

How does Robinhood work?

To use Robinhood, you create an account on the iOS or Android app. To start trading, you apply by entering in all of your information: email, name, address, phone number, date of birth, and Social Security number — all of the typical info you’d need to create an account with a brokerage. Once you create an account and it gets approved, you fund your account and you can begin investing. The signup process is similar to that of other online brokerages. There may be a waiting period of a few days between the time you sign up and when you can begin trading.

On the Robinhood app, you can see data about different stocks like pricing info, news stories, and analysts ratings. You can use this info, coupled with other published information and your own trading strategies, to make investing decisions. You can buy stocks in shares or even fractional shares (as small as (1/1,000,000 of a share). This allows you to invest in pricier companies without such a large investment. You can also purchase stock by the dollar amount instead of by the number of shares.

More advanced traders can also take advantage of other strategies like options trading and margin.

Does Robinhood have fees?

Robinhood offers “commission-free trading” like some other self-directed platforms, but this doesn’t mean you always pay nothing to trade. You may incur regulatory fees and other non-commission fees as part of trades.

If you trade on margin (effectively borrowing money to boost your buying power for a trade), you’ll have to pay interest on that money you borrow. The rate you pay is based on a floating rate that changes regularly, so check Robinhood’s FAQ for the latest information, but at the time of writing it is 12% — the Federal Funds Target Rate plus a base rate of 6.5%. This interest is paid daily on settled margin transactions.

If you have Robinhood Gold (its premium subscription), you get a discount on the interest you pay on margin. At the time of writing, that discount drops your interest rate down to 8%, a considerable savings.

Robinhood does not charge any fees for keeping an account open, account inactivity, or closing an account. And unlike some banks, there is no minimum amount you need to keep in your account.

The Robinhood Cash Card (previously known as Cash Management) doesn’t have any foreign transaction fees, transfer fees, or card replacement fees. There also are not any overdraft fees — although this is technically a debit card — Robinihood will typically decline the transaction that would overdraft your account.

Is Robinhood Gold worth it?

It depends on your trading activity. Robinhood Gold is a $5-per-month subscription that gives you access to perks like higher instant transfer limits (up to $50,0000) and professional market data. On the hard money side, you pay a lower interest rate on margin, earn interest on uninvested money in your account, and get a 3% match on IRA contributions.

If you intend to use Robinhood regularly for trades and will hold larger amounts of money in your account, the amount you save on margin interest and make on deposited money interest will easily pay for the subscription fee.

How does Robinhood make money?

Robinhood makes money through rebates, margin interest, stock loans, uninvested cash, and cash management. Here’s a brief rundown of each revenue stream:

  • Rebates: Market makers help make securities more liquid so orders go through more quickly and easily. These firms (usually banks or financial institutions) may offer rebates to brokerages, and Robinhood makes some revenue off of these rebates.
  • Margin interest: Margin is money you borrow from a brokerage to purchase more investments. Robinhood makes money off of the interest it charges for letting people borrow this money. Robinhood may also lend margin securities to counterparts and make money from those transactions.
  • Uninvested cash: Robinhood may place uninvested cash in interest-bearing accounts and make money off of that.
  • Cash management: Products like the Robinhood Cash Card and other money management products can also generate revenue for the platform.

Is Robinhood safe?

With any trading platform, you face the risk of financial losses if you make a high-risk investment. It’s important to make sure you understand all details of any investment or trade you are going to make, whether it’s on Robinhood or another platform.

As a brokerage firm, Robinhood is regulated by the Securities and Exchange Commission (SEC), which is designed to ensure fair practices. This doesn’t mean Robinhood can never do anything wrong, but it should mean unfair practices should not be able to continue for any significant length of time. Robinhood has faced scrutiny for some of its practices, particularly removing stocks or blocking trading on certain stocks.

Is Robinhood FDIC insured?

Robinhood itself is not a bank, but if you sign up for the Cash Card, your uninvested funds go to a network of banks. The Cash Card is issued by Sutton Bank, which is Federal Deposit Insurance Corporation  (FDIC) insured. It’s important to take note of where your funds are, between your investments and your Cash Card, to understand what portion is insured.

Is Robinhood legitimate?

Yes, Robinhood is a legitimate trading platform.

Editors’ Recommendations








READ SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.