What is Robinhood? Everything you need to know

Comprehending the trading approach of Robinhood

Robinhood's success surged amid the Covid-19 pandemic, with lockdowns prompting a rise in home-based investing across various assets like stocks, ETFs, options, and cryptocurrencies. The company's revenue soared by 245.18% in 2020, reaching $958 million, as it revolutionized trading by introducing a commission-free platform accessible to all, regardless of their account balance. Founded in 2013 by Vladimir Tenev and Baiju Bhatt, Robinhood's user-friendly app simplified investment processes, appealing especially to younger, tech-savvy investors. The platform gained further attention during the GameStop short squeeze in early 2021, showcasing the impact of retail traders and social media influence on market dynamics.

The operational mechanism of Robinhood

Robinhood's user-friendly trading app is particularly suitable for beginners and young investors entering the stock and crypto markets due to its ease of navigation and low costs. The platform's convenience extends to allowing users to purchase fractional shares, enabling retail investors with limited funds to invest in small portions of stocks or ETFs.

Operational only in the United States, Robinhood is accessible via its mobile app or web platform solely to U.S. customers who are at least 18 years old, possess a valid Social Security number, have a legal U.S. residential address, and are U.S. citizens, permanent residents, or hold a valid U.S. visa.

To get started, users simply need to sign up for the platform, providing basic personal details without any minimum deposit requirement.

Minimum investment requirement for Robinhood

The Robinhood model is adaptable, catering to various investors, including large corporations and retail users who can initiate an account with just $1.

Robinhood's innovation enabled retail investors to engage in financial and trading activities by eliminating the need for a minimum balance and introducing the option to purchase fractional shares instead of whole ones.

Robinhood's revenue generation model

Earnings from cash balances

When customers keep uninvested cash in their Robinhood balance, the platform allocates these funds to pools and generates interest from them. Robinhood then shares a portion of this interest revenue with its users, usually through its "Robinhood Cash Management" program, which users can choose to participate in to earn a modest interest rate on their uninvested cash balances.

Users can access this cash using a Robinhood debit card. The company transfers customers' uninvested funds to FDIC-insured partner banks, which in turn pay Robinhood a fee, including a portion of the interchange fees from debit card transactions.

Transaction direction

Order flow is a compensation structure commonly employed by Robinhood and similar brokerages to handle retail trades across various assets like stocks, ETFs, options, and cryptocurrencies.

Here's how it functions: When users place trades on the platform, their orders are directed to market makers or trading firms for execution and order flow creation. These firms pay Robinhood fees for executing trades and potentially benefiting from bid-ask spreads and other trading strategies.

While this method enables Robinhood to offer commission-free trades, it has attracted regulatory scrutiny and controversy due to concerns about potential conflicts of interest and trade execution quality.

Robinhood API fees

Robinhood permits developers and businesses to utilize application programming interfaces (APIs) that they can integrate into their platforms. Robinhood generates revenue from these collaborations and integrations by imposing fees for API access.

Premium accounts

Although the standard trading services are free of commissions, Robinhood offers a premium account subscription known as Robinhood Gold. This subscription provides users with access to advanced tools and benefits in exchange for a monthly fee. These benefits include higher instant deposit limits, Level II market data from NASDAQ, professional research insights from Morningstar, and the ability to engage in margin trading.

Trading of securities

Robinhood introduced a lending program that enables its clients to generate income from stocks. Those who choose this option allow the trading app to lend their shares to financial institutions for various purposes, such as covering shortfalls, aiding trade settlements, and facilitating short sales. Borrowers pay interest on the loan they receive, a portion of which is passed on to Robinhood users.

Safety of using Robinhood

Is it possible for an app to enable rapid investing, be commission-free, and still be secure? Is Robinhood a safe platform? As a financial services provider, Robinhood operates within the stringent regulations established by U.S. financial laws, maintaining registrations with both the Financial Industry Regulatory Authority (Finra) and the Securities & Exchange Commission (SEC).

Finra, an authorized federal body, oversees investment brokers, ensuring their adherence to established standards, promoting transparency, and educating investors. The SEC, a government agency, regulates the U.S. securities markets, safeguarding investors against fraud and misconduct. It mandates brokers to operate transparently, adhere to business regulations like prohibiting insider trading, and apply fair pricing and fees.

Despite ongoing oversight and official registrations, Robinhood faced a $70 million fine in 2021 for disseminating false and misleading information, leading investors into risky trades and substantial avoidable losses.

Moreover, Robinhood users encounter challenges due to the platform's inadequate investment management tools, which can lead to imprudent activity rather than helping users steer clear of risky investment strategies. For instance, the platform's setup doesn't facilitate easy portfolio diversification management, which could pose concerns given its offering of stocks, ETFs, options, and cryptocurrency trading.

Nevertheless, Robinhood does provide sufficient coverage through the Securities Investor Protection Corporation (SIPC), protecting its members' customers up to $500,000 for securities and $250,000 for cash claims.

Pros and cons of utilizing Robinhood

Here are some of the advantages and disadvantages for users to consider when engaging in the Robinhood trading experience.

Pros

• Commission-free trades: Robinhood removes the cost barrier traditionally associated with trading and investing, making it particularly appealing for frequent traders or those with limited investment capital.
• IRAs with 1% match: Robinhood introduced non-employer-funded individual retirement accounts (IRAs) with a 1% match on pension contributions, a first in the industry as of December 2022.
• Intuitive interface: Robinhood offers a sleek and user-friendly mobile app interface that is easy to navigate, catering to both non-tech-savvy investors and beginners. However, some argue that this simplicity could lead inexperienced investors to engage in risky trades, such as options trading.
• Access to cryptocurrency trading: Robinhood was among the pioneers in offering free crypto trading, although cryptocurrency investments cannot be included in Robinhood IRAs.
• Fractional shares: Robinhood enables users to purchase fractional shares of stocks and ETFs, allowing investment in favorite stocks with smaller amounts of money and facilitating broader market access and diversification, even for investors with limited funds.

Cons

• Limited investment education: Robinhood's research and analysis tools are relatively limited compared to other brokerage platforms, which may deter experienced traders who rely on comprehensive market data for their investment decisions.
• Lack of investment options: The absence of mutual funds or bonds in Robinhood's services could hinder its competitiveness and limit opportunities for building diversified investment portfolios.
• Limited customer support: Robinhood has faced criticism for delayed responses and difficulties in reaching customer service representatives, although efforts have been made to enhance customer service.
• Technical issues: Untimely outages and trade restrictions during market volatility have raised concerns among Robinhood users and regulators, resulting in fines for the company due to misleading customers.

Robinhood integration

The introduction of "Robinhood Connect" marks a new strategy to introduce Robinhood customers to the realm of Web3, aligning with decentralized finance (DeFi) trends in the financial market. In April 2023, the trading app unveiled this fiat-to-crypto on-ramp, integrating support for decentralized applications (DApps) and self-custody wallets.

This service enables users to achieve "true ownership" of their assets by purchasing and transferring cryptocurrency directly to their self-custody wallets within the DApp environment or without exiting their Robinhood Crypto accounts.

Additional features include a crypto home tab, price alerts, and advanced charts to aid users in applying technical analysis, enhancing portfolio management, monitoring crypto prices, and executing stop and limit orders. Robinhood Connect permits customers to trade the same cryptocurrencies available on Robinhood Crypto, with seamless transfers between the two platforms, requiring only a network fee.

However, certain limitations apply to this offering, such as the ability to send up to $5,000 worth of crypto or execute a total of 10 transfers per day. Users can also purchase up to $1,000 per business day using a debit card, with the same limits applicable to instant funds from a bank account.