Did you know about Robinhood?
No not the one that steals from the rich and gives to the poor.
The Robinhood in this context is an app that will help you in making money.
If you have heard about it, great.
But if you didn’t, then stick till the end to find out more about Robinhood.
Story behind Robinhood
Robinhood is an online trading and investment app that was launched back in 2013. Through their mobile app or website, the users can trade ETFs, Stocks, options. Not only that they can even cryptocurrency can be traded on this platform. The reason behind the popularity of this online investment app is because of its low cost, commission-free model. Simply put, this platform keeps the costs low for the investors as they don’t have to pay for the commission. The commission is one of the biggest burdens for the traders. So it is a given that many investors would take an interest in this app.
People are looking for ways to invest their money to secure their future, even millennials are quite keen on this idea. But the problem is not everyone is well versed in concepts of finance. So there is the most likely chance of them making a mistake and losing money. This is the reason why most people opt for low-risk investments but one thing they forget about these investments is that they bring low income only. But without guidance investing in high-risk investments like stocks can put a huge dent in your pocket. Not only that investing is not cheap.
This is why many people are looking for easier ways to invest. With investment apps like Robinhood, it looks like investing has become easier and seems like this is the future. The idea behind this app is to democratize America’s financial system and provide an opportunity to make investments without any commission.
Is it safe?
One can say that Robinhood mainly focuses on the younger generation. It provides them with an opportunity to enter the market early and not to mention the app provides them with inexpensive access to the world of trading. With its ideology i.e, no to low fees motto, this platform has gained a large user base.
But is it safe?
See, as people are putting their hard-earned money, it is quite common to have this question. That too this platform being an online trading app, people are more skeptical about it. This application also has membership with the Financial Industry Regulatory Authority (FINRA). Robinhood is regulated by the Securities and Exchange Commission (SEC). Not only that this app is also protected by the SIPC (Securities Investor Protection Corporation). SIPC protects up to $250,000 cash claims or $500,000.
As of 2019, this investment application has received a recent Series-D investment of $363 Million. Currently, the company is valued at $5.6 billion. In the last year, it has also begun offering a variety of investments including the ETFs, Stocks, Options, and Cryptocurrency. Back in 2018, the company has said that they have saved around $1 billion in commission fees to their customers.
But this brings us to the question, how does Robinhood make money then?
The secret of money-making
As you already know that Robinhood is offering low cost to no cost commission fees, but the point is, how does this investment app make money then? Although commission-free trading may sound like no money, on contrast Robinhood actually makes money through different means such as rebates, interest, premium accounts.
Here are a few ways how this app makes money.
- Marginal lending and interest
- High-frequency trading
- Premium Accounts
The major source of income for this app comes from the interest. They lend out the investors idle cash and receive handsome interest on that sum. Simply put, they’re making money from the customer’s uninvested funds. A bank collects the interest on cash deposits, similarly, Robinhood also makes money from the interest from customers stocks and cash. Although this is the primary source they also charge for the additional service they provide such as live broker trading, foreign stock transactions, etc. For live broker trading, they charge around $10 per trade and for the foreign stock transaction, they charge around $35-$50. They also make money by routing customer orders through the electronic trading giant.
Marginal Lending and Interest
Another important source of income for them is the Company’s margin trading service through the Robinhood Gold. There are different tierss in this too. The minimum portfolio value for this margin account is $2000. For an additional marginal loan of $1000, you must pay $6 for a month. You can continue borrowing money as the margin is 50% of your balance. Another source of income is that whenever the user switches to another broker they need to pay Robinhood $75. So apart from interest money, this is also a source of income.
Robinhood also depends on the high-frequency trading for revenue. Not only that it also has a strategy called payment for order flow. More than 40% of the revenue comes from these methods. The payment for order flow is a method that is followed by many online brokerages and this has been quite controversial. Instead of orders being processed on a public exchange, Robinhood and similar companies make money by directly the trades to the third parties (behind-the-scene parties). These parties provide the other end of the trade.
Robinhood makes money from the rebates. According to Robinhood, they earn $0.00026 in rebate for every dollar traded. Some people suggest that reliance on rebates may become harmful to the company.
The premium accounts also bring in good revenue for the company. Premium account is called as Robinhood Gold. It provides them with an additional margin of $1000, but they have to pay for it. This way the traders can trade with more amount that they have in their cash balance.
Apps like Robinhood has made the investment easy for the younger generations. Not only that they have even reduced the costs of trade by their low to no commission policy. This is quite beneficial for expert traders. If you are interested in knowing how a business makes money then check out the business model articles.