Published May 25, 2017|8 min read
Updated September 18, 2020: Up until downloading Robinhood, I had never bought stock before. That isn’t to say I haven’t been working on a financial plan – I’ve been using Betterment to save for retirement and to hold my emergency savings while also shopping around for life insurance. Betterment, like other investment services geared towards millennials, is built around the idea of passive investing.
Adopting a passive investing strategy means that you’re basically throwing your money into exchange-traded funds (ETFs) – funds that typically track an index like the S&P; 500 or another set of related stocks. ETFs are cheaper than actively managed funds, primarily because you need a lot fewer people to look after them. Plus, they’ve historically performed better than actively managed funds. For the majority of people, it makes a lot of sense to just throw a set amount of money into a passively managed fund and forget about it until you need to retire.
But let’s face it: as logical as passive investment strategies are, they’re not a lot of fun. You can’t go into Betterment and say you want to bet the farm (or just a pitchfork) on whatever hot new IPO is popping up that month.
That’s exactly the situation that spurred a 50% increase in trading activity on Robinhood, an up-and-coming favorite app of millennial investors.
But what exactly does Robinhood offer, and is it a good idea for novice investors to use it to trade individual stocks?
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Robinhood is an online stock brokerage, only accessible through a mobile app, that allows you to purchase stocks and ETFs with no commission. That means that Robinhood is completely free to use to buy stocks and ETFs. There’s no minimum account balance you need to maintain, and you can buy as much or as little stock as you’d like.
While you can use Robinhood to build a passive portfolio of ETFs – just like Betterment or Wealthfront does – the app doesn’t do it for you. You’re in charge of every single purchase and sale.
Inside the app, you’re treated to a bare-bones interface that emphasizes real-time market data. You’ll see how much your portfolio has gone up or down in a particular day, or zoom out to see price changes over the last week, month, three months, year, or the entire history of your account. Underneath a small section for headlines, you have two watch lists: one for your held stock and one for stock that you just want to keep an eye on. Tapping a stock will bring you to a screen where you can see the price changes over the last five years, buttons to buy and sell, and detailed information on your currently held shares, more headlines, stats on the stock, and a history of your purchases.
You can buy most U.S. listed stocks and ETFs. Robinhood does not yet allow you to trade options, futures, and other types of securities. While this likely won’t be an issue for most novice investors, the lack of other securities is considered a big limitation by more advanced traders.
Robinhood Instant is a free upgrade to your brokerage account that allows you to use deposited funds instantly, without waiting for bank transfers or stock sales to settle. When upgrading to Robinhood Instant, you’re turning your brokerage account into a limited margin account. This means that Robinhood is fronting you the money, though unlike full-featured margin accounts, there is no fee or interest rate associated with the loan. You can instantly access up to $1000 in pending deposits with Robinhood Instant.
Robinhood Gold is a paid upgrade that turns your brokerage account into a margin account. This means that you are offered a line of credit for trading stocks and ETFs – an inherently risky strategy that could end with you losing more than just your money. Unlike other margin accounts, you pay a flat monthly fee for Robinhood Gold, as opposed to an interest rate on borrowed funds. Robinhood Gold also gives you access to the same instant deposits as Robinhood Instant, plus access to pre-market and after-hours trading. You must have a minimum of $2000 in your account – as cash or as held securities – to upgrade to Robinhood Gold. Robinhood Gold currently starts at $6 per month for an extra $1000 of buying power.
Free trades and no account minimum
Let’s not mess around: these are the number one and number two reasons to use Robinhood. By lowering the barrier of entry to literally zero, Robinhood makes it easy to play around with a small amount of cash. Besides the money you’re using to fund the account, it’s completely free to do some hands-on learning about the stock market.
Free trades also makes Robinhood an attractive option for more experienced investors with accounts at other brokerages – if they can deal with some of the limitations. Because there’s no account minimum, it’s simple for anyone to try Robinhood out with no commitment.
Simple, clean UI
Whether you’re on iOS or Android, Robinhood’s mobile app is easy to navigate. Unlike other brokerages, Robinhood was designed to be mobile-first, which means its app should be familiar to any smartphone user. Considering that other brokerages’ apps are frequently messy, overstuffed, and outdated, Robinhood didn’t have to clear a high bar when it came to designing their app. But not only did Robinhood clear the bar, it exceeded it by creating a genuinely pretty app that is a joy to use.
(Here are some more apps that can make your life easier.)
No educational resources for first-timers
For an app focused on first-time investors, Robinhood sure does fail to provide educational resources that could help new investors navigate the stock market. This feels like a huge oversight for a company that has specifically targeted novices. At the very least, Robinhood should have a "Getting Started" article, and at best, Robinhood would build out a library of "Investing 101" resources within the app.
Robinhood does make some gestures to building an "investor profile." When you first sign up, you’ll be asked to answer questions about your goals, your timeline, your risk tolerance, and your income. These questions are reminiscent of how robo-advisors like Betterment and Wealthfront build your portfolio. But Robinhood doesn’t do anything with this information. It’s like someone set out to build an educational feature, but forgot to actually put it in.
Missing research tools
Unlike other brokers, Robinhood doesn’t offer much in the way of research tools. If you want to dive deep on a company or an entire industry, you’ll have to look elsewhere. For more experienced investors, research tools at other brokerages could be worth the cost of a commission fee on trades.
No IRA options
Most people in their twenties should be focused squarely on retirement. While you can save for retirement in an individual taxable account – the only type of account that Robinhood offers – it doesn’t come with any of the tax benefits of a traditional or Roth IRA. While you don’t have to pay any taxes on the stock you buy, you will owe tax on the gains for every stock you sell. These basic facts about the tax implications of investing are another casualty of the lack of educational resources in the app.
Here's our easy guide on opening an IRA.
While the simple and clean UI makes Robinhood easy to use on the go, you end up doing a lot of scrolling if you have a big portfolio or a long watchlist. This wouldn’t be a big deal if you could also access Robinhood on a larger screen. Web and tablet apps could help expand Robinhood’s capabilities without compromising the simplicity of the mobile app. Not having a web app also puts Robinhood at a disadvantage when compared to other online brokerages. While competitors may not have as pretty a mobile app as Robinhood, they make it up for with access across platforms.
If other brokerages make money by charging you a fee per trade, you’re probably wondering how Robinhood makes money. According to Techcrunch, the company makes money in three ways:
Robinhood Gold subscriptions, which cost anywhere between $6 and $200 per month.
Rebates for directing order flow to broker dealers.
Interest on the cash sitting in your account.
Learn more about the dangerous of investing apps here.
Robinhood co-founder Baiju Bhatt was quick to push back against the rumor that Robinhood sells data to other traders, with the idea that those traders could then trade against Robinhood’s users. Bhatt cited that U.S. laws would make that impossible – but it also goes against the company’s mission of democratizing access to the markets.
You can read our reviews on other investing apps here.
If you’re anything like Robinhood’s core user base – in your mid-20s and new to the stock market – you should make sure you have your retirement accounts in order before putting money into an individual taxable account. For the vast majority of people, a portfolio of ETFs is a better way to invest for the long term. Consider setting up a tax-deferred account with Betterment, Wealthfront, or one of their competitors before you start messing around with individual stocks. Additionally, if your employer offers you a 401(k) with matching contributions, you’ll want to contribute at least enough to get the maximum matching contributions you can annually.
If Robinhood starts offering IRA account options in the future – which they say is on the roadmap – it could become the best option for investors who are looking to build their own retirement portfolios. While you still shouldn’t gamble away retirement savings on individual stock, you could use a Robinhood IRA to build your own portfolio of ETFs that matches your investment goals.
But let’s say you already put aside 10 to 15% of your income in a tax-deferred account, and you’re ready to gamble a little on a stock market. With free trades and no account minimums, Robinhood is easy to suggest as the best brokerage for novice investors – as long as these investors are willing to find educational resources and research tools elsewhere.
Image: Rafael Matsunaga
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