Robinhood is an online stock broker that prides itself on offering commission-free trading of stocks, ETF’s, cryptocurrencies, and stock options, all through an easy-to-use mobile app. But with an increasing number of free alternatives from larger, more established organizations, how does Robinhood stack up against the competition?
Who is the service geared towards and, more importantly, is it a good fit for you?
See the answers to all of these questions and more below.
Pros & Cons of Robinhood
- No minimum deposits, inactivity fees, or withdrawal fees
- Commission-free stock and ETF trades
- Instant deposits up to $1,000
- Ability to track and purchase cryptocurrency and stock options w/ no fees
- High-yield cash management account (currently in a beta phase and requires interested customers to sign up for a waitlist)
- Easy-to-use mobile app
- Provides a cheap introduction to the stock market w/ purchasable fractional shares
- Limited account options (no IRA’s, money market, 529’s)
- Limited investment options (no mutual funds, bonds, inability to short sell stocks)
- Relatively few informational and educational resources (though they plan to improve this in the future)
- Customer support only accessible via email
- Maximum of 3 day-trades/ week with a standard account
Overall, whether or not Robinhood is a good fit for you will depend on what kind of investing you hope to do and how advanced you plan to get. With that in mind, I recommend avoiding any of the paid premium accounts unless you’re an experienced investor who intends to utilize day trading heavily or buying on margin.
Robinhood’s lack of account minimums or trade-based fees combined with their accessible and user-friendly mobile app make Robinhood a solid choice for the new, casual investor who wants to engage in some DIY experimentation in the stock market or invest in cryptocurrency.
The ability to purchase fractional shares also provides a cheap introduction to buying and selling stocks and removes a lot of the barriers to entry that often keep out prospective investors.
If you were looking for a quick and easy place to practice your day trading however, you may want to look elsewhere. Robinhood limits the number of day trades to 3 trades per 5 business days unless you change your account from the standard one.
Also, the current lack of educational resources and limited research information compared to what you could find elsewhere make Robinhood a suboptimal choice for those planning to use it as a way to learn about how to pick stocks or engage in more serious investing.
However, do check out Robinhood Snacks if you’re looking for financial news – they’re pretty good about sharing financial news in easy-to-understand ways!
For the long-term investor, the limited account and investment options start to really reduce your benefits compared to other tax-advantaged ones. If you’re new to investing and are looking into long-term savings options, we tend to recommend first opening an IRA account and investing in passively managed index funds (you can check out our guides to opening an IRA account or picking the best index fund on our site).
A More In-Depth Review
Commissions / Fees / Account Minimums
Robinhood has no commissions, fees, or account minimums, which is great news for you (who doesn’t like free?). Until recently, Robinhood was one of only a few companies offering such options.
That being said, these days, there are many other alternatives that have begun offering free stock and ETF trading, such as Charles Schwab and Fidelity. While this does mean that Robinhood is no longer unique in offering commission-free trades or $0 account minimums, it is still a great option as far as fees (or lack thereof) go.
It’s also worth noting that while Robinhood does not charge any fees to open an account, transfer funds in, or maintain an account, they do charge a $75 fee to transfer your account’s stocks and other investments to another broker (this can be avoided if you first liquidate your investments and then transfer the money to your checking account).
Before you run and start selling all of your current investments, speak to a tax professional to understand the tax consequences of doing so.
If you do end up using Robinhood Gold, a premium version of the standard account, you will have to maintain a minimum balance of $2,000 if you want to borrow on margin, as per federal law.
User-Friendly / Accessibility
This might be the best part about Robinhood: from start to finish, creating an account and using the app to buy and sell feels seamless. The interface is simple to use and easy to understand.
Buying and selling stocks is as easy as looking up a company with the search bar at the top of the screen, seeing some basic details of the company in question and recent history of the stock’s price, and typing in the number of shares you want to buy or sell. The instant deposit and trade features help expedite the whole process too.
Creating an account takes only a couple of minutes and takes place entirely within the app itself. You fill out your name and email address, pick a username and password, enter some basic contact information, verify your identity by filling out some more standard information including your social security number and citizenship status, and then select how you want to fund your account. After that, you’re ready to go. The whole process took me 2 minutes!
Robinhood makes it easy to find your account information and see the total value of your portfolio (stocks + cash) as well as your buying power. It also keeps track of any shares you’ve purchased and allows you to quickly find them to see their recent performance history.
An interesting note: Robinhood will assign you a risk tolerance after you fill out a brief questionnaire that provides you with your investment profile. While this doesn’t impact anything related to your portfolio’s performance, if you have a low risk tolerance, Robinhood might prevent you from taking such actions it deems “too risky,” such as trading options. Your profile is easy enough to change, so it won’t prevent you from doing these things if you really want to, but it’s nice to have that extra layer of protection against accidentally taking on more risk than intended.
Investment and Account Options
Here we see Robinhood start to reveal some of its limitations. The inability to invest in mutual funds or bonds inhibits your ability to make long-term investments, as you will be increasingly subject to the volatility that comes with investing in individual stocks.
If you do ultimately decide to use Robinhood as a long-term investing app, you should make sure to look into ETFs over picking individual stocks (click here to learn more about why we don’t recommend picking individual stocks). ETFs contain a more diverse collection of stocks and can provide an easy way for you to diversify your portfolio.
Similarly, the only type of account offered is a standard brokerage account, which does not provide any tax benefits (unlike an IRA or 401(k) account, which we recommend contributing up to 20% of your annual income towards before using other types of non-tax-advantaged accounts).
For the more advanced investor, know that Robinhood does not allow you to sell stocks short but has recently updated to allow for multi-leg option strategies such as iron condors to customize your trading strategies.
Despite not having all the account or investment options we’d like to see, Robinhood still offers a fair number of basic choices that will likely satisfy the more casual investor. Among its more unique features are the ability to buy fractional shares and trade cryptocurrencies and options without fees.
Fractional shares let you buy stock in a company that has a high price per share without needing to purchase entire shares at a time. This lowers the amount of money you need to start investing and helps you diversify your portfolio using less money.
As far as cryptocurrencies go, Robinhood currently lets you invest in the following ones: Bitcoin, Omise, Lisk, Dash, Monero, Zcash, NEO, Steller, Ethereum, Qtum, Ripple, Dogecoin, and Litecoin, all without fees. This can be a very helpful feature if buying and trading cryptocurrency is your preferred investment method since there aren’t many other options on the market that provide free cryptocurrency trading.
Robinhood also lets you trade stock options without fees – this is actually a pretty useful feature! Often times, trading options contracts costs a small fee each time, which can add up to more substantial amounts fast. However, we recommend new investors stay away from options trading for now
It can be difficult to know what to look for without experience, and you’ll generally be better off sticking to shares until you have a bit more familiarity with picking stocks and understanding the market.
Day Trading and Research Resources
As mentioned at the top of this article, you are limited to 3 trades per 5 business days unless you have a Robinhood Cash account, which removes your access to instant deposits and instant returns from selling a stock.
Without the flexibility and swiftness of instant returns and deposits, as well as having to jump through a couple of hoops to switch your account type, we think there are better alternatives out there for prospective day traders (TD Ameritrade or E*TRADE to name a few).
Robinhood’s current pool of resources lag somewhat behind what many other brokerage accounts offer. While they do offer standards such as news feeds from sites like Yahoo finance and the WSJ, stock watch lists to easily keep track of any stocks you’ve purchased, analyst ratings so you can see an expert opinion on the stock you’re looking at, and categorical organizers that allow you to select stocks based on industry, there are simply better free options out there currently that you can use. However, they have stated that they are looking to increase the number of tools they provide in the near future, so keep an eye out for any new features.
There is one big upside to Robinhood’s financial information: Robinhood Snacks. This podcast and newsletter combination aims to provide its listeners and readers with daily financial news boiled down to include the relevant takeaways without all the jargon. After listening to a number of their podcasts and pouring through some of their articles, I have to admit: it’s actually pretty helpful! If nothing else, it could be worth downloading the Robinhood app just to make use of Robinhood Snacks.
Robinhood’s Business Model
Here at TFT, we think it’s important for you to understand how companies, especially those that claim to offer free services, earn their money. Robinhood earns its revenue in two main ways: paid premium accounts and a process known as payment for order flow.
Robinhood’s premium accounts are a simple enough business model: for an extra $5/month ($60/year), you’ll gain access to some additional research and market data, the ability to make larger instant deposits, and the ability to buy stocks on margin. While the extra information provided can certainly be useful in picking stocks, the main selling point of this service is the ability to buy on margin.
Simply put, buying “on margin” equates to borrowing money in order to buy more shares of a stock than you otherwise could (think of it like taking out a loan). If the stock performs well, you’re able to pay off the borrowed money plus interest and earn more than you otherwise might have. If the stock performs poorly however, you can end up in a difficult situation as you’ll still owe borrowed money (this is why investing with margins can be a risky business).
The more insidious aspect of Robinhood’s business model is the payment for order flow. Whenever you’re buying a stock, you buy it from somewhere or someone else. A broker acts as a sort of middleman, matching potential buyers with sellers and taking a small portion of the profits in exchange for such a service.
To give an example: A broker might buy stock from a seller at $100.00 per share and then sell that same stock to the buyer for $100.05 per share, collecting 5 cents per share in profits (often called the “spread”). While this isn’t an uncommon industry practice, Robinhood’s spread is reportedly much higher than many of its competitors.
This means Robinhood is matching you with sellers who are charging more than the market price for the same good. Put differently, the price you’re paying for individual shares purchased through Robinhood is likely a bit higher than what you would pay with another broker.
When choosing between a broker that earns its money through commission vs. payment for order flow, if you only plan to purchase a small number of shares, it’s generally still cheaper to pay a couple of extra cents per share than it would be with a $4.95 commission fee on the whole purchase. So long as you don’t plan on buying hundreds of shares at a time, Robinhood’s business model isn’t too bad. Just be aware of the hidden costs, especially whenever a company claims to offer a “free” service.
Though it may lack the same available information or investment options that other brokerage services offer, Robinhood’s commitment to commission-free trades, no minimum deposits, and fractional shares, all of which are put into one user-friendly app, makes them a good choice for someone simply looking for a low-commitment introduction to investing in the stock market.
As a low-cost, introductory tool to get started in the stock market, Robinhood is a solid option, albeit one that the more serious or long-term investors may find themselves outgrowing in favor of more feature-rich alternatives.
- No Minimums
- No Fees
- Instant Deposits (up to $1,000)
- Easy-To-Use App
- Ability To Trade Crypto
- Limited Account Options (No IRAs)
- No Mutual Fund Options
- Limited Educational Sources
- Email-Only Customer Support
- Ability To Trade Crypto
Lucas is a personal finance expert, an undergraduate student at Harvard University and the founder of the Personal Finance and Consulting Group at Harvard College (an officially recognized student organization). He has spent much of his life working to increase financial literacy in his surrounding communities through independent financial research and curricula design, and he is currently studying economics with a secondary in music.