Why ‘Free Trading’ on Robinhood? Isn’t Really Free or Just a Scam?
How will you feel if you can make money by offering something at no cost? Many millennial investors are looking for such commission-free options. For young investors, the emergence of online trading apps is a straight path towards their bright future. Robinhood, one such investment app, is attracting investors for commission-free secure investments just by using a mobile phone. But how does Robinhood make money? This question will hit your mind too when you know that Robinhood had taken tremendous heights by doubling its growth to 6 million users in 2019! As a customer, you will like to know if there are some Robinhood hidden fees and charges, which you have to pay later.
How Does Robinhood Work?
Robinhood is a no-problem Smartphone app that helps in the easy buying and selling of stock. The significant advantage of this app is that it does not charge any transaction fees. Conversely, other apps cost $1-7 per transaction.
The app initially designed for Apple is now available on the Android platform, also. The attention-grabbing facts of Robinhood are
- Get for free
- Automate your sales and buys
- You don’t need to be fanatic about your assets
- The app is user-friendly and easy to operate and use
Until 2019, Robinhood offered various investment ventures that included ETFs, stocks, cryptocurrency and some others. According to the company, it has supposedly saved customers over $1 billion in terms of commission.
How does Robinhood make money- the Million-Dollar Question
A company taking pride in providing commission-free trades, how does Robinhood make money! Robinhood makes money by three methods. A discussion on this unique app will clear all questions in your mind.
1. Lending out your money
The large fraction of the money made by Robinson is mainly due to money lending. Robinson uses its investor’s idle cash or better to say the uninvested money left in their accounts. It uses this money for margin trades, or it invests it in super-safe bonds. It may also deposit in a banking institution earning a return to every dollar.
Let us take an example. Say, you have $2000 idle cash in Robinhood account. The interest may be minimal if Robinhood lends out your money. It can be as little as $40 per year. But, there are millions of such accounts with Robinhood. If you now calculate the amount, you will realize how it becomes a turnover booster. The interest earned flows directly to the top line and customers in the lower line do not make it.
In recent times, brokers are solid stock-market performers. The reason is apparent. As the interest rate increases, investing in the uninvested cash of customers become more profitable and earning profits. The same concept goes with Robinhood.
2. No pay for trades, pay for perks
The basic level of Robinhood is free. But, like other applications, Robinhood has a premium account known as ‘Robinhood Gold.’ If you are still thinking, how Robinhood makes money, here is your answer.
‘Robinhood Gold’ is the primary source of revenue for Robinhood. The additional features that you will get as a Gold member are:
- You can buy it on margin. This means Robinhood allows its Gold customers to borrow money for making more significant purchases.
- Gold members are eligible to access accounts for longer hours. You can access 30 minutes before the market opens and 2 hours after the market closes.
- Gold customers get an exclusive benefit of getting funds early. Free members have to wait for 2-3 days before they can use money. You, as a gold member, can access the money instantly.
The minimum account deposit for Robinhood Gold is $2000, which is similar to all other brokers. But it is not free. Members have to pay certain charges to access an amount set for margin loans. The concept behind this is you will be able to borrow more if you have more funds in your account. In that way, if you want to have an extra $1000 in your account, you have to pay $6 per month.
You are getting a benefit, no doubt. But, these monthly charges for so many accounts are, of course, the stable income source for Robinhood.
3. Selling orders and making money
The market maker pays fees to brokers for sending trades for processing. This is similar in the case of Robinhood and this amount goes to Robinhood’s account. Even though Robinhood does not collect a commission from its customers, it wants its customer to trade regularly. The reason is the revenue for order flow depends on the number of shares bought and traded. The more the number of shares or options traded more will be revenue for Robinhood.
Another option for Robinhood to earn revenue is internalization. Robinhood, like other brokers, can match up to its buyers and sellers. For example, say a buyer wants to buy 200 shares of some company and another customer wants to sell 200 shares of that company. There is a minimal difference between the buyer’s amount and the seller’s amount. This amount is Robinhood’s profit. The amount per share is so small that it does not matter much for the buyer or seller. But it matters for Robinhood because ‘little drops make the mighty ocean’.
Robinhood hidden fees and charges
No doubt, Robinhood provides the best platform for online trading. It does not take any commission for the necessary accounts. You know how it makes money. Still, the matter of Robinhood hidden fees and charges hammers in mind and you will search for it before becoming a customer.
Yes, there are some hidden fees for some cases. Let us know them one by one.
1. Transferring an account
Robinhood charges $75 when you transfer your account through the ACATS system to another competitor. The paper statements cost $5 each and the paper confirmations cost $2 per piece.
2. Restriction of account
There may be several reasons for account restriction. Whatever the reason is you have to pay a $10 surcharge per trade for the limitation of the account.
3. Live representative charge
Sometimes, to submit an order, you have to use a live representative through calling. Robinhood hidden fees and charges are incurred here. The amount is $10 extra.
4. Foreign Security Trading
There is a straight $50 transaction for trading foreign security. Moreover, if you cancel international security, Robinhood will charge $15. The same amount goes for making a trade adjustment also.
5. The service of Robinhood Gold
Robinhood Gold is the premium version of the application. It charges a monthly fee from the customers. There is no criterion for paying percentage as per money borrowed. The amount is a flat monthly charge. The minimum account balance should be $2000. But, if you want to have an extra amount you have to pay additional fees. Robinhood charges $6 to $200, depending on the amount you are borrowing.
Moreover, there is a twist if you borrow more than $50,000. Robinhood incurs a charge of 5% on balances above $50,000.
6. Regulatory Fees
Another hidden charge of Robinhood is regulatory fees. The customer has to pay the SEC fees applicable for sales only, which is $2.31 per $100000 of the principal amount.
7. Trading Activity Fee
The trading activity fees or TFA is the charge applied to stock sales only. The amount is not eye-catching. The amount is 0.0119 cents. Robinhood rounds it up to the nearest cent. The capping amount comes to $5.95 per transaction.
8. Other charges
The wire transfer in Robinhood has a charge too. If you wire transfer a domestic one, you have to pay $25. The amount for an international wire transfer is straight $50. You have to pay $35 for overnight check delivery for domestic purposes. On the other hand, ACH, a returned check or wire, costs around $30.
Robinhood- Is it a Legit platform?
Robinhood is one of those rarest platforms which provides commission-free options for the customers. If you are a newbie, a free platform with all the necessary facilities is right for you. Though you receive a commission-free service, you have also known how Robinhood makes money by this time. But, along with no commission options, Robinhood hidden fees and charges may also skip your eyes. So, before opening an account in Robinhood, make sure you know everything about what you get and what you don’t, because, Money Matters!