How do stocks work on Robinhood? When you sign-up for Robinhood, your account is funded with $1,000 to buy stocks. However, this $1,000 isn’t free money—it’s funded via margin . This means that the $1,000 you use to buy stocks is actually borrowed money. It works just like your loan statement at school or work. You deposit $100 into your bank account and then spend money out of that account without paying off any of the balance because you have no other debt outstanding. The same can be said about Robinhood because all you need to get started is to fund the $100 minimum deposit. After that, the remaining $900 is used to buy stocks—
Have you ever wondered how stocks work on Robinhood? This article will cover the finer details of stocks, including how to open an account, what are dividends, and if there are any limits.
Robinhood’s Financials
In its recently submitted S-1 form, Robinhood provided financial results for Q1 of its 2021 fiscal year (FY), the three-month period ended March 31, 2021. The company’s net loss widened to $1.4 billion from $52.5 million in the year-ago quarter. However, revenue for the quarter more than quadrupled to $522.2 million. The net loss was driven primarily by a $1.5 billion one-time, noncash charge related to a mark-to-market (MTM) change in the fair value of convertible notes and warrant liability.6
Robinhood’s net cumulative funded accounts, a key metric that gauges the number of accounts into which users made an initial deposit or money transfer during a specified period, rose 150.0% year-over-year (YOY) to 18 million in Q1 FY 2021.7
The company also provided results for FY 2020, which ended Dec. 31, 2020. Robinhood posted a net income of $7.4 million, a significant turnaround from the $106.6 million net loss reported in the prior year. Annual revenue rose 245.5% from the previous year to $958.8 million.8
Robinhood’s Business Segments
Robinhood operates and reports its financial results as one business segment. However, it does provide a breakdown of revenue into the following categories: transaction-based revenues; net interest revenues; and other revenues. We take a closer look at these revenue categories below.9
Transaction-based revenues
Robinhood generates transaction-based revenues by routing its users’ orders for options, equities, and cryptocurrencies to market makers, which is a process known as payment for order flow (PFOF).9 Brokerage firms that use PFOF receive a small payment as compensation for directing orders to a particular market maker. The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders. PFOF is a major reason Robinhood is able to offer zero-commission trading. Robinhood’s transaction-based revenue rose 339.6% to $420.4 million in Q1 FY 2021, accounting for more than 80% of companywide revenue.10
Net interest revenues
Robinhood generates net interest revenue (interest revenue minus interest expenses) on securities lending transactions. Interest is also earned on margin loans to users, and interest expenses are incurred in connection to the company’s revolving credit facilities.9 Net interest revenues rose 160.2% to $62.5 million in Q1 FY 2021, comprising approximately 12% of Robinhood’s total revenue.10
Other revenues
Robinhood’s other sources of revenue primarily consist of memberships fees for Robinhood Gold. Robinhood Gold is a paid subscription service that offers users premium features, including enhanced instant access to deposits, professional research, Nasdaq Level II market data, and access to margin investing for approved users. Other revenues also include proxy rebates and miscellaneous user fees.11 Revenue from these sources rose 396.5% to $39.2 million in Q1 FY 2021, accounting for nearly 8% of companywide revenue.12
Who uses Robinhood?
The app is popular among young, first-time investors, as evidenced by its game-like interface, including celebratory animations and push notifications when there are updates in the market.
It’s not limited to only Redditors taking on risky investment moves. If you do some proper research, Robinhood can, at the very least, serve as a good introduction to investing. But no matter how savvy you are at picking stocks, you’re highly unlikely to beat the market over the long term. (Which is why Money has always advised new investors to start with passively-managed index funds with proven track records instead.)
Day traders will always try to game the system — even if it’s usually next to impossible to make boatloads of cash that way. And since Robinhood lets anybody with a bank account buy and sell risky financial products, it’s no surprise that more and more people are opening up accounts.
How to invest with Robinhood (the right way)
Before you download any sort of investing app, figure out what your motivation is, Falcone suggests. Are you doing this to make some quick cash? Because you have Reddit-induced FOMO? Or because you want to put your money to work responsibly, and are prepared to think about long-term strategies?
“That should help you put blinders on to what you might be seeing on social media or hearing from your friends,” Falcone says. “If [certain] types of stock don’t fit into your strategy, then you should immediately know to ignore those suggestions.”
If you’re approaching this through a financial planning lens, make sure you’ve already paid off all your credit card and high-rate consumer debt. You should also be contributing enough to your employer-sponsored plan to maximize any potential match benefit — that’s an immediate, guaranteed return on your investment that you can’t expect from the stock market.
“Once you are on track for retirement and have additional cash to invest, you may want to consider adding some individual stocks to your portfolio,” Falcone says. “However, it is recommended to secure your financial future with diversified securities first … either through your employer’s plan or an IRA.”
You’ll also want to set some investing goals before you start trading, Falcone says. Maybe you want to invest to help pay for a new couch, a trip to the Bahamas, an engagement ring, or a downpayment on a future home.
“Determine how much that goal will cost, how long of a time horizon you have to achieve it, how much money you have to invest toward it today, and how much you’ll have to contribute on a weekly or monthly basis to reach that goal using a reasonable expected return for your time horizon,” Falcone says.
Where Robinhood shines
Costs: Robinhood is a true discount broker — although its offerings may not be as robust as some other brokerages, Robinhood has some of the lowest costs in the industry.
Streamlined interface: Robinhood is extremely easy to use. So easy, in fact, some have argued that it’s made complex trading strategies, such as options trading, too accessible to inexperienced users. However, if your only goal is to dabble in stocks, the trimmed-down interface is highly convenient.
Free cryptocurrency trading: Robinhood is still one of the few brokers that lets you trade cryptocurrencies for free, so among stock brokerages, it’s a stand out feature. However, if you compare Robinhood’s crypto offerings to pure-play crypto brokerages, that shine starts to fade.
IPO access: In 2021, Robinhood unveiled a new offering that lets users take part in a company’s initial public offering, or IPO. This has typically been reserved for financial institutions.
Where Robinhood falls short
No retirement accounts: Robinhood only offers taxable brokerage accounts. So, if you park your money here long-term or are hoping to save for retirement, you’ll miss out on the tax benefits of retirement accounts like traditional and Roth IRAs. For most investors, investing through a taxable brokerage account should come only after they have started funding such a retirement account.
No mutual funds or bonds: The lack of mutual funds and bonds may make it difficult to build a truly diversified portfolio.
Limited customer support: Robinhood has made noticeable improvements to its customer service in the past year, but it’s still not on par with other brokerages.
Reliability: Robinhood has received criticism for untimely outages and trade restrictions amid market volatility, and has been charged by regulators for misleading customers, resulting in significant fines. We discuss these charges and other customer service issues in detail below.
Robinhood is best for:
- Mobile users.
- Individual taxable accounts.
- Margin accounts.
Robinhood at a glance
| Account minimum | $0 for brokerage account and for Robinhood Gold account. |
| Stock trading costs | $0. |
| Options trades | $0. |
| Account fees (annual, transfer, closing, inactivity) | No annual, inactivity or ACH transfer fees. $75 ACAT outgoing transfer fee. (Robinhood Gold costs $5 a month.) |
| Tradable securities | • Stocks.• ETFs.• Options.• Cryptocurrency.• American Depositary Receipts for over 650 global companies.• Fractional shares. |
| Crypto offering | 7 coins in 48 states. |
| Number of no-transaction-fee mutual funds | Not rated. |
| Trading platform | Web platform is purposely simple but meets basic investor needs. |
| Mobile app | Mobile trading platform includes customizable alerts, news feed, candlestick charts and ability to listen live to earnings calls. |
| Research and data | News available from WSJ Markets, Reuters, Barron’s, CNBC Business and Cheddar. Gold members have access to research from Morningstar, Nasdaq, Nasdaq Totalview level II Market Data for an additional $5 per month. |
| Customer support options (includes how easy it is to find key details on the website) | Email, social media, in-app request-to-call service 24/7. |
Conclusion
Robinhood is an awesome app that allows you to buy stocks for free, but what you may not know is that it also has many other features. For example, if you want to learn about the stock market, there are features for that too!