Robinhood Broker Review – Are Free Commissions Worth It?

Robinhood is a discount stock brokerage firm opened in 2013. Robinhood is currently a smartphone-app based brokerage, offering their services exclusively on their app, with their web interface currently in production.

Robinhood’s main selling feature is their commission-free stock trading, trading the resources of a big box brokerage firm for free commissions. For this reason, Robinhood offers no research reports, complex analytics, short selling, sophisticated trading platforms, or options trading.

Broker History

Opened in 2013, Robinhood was founded by former high-frequency traders and Stanford graduates Vlad Tenev and Baiju Bhatt. As HFTs, they realized commission-free trading is possible, and they aimed to bring it to the individual investor. Robinhood launched as a waiting list, and after a month, had 100,000 members on their list. The firm has executed over $30 billion in trades as of 2017.

Robinhood claims their ability to offer free commissions is due to their lean spending. Here is an excerpt from their About page on the website.

“How are we able to offer commission-free trading while others charge up to $10 per trade? Robinhood was built from the ground up to be as efficient as possible. By cutting out the fat — hundreds of storefront locations, manual account management, expensive Super Bowl ads, etc. — we are able to maintain a lean bottom-line and pass the savings along to you, the customer.”

Account Minimums

Robinhood has no account minimums, you can start investing with as little as $0.10, and with no commissions, you can trade penny stocks with loose change.

Commissions & Fees

Robinhood currently charges no commissions for trading. With this, comes some caveats.

Trading Restrictions

  • No short selling
  • No options trading
  • Limited margin offerings

Fees

Margin

As an alternative business model, Robinhood charges a monthly fee to access margin. This service is called Robinhood Gold, and the monthly fee depends on your account size. Additionally, the margin is only limited to 2x your buying power, as opposed to most broker’s 4x margin, and 6x intraday margin, which does not require a membership fee (although interest is charged). However, Robinhood still claims their margin fees are cheaper than the big box brokerage firms, the following infographic is from their About page.

Robinhood Margin

Smartphone App

Currently, Robinhood offers one trading platform, their smartphone app, with zero fees. It has very limited analytics, not enough to satisfy most traders and investors. For unsatisfied traders, it is recommended to subscribe to a secondary trading platform to perform their analysis.

Robinhood App

Robinhood App 2

Robinhood for Web

Robinhood currently has a waiting list for their upcoming web platform, Robinhood for Web. There are only screenshots available, but it looks similar to the web app. Users of Thinkorswim and other sophisticated platforms shouldn’t hold their breath.

Robinhood Web

Customer Service

Robinhood is infamous for their poor customer service. Most users of the app see the poor service as a necessary evil to attain free commissions. As a result, a large community of passionate Robinhood users has cropped up online at Reddit, where they help each other troubleshoot problems with the app.

Multiple users on the Robinhood Reddit have reported especially negative experiences with Robinhood’s customer service. Here are a few:

Clients of customer friendly brokerages like Ally Invest will be disappointed if they move to Robinhood.

Executions, Routes, Borrows, and Locates

Routes

Robinhood has no direct market access available, hence, choosing which route to send your order through isn’t a choice.

Executions

It is safe to assume that of all discount brokers, Robinhood likely has the worst executions because of the lack of commissions. Additionally, like many discount brokers, Robinhood makes revenue by selling your order flow, or in other words, allowing high-frequency traders first access to your order.

Borrows and Locates

At this time, Robinhood does not offer short selling. However, shareholders still earn the interest from loaning their shares to short sellers.

Notable Benefits

As many traders and investors have remarked, a well-capitalized trader is better off paying the small ticket charge at a big box firm for the superior analytics, research, and customer service. But, even the well-capitalized trader wants to take very small, speculative trades from time to time, of which $5-10 commission charges can eat into the profits. Many traders have reported using Robinhood strictly for their speculative trades.

A workaround used by many is opening an account at a big box brokerage firm, fulfilling the minimum deposit, and using the firm’s resources for analysis, and Robinhood for trades.

Type of Trader it is Best For

All of Robinhood’s downfalls aside, its existence is still a breakthrough for the retail investor. Because of Robinhood, even the paycheck-to-paycheck gas station clerk can begin investing his spare change, allowing it to accumulate over time. It has served as yet another step in further democratizing financial markets.

The ideal user of Robinhood is a new, or under-capitalized trader, for whom commission costs would greatly hinder their ability to trade profitably. Whether you’re a broke college student who lives and breathes markets, but can’t scrape up more than $400 to trade, or an electrician who chooses to punt on penny stocks rather than the state lottery, Robinhood has brought access to financial markets to many who would have never entered them. It can be a viable broker option for self-directed investors who may receive basic research from companies like Motley Fool and IBD. That said, traders who prefer access to more tools and trading options may prefer a broker like ETRADE or TD Ameritrade.

Pros & Cons

Pros

  • Free commissions
  • No account minimums
  • Innovative company

Cons

  • Rudimentary trading platform
  • No solutions for active traders
  • Limited margin available

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