Want to learn new ways to make extra money?
Join the family to get updates from us and tons of cool freebies:
Our number one goal at DollarSprout is to help readers improve their financial lives, and we regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Here’s how we make money.
There are many different investment strategies to choose from, but they all share one thing in common: you have to buy and sell different securities, such as stocks or ETFs, to build the portfolio you want.
With most brokerage companies, you have to pay a commission fee for each trade you make. These fees can range from $5 to $10 per trade. If you’re looking to be an active trader who regularly enters and exits different positions, these commissions can take a huge cut out of your gains and further impact your losses.
That’s where Robinhood comes in. It’s a mobile-focused brokerage company that offers no-fee trades for stocks, options, ETFs, and cryptocurrencies.
Robinhood Review at a Glance
- Trade with no fees
- No minimum balance requirements
- Easy, mobile-focused interface
- Trade a variety of securities
- Margin trading available
- No retirement or other account types
- Can’t trade certain popular securities, including bonds and mutual funds
Best For: Robinhood is great for cost-conscious investors. It’s also a good brokerage for active traders since its lack of commissions lowers the cost to enter and exit positions. People who want more account options and investment options should look elsewhere.
Looking for more options? Check out our best online brokers.
What is Robinhood and How Does it Work?
Robinhood, like the legendary heroic outlaw, bills itself as returning power to the regular people. Some big financial companies make it easy to buy and sell with their platform but charge exorbitant fees in the process. Robinhood lets you buy and sell stocks and other securities without paying commission fees.
The company launched in 2013, at first only offering the option to trade stocks. In the years since, it has expanded to offer ETFs, options, and cryptocurrencies, with plans to offer a cash management account in the near future.
Rather than focusing on all the bells and whistles a traditional brokerage company offers, Robinhood has streamlined the investing process. The company only offers one account type: the taxable brokerage. You can’t use Robinhood to open an IRA or manage your 401(k). The buying and selling process is also quick and easy, letting you spend less time managing your money and more time doing the things that are important to you.
Robinhood is a mobile-focused brokerage, so the best way to get started is to sign up for an account and download the app.
Like any other financial services company, Robinhood will ask you to provide some information when you sign up. You’ll give your name, address, bank information, and so on, at which point you’ll be ready to start trading.
One nice thing about Robinhood is that there’s no minimum balance requirement to open an account. You don’t need to worry about saving up or committing a substantial chunk of your money to the account. So long as you have enough money to buy the security you want to invest in, you’re good to go.
Buying and Selling Stocks
Stocks are one of the most basic securities you can invest in.
Each stock represents an ownership stake in the company that issues it. For example, if you own stock in Amazon, you’re technically a partial owner of Amazon. Stock ownership typically comes with certain rights, such as the ability to vote in elections for the board of directors.
A stock’s value changes based on the company’s performance. If the company performs well, its stock will gain value. You can then sell it for more than you paid for it, meaning you’ve made money on your investment.
If the company performs poorly, its stock will lose value and the investor would lose money selling their shares. This dichotomy makes stock trading one of the riskiest, but also most potentially lucrative forms of investing.
Robinhood makes it easy to buy and sell stocks. Open the app, use the company’s name or ticker symbol to search for the stock you want to buy and enter the number of shares you want to purchase. You can sell stocks from your portfolio in the same way.
Buying and Selling ETFs
Exchange Traded Funds (ETFs) are very similar to mutual funds. ETFs invest in a number of different securities, including stocks and bonds. By buying a share in an ETF, you’re buying a small share in each of the securities the ETF owns. This makes it easy to diversify your investments while only buying one security.
Unlike mutual funds, ETFs are traded between individual investors rather than bought from and sold to the company managing the ETFs. That means you can buy and sell ETFs throughout the trading day rather than having to wait for the day to end. The downside is that you cannot buy a partial share of an ETF.
Like all of the trading services offered by Robinhood, ETFs are free to buy and sell. However, ETFs charge management fees to the people who own them. You’ll pay anywhere from .05% to 1% or more, depending on the ETF you invest in.
You can buy and sell ETFs in the same way as stocks. Each ETF has its own strategy, so you should have no trouble finding an ETF that meets your investment needs.
Buying and Selling Options
Options are a type of derivative security. Unlike stocks, which have their own value, the value of an option is tied directly to the value of something else. Typically, they’re tied to specific stocks.
When you buy an option, you are buying the future right to buy or sell a specific stock at a certain price. When you sell an option, you’re promising to buy or sell a specific stock to the buyer at a certain price.
Put simply, options are a way to bet whether a stock will increase or decrease in value. If, for example, you think a stock that currently costs $10 will fall in value, you can buy an option that lets you sell the stock at $9. If the stock’s price falls below $9 before the option expires, you can make a profit.
When you view a stock, Robinhood shows you all available options, allowing you to easily short a company or go long on companies you believe in. It also offers sophisticated options strategies, like straddles and iron condors for sophisticated options traders.
Buying and Selling Cryptocurrencies
Cryptocurrencies are a type of online currency that relies on complicated cryptographic technology. Many cryptocurrencies, such as Bitcoin and Ethereum, have become well known over the past few years. Robinhood has begun to offer cryptocurrency trading to customers in most states.
Just like buying and selling stocks, Robinhood makes it easy to search for cryptocurrencies and view their price histories. Unlike stocks, cryptocurrencies can easily be divided into smaller amounts, so you can buy exact dollar amounts of the cryptocurrencies Robinhood offers rather than having to purchase full shares.
With a minimum balance of $2,000 and a monthly fee of $10, you can upgrade your account to Robinhood Gold. Robinhood Gold gives you the option to invest with margin, which means borrowing money to invest in securities.
This lets you make more money than you would be able to just by using the money you already have. Of course, you’ll pay interest for the privilege, and you could wind up in debt if the value of your investments falls.
You can borrow up to the balance of your account, giving you twice as much investing power. If you’re comfortable with investing on margin and want that option, Robinhood Gold is the service you’re looking for.
Here are some of the most common questions investors have about Robinhood.
How Does Robinhood make money?
If Robinhood doesn’t charge commissions, how does the company make enough money to keep the lights on?
One way is by charging interest and fees to Robinhood Gold users. Robinhood also earns interest by lending out customers’ cash that is sitting idle in their account.
Are penny stocks worth it?
Robinhood is a great way to trade all sorts of stocks for free, and you might be tempted to invest in some cheap penny stocks. This is usually a bad idea.
The vast majority of penny stocks are incredibly small companies with little future potential or companies on their way to bankruptcy. You’re more likely to lose all your money on a penny stock than you are to make any money at all.
Is day trading illegal?
Day trading, making many stock trades over the course of a few days to try and make money from the daily movement of stock prices, is not illegal. However, to be eligible to day trade, you must have at least $25,000 in your account. SEC regulations prevent day trading for people who cannot meet those requirements.
Robinhood Review Summary
Robinhood is a great way for investors to build a taxable portfolio of stocks and ETFs, and for interested consumers to learn about options. If you’re looking for a more fully featured brokerage, take a look at our list of best online brokers.
More Cool Stuff
Wealthsimple Review: is Automatic Investing and Saving Right for You?
In this review of Wealthsimple, we cover the investing and saving services offered and help you decide whether they’re the right choice for you. Wealthsimple aims to make investing easy. You tell Wealthsimple your goals and it handles the rest.