Robinhood App Review – The Real Cost of “Free Trades”

Robinhood Review

Robinhood App has gained the attention of part-time traders and investors for it’s “Free Trades” commission structure.  It’s sure does sound appealing!

Anyone who has been in the market understands commissions are an expensive part of the business.  Robinhood states on their website “Our mission is to democratize access to the financial markets”.

For those who aren’t familiar with how commissions work, commissions are payments to your broker for the purchase or sale of stock.  Generally speaking, commissions make up the bulk of a brokers profits.

Brokers also profit from the interest collected on cash they are holding and from the interest gained from lending traders money on Margin.

Commission fees generally range from $3.95-19.99 per trade.  An active trader that places 10 orders in 1 day could be looking at anywhere from $39.50 to $199.90 in daily commissions.

Clearly, these add up over time and eat into your profits.  We highly suggest traders check out Lightspeed, Tradestation or TradeZero before deciding on a broker.

The Pros of Robinhood’s Free Trades Offer

If you are trading at a firm like Ameritrade or E*Trade, you could easily be paying $10-15/trade.  That means it’s not unlikely for an active trader to generate $200 in commissions each day.

Just think, $200/day is $52k/year.  And that is going straight to the broker!  This makes any reduction in commissions an appealing offer.

When Robinhood first started advertising their Free Trades commission structure I immediately thought, “what’s the catch?”.  Robinhood, as advertised, charges $0.00 commission on buys and sells.  In their Fees Section they note that traders still have to pay the FINRA and SEC fees on the sell orders.

These generally amount to less than 50 cents per trade, so it’s very marginal.  The biggest advantage to Robinhood is the Free Trades.  That’s their selling point, but it’s the only selling point.

The True Cost of Free Trades

• No Leverage means Cash Balance Margin Only
• Mobile App Only Trading means No Hot Keys or 1 Click Orders
• No Level 2 or Time & Sales means No Reading Market Sentiment
• No Short Selling

Robinhood is lacking several critical features for day trading.  They don’t offer a Level 2 or Time & Sales window.  That means you can’t scalp momentum trade breakouts by watching the big sellers thin out, or jump in long because you saw that 100k share bidder pop up.  A day trader cannot actively trade the markets without Level 2 or Time & Sales.

It’s like a carpenter trying to build a house without a saw.  Sure, you could do it, but it would only make you slower, less competent, and less effective.  So it doesn’t make any sense.  Secondly, Robinhood currently doesn’t allow leverage.  Trading on leverage is a controversial topic.  It’s trading on borrowed money.

In 2016 I took a $1k trading account, and aggressively using leverage, I grew that account to over $8,600.00 in less than 1 month.  That wouldn’t have been possible with Robinhood for 2 reasons.

The first reason is that they don’t allow leverage, and the 2nd reason is the Pattern Day Trader (PDT) Rule.  This means you can’t actively trade on margin unless you have a $25k min balance.

You can actively trade with a cash account, but you have to wait 3 days for each trade to settle, which effectively makes it so you can only day trade 2-3 times/week.  Lastly, Robinhood doesn’t allow short selling.

This means you can’t short stocks, profit as they go lower, and then buy back shares at a lower price.

Not suitable for Active Traders & Passive Traders Don’t Need It

When you put together this list of cons, you find yourself with an incomplete broker.  It seems they made the decision to go with zero commissions at the sacrifice of features that have been standard on every broker for many years.

While mobile apps are extremely popular right now, trading from a mobile app is a horrible user experience.

Robinhood, in all fairness, has done a great job with user experience, but from a practicality standpoint, it still fails to offer the speed necessary to be a day trader.

If you want to day trade, Robinhood is not the solution. In my opinion, Robinhood App is only suitable for part-time traders and investors who make fewer than 3-5 trades per week.

Part-time traders are often going to be working professionals who want to take a few trades on the side.  Perhaps a doctor who wants to add to his $CELG position, an accountant who wants to add to his $VRX short, or a banker who wants to add Warren Buffett’s latest stock choice.

These individuals all have one thing in common.  They are not day traders.  They are taking positions and planning to hold them for several days at a minimum.

As a result, they don’t need Level 2, Time & Sales, or Hot Keys.  They also probably won’t worry about not being able to short stocks or trade with leverage.

So they may not take issue with the lack of those features.  But of course on the other hand, since they are only trading 3-5 times per week, commissions were never that big of an issue for them.

And this is the reason Robinhood  App fails to catch my interest.  This is only desirable for people who feel they could use it to save $50-75/week, and that has never been enough money for me to justify changing brokers, and I doubt it would be enough for the working professionals who would be the best fit for Robinhood.  In short, it’s not suitable for active traders, and passive traders don’t need it.

Most passive traders or investors will happily continue using Ameritrade or E*Trade for the convenience of online bill pay, credit and debit cards linked to the account, and an advanced desktop platform should they decide to dabble in active trading strategies.

For those individuals, the extra commissions with full services brokers is worth the cost.

To read about our suggestions for the Top 3 Online Stock Brokers, check out this blog post.

New Trading Platform

In November of 2017, Robinhood announced the introduction of a web trading platform. The platform was realized after 2 years of research which involved chatting with industry experts and investors.

During development, Robinhood developers had the following objective in mind: to develop an amazing web trading platform that is able to cater for a wide variety of investment and financial needs.

The brand new web trader is now enriched with extensive discovery and research tools designed to help investors and traders make informed trading decisions. Although Robinhood has announced this intuitive web trading platform, it will be providing access in waves.

Robinhood Web Trader Features and Services

Since Robinhood launched its zero-fee stock trading app, not only has the company been able to transact over $100 billion and garner 3 million users but they have saved users over $1 billion in trading fees which is pretty impressive.

Introducing Collections, a new feature available on Robinhood for Web. Basically, the feature enables its users to discover the latest stocks. To help traders and investors locate stocks and options they are interested in, Robinhood organizes the assets by sectors such as social networks, gas and oil and entertainment.

They have taken a step further by adding the following categories – Female CEOs and 2017 IPOs among others. The feature is designed to be interactive which makes it easy for traders and investors to sort through. Users also have access to side by side asset comparisons. This makes it easy for them to select which asset to invest in and what trading strategy to use.

Robinhood Introduces Options Trading

Option trading will be available on Robinhood for Web as of 2018. At the moment, they are providing early access and once you sign up, they will release option trading by sending a card to your app and an email. Both services are designed to provide you with an instructive guide on how to apply for Options.

Start searching for the security (stock) that you would like to trade options for. To search, simply click on the magnifying glass icon on your home page, select the name of the stock you are searching for and click “Trade.” Once you are done, click on “Trade Options”.

As a trader, there are a lot of factors you need to consider when selecting the right Option to trade. They include:

Strike prices – usually listed from high to low. Robinhood web trader allows you to scroll and view the different strike prices

Breakeven Point – this is the point where a stock must trade at expiration in order to break even. Takes into consideration the Option’s premium.

Expiration Date – it’s usually displayed below the underlying stock and strategy. Scroll up and down to view expirations

Premium – refers to the price of the option

Chance of Profit % -refers to the probability of your investment being profitable after selecting the sell strategy. At the moment, Robinhood utilizes Black Scholes model in order to determine the investors’ probability to profit

Break Even % – refers to the amount an underlying stock requires to transition from the present to expiration in order for investors and traders to break even once they select the buy strategy.

It is important to understand that not all stocks have options and this is due to regulatory standards.

For customers who have attained Level 2 status, they have a chance of using the following strategies during Option trading:

Cash Covered Puts

Long Calls, Long Puts

Covered Calls

Robinhood Introduces Crypto Trading

As a technology driven brokerage with less overhead, Robinhood announced that it will start offering cryptocurrency trading on its platform. In the last four days since the announcement was made, more than 1 million interested users have joined Robinhood’s waiting list.

The first group of customers will enjoy the new service which will be first available in 5 states – California, Massachusetts, Missouri, Montana, and New Hampshire – starting from February 2018. This service will be rolled out to other states in waves.

The good news is that Robinhood can bump you up the wait-list if you do one little thing – invite your friends to join. Not only that. You stand a chance of getting a free stock like Apple, Ford or Sprint.

The service is being introduced at a time when the cryptocurrency community is experiencing a downward trend especially in terms of cryptocurrency price. At the start of January 2018, the South Korean government announced that it had banned anonymous trading of cryptocurrencies. After the announcement, the price of Bitcoin plunged by 48%.

Baiju Bhatt, Robinhood’s Co-CEO announced that the company which is popular with millennials will act as a broker dealer and not like a traditional exchange. The company is planning to partner with large institutions in order to acquire virtual currencies on behalf of their customers.

The reason Robinhood ventured into cryptocurrencies is to provide low cost trading services designed for millennials who are in search of diverse digital products. What you ought to know is that Robinhood is making this move a year after it attained its “unicorn status” finally becoming the preferred brokerage for millennials.

Supported Cryptocurrencies

From February 2018, Robinhood will be supporting the purchase and selling of the following cryptocurrencies:

Bitcoin (BTC)

Ethereum (ETH)

It will also provide support for real time market data for the following cryptos:

Bitcoin Cash (BCH)

Bitcoin Gold (BTG)

Dash (DASH)

Dogecoin (DOGE)

Ethereum Classic (ETC)

Lisk (LSK)

Litecoin (LTC)

Monero (XMR)

NEO (NEO)

OmiseGO (OMG)

Qtum (QTUM)

Ripple (XRP)

Stellar (XLM)

Zcash (ZEC)

Robinhood Crypto Features

Some of the features that early adopters will enjoy include:

Instant deposits – cryptocurrency traders will be able to make bank transfers totaling to $1,000. The funds will be made available immediately in the user’s account. Additional funds will be made available via ACH transfer system.

Commission free – trading will be available at the lowest fee and not the exorbitant fees charged by other cryptocurrency exchanges

Security – to ensure your personal information and digital assets are protected from malicious people, Robinhood will offer a secure platform protected by SSL and 2-Factor Authentication among other security protocols.

Round the clock trading –As from February 2018, Robinhood will limit cryptocurrency trading to Bitcoin and Ethereum even though it will be supporting 16 cryptocurrencies. More cryptocoins will be tradable later on. As a brokerage app, Robinhood will extend the app’s functionality to cryptocurrencies. This means trading will be in one place together with stocks, ETFs and options.

Final Thoughts – Robinhood Review

Overall, Robinhood has improved its service by quite a bit but it still doesn’t make up for some of its shortcomings that day traders must have like hotkey capabilities.

So unless you are a passive investor, this app is not for you and you’re better off finding a broker with cheap commissions like TradeStation, TradeZero or Lightspeed.