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A Great (Free) Way to Trade Stocks, But Mainly for Beginners
If you’re anything like me, you’re probably wondering if “free” really means “free” and if there are any catches to it. When it comes to Robinhood, the answer is yes – it costs exactly $0.00 to buy or sell a stock. And no – there are no catches to it.
After being backed by some major investors in 2013, like Google Ventures and Andreessen Horowitz, Robinhood started rolling out free accounts to all and have since made over $30 billion in trades for their 2+ million users.
When I personally joined Robinhood in 2015, I didn’t know whether (or how) it would pay off. Part of me thought these guys were just leveraging a growing Fintech market for an eventual brokerage house product launch. But I also didn’t see any harm in joining and playing it safe with a small amount of money, so I gave it a shot.
(Screenshot of my personal account)
The consensus? It’s not an app with all the features you would want or need, however, if you just want to explore and experiment without the high risk of fees, there is no better alternative.
Getting Started With Robinhood
Robinhood is available for download on iOS or Android from the Apple App Store or Google Play Store respectively. You can complete your initial registration on the web (robinhood.com) or use the downloaded app.
The entire registration process should take less than 10 minutes to complete from start to finish. Robinhood asks for your name, date of birth, residential address, social security number, and some other basic demographic information.
You’ll then be prompted to link a bank account. This will allow you to transfer funds in and out of Robinhood for investing. I’ve initiated transfers both ways many, many times and have never had an issue. The app is supported by most of the major U.S. banks, so the process is fairly seamless. If you’re an Apple user, you’ll appreciate the app’s built-in support for Apple Watch.
It’s important to highlight that Robinhood has done a great job of implementing enhanced security. With SSL and 256-bit encryption, optional two-factor authentication (2FA) with customizable PIN code or Touch ID where available, you shouldn’t be wary of sharing your sensitive information on the mobile app. Your portfolio will be safe from anyone who randomly gets access to your phone.
Two additional account settings that are useful include:
- Scheduled Deposits: Allows you to automatically transfer money into your Robinhood account on a weekly, biweekly, monthly or quarterly basis.
- Pattern Day Trader (PDT) Protection: Day-trading is the purchase and sale of the same stock on the same day. If a trader makes 4 day trades in a 5 trading day period, they will be marked as a pattern day trader (PDT). And if marked as a PDT, you may only place day trades if you carry a balance greater than $25,000. But rest assured, Robinhood has built in app settings that protect (or notify) you of PDT activity. This can come in handy if you’re just trying to learn the ropes and don’t want to get penalized for day trading.
How Robinhood Works
For the Robinhood app user, it’s all about the trading experience. Stock trading on a mobile platform can be a love-hate relationship for some, especially among older investors.
The Robinhood app, however, is simple and streamlined, providing only essential features that are well placed and easily accessed. This way, a smartphone user of any age should have no trouble using the Robinhood dashboard to execute trades.
To make a trade, search for a stock using the magnifying glass icon in the top right corner. This brings up a quick one-page summary of the stock’s price, its performance ranging across 1-day to 5-years, recent news, stats, and volatility and earnings indicators. Also included on this screen is the buy button.
Clicking on the buy button takes you to the default Market Buy screen where the user can enter the number of shares desired and instantly see the current market price/estimated total cost. You then click on an intermediary step to review the proposed order and swipe up to confirm/place. Smart notification features (to text and/or email) provide immediate reinforcement and acknowledge of trader actions.
My own experiences with trading on Robinhood have been generally positive. While I haven’t experienced any hiccups with the process, I have come to learn that Market Buys, specifically on Robinhood, can be temperamental. The timing is not as instant or reliable as what we’ve come to expect on desktop trading applications like Thinkorswim. For example, you’re not going to see robust order depth or exponential moving average indicators updating on the split-second here.
My workaround (and recommendation) has been to take advantage of Limit and Stop-Loss order functions on the Robinhood app. Needless to say, Robinhood isn’t designed for high-frequency day-trading. But effective and patient use of the Limit order tool is reliable and effective in managing short-term positions.
The Downsides to Robinhood
While the Robinhood app is one of the most-loved offerings for trading on the market today, you’ll need to look elsewhere for financial education resources. Robinhood has skipped all the research bells and whistles that most other brokerage platforms typically provide, so you’ll need to do your investing research on your own. There’s simply little to no information directly available on the app – some news feeds and basic statistics, and that’s it.
Another downside with Robinhood is that you’re limited to U.S. only stocks and funds. That’s fine if you’re just using the account as a side app or to get your feet wet, but for those looking to diversify more you’re simply out of luck.
Lastly, while free trading is great, you’ll need to make sure it doesn’t lead to mindless investing. You can lose much more by aggressively trading aimlessly than you can from the typical trade fees. Always be an informed trader – I can’t emphasize this enough. If you’re looking for a good research tool to pair with Robinhood, check out Morningstar.
Robinhood “Gold” Upgrade
OK, so I lied. Sort of. Not really. Fees can and do exist within Robinhood, but only within their Robinhood Gold features. This is where Robinhood makes its money, but is in no way a requirement if you’re perfectly happy with the free version.
Here’s a look at its pricing and features:
Robinhood Gold introduces three additional features:
- Extended Hours Trading – For the traditional stock trader, the traditional market hours of 9:30am to 4:00pm will not apply. You’ll gain access to early trading – 30 minutes prior to market open. You’ll also be able to trade during after-market hours from 4:00pm to 6:00pm. There are advantages here. Earnings announcements typically occur outside market hours. And you may be able to take advantage of international market shifts during extended hours.
- Additional Buying Power – In short, you’re buying on margin (or borrowing money/purchasing power from Robinhood). You can invest more, win, and keep the profits. But understand, you can also invest more, lose, and receive a margin call (i.e., a demand from the broker to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin/account value). The app does a nice job of educating the user about leveraging and margin investing.
- Instant Settlement – This paid feature provides a great convenience to the trader. Generally, the stock market world revolves around traditional 3-day holds. With this feature, the trader can enjoy instant settlements of trades for reinvestment. Also, bank deposits are often instant.
Altogether, Robinhood Gold provides several useful tools for the informed trader in need of additional short-term capital to invest. But I strongly believe that new investors should be careful and patient. Borrowed money comes with increased risk for the inexperienced trader.
The Bottom Line
Robinhood has achieved popularity throughout the industry by positioning itself as a simple – and free – alternative to the traditional stock broker. If you’re just getting started with investing and/or looking for a no-cost option that’s intuitive and has little downside, Robinhood is just your app. If, however, you’re an experienced investor and are not willing to give up a few things such as trading analysis, research tools, and more extensive investment options (i.e., non-U.S. securities), then Robinhood is probably not for you.
To learn more, or sign up, visit Robinhood.com
About the author: Kevin is the founder of TeacherInvestor.com, a blog helping others with their own personal finance path ~ saving for the future, investing for retirement, living a frugal or minimalist lifestyle, and paying down that debt. When he’s not blogging, Kevin is a college professor, parent, and musician. You can find him on Twitter @TeacherInvestor.
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