Too Good to Be True?
I have to tell you. When I first started shopping around for a new online stock trader, I was skeptical of Robinhood. Could it really be free or were there hidden charges that I would discover down the road?
The gist of it is, YES, Robinhood does offer a basic service with free trades. There are no commissions for buying, selling, or withdrawing funds and better yet, no minimums.
How Does Robinhood Make Money?
The company makes money by offering an optional Robinhood Gold account which charges a small monthly fee for extra services such as: double the buying power, extended trading hours, and bigger instant deposits.
Another way Robinhood makes money is in the form of interest. Every investor usually has some kind of balance in their "buying power" account that isn't currently being used, either because they just sold a stock, received dividends, or just haven't gotten around to buying stock yet. That adds up to lots of potential earnings for the company.
My Personal Experience
I have bought and sold stocks in the past with Capitol One's Sharebuilder. At the time, I felt like I was getting a steal at $4.95 per buy/sell. I could buy/sell as many stocks as I wanted as long as they were the same company. So the commission on 1 share of Pfizer was the same as 5 shares of Pfizer. This was not as condusive to diversifying though.
In spite of owning stocks for 15+ years, I consider myself a novice. My starting investment was small and I felt like so much of my earnings were eaten up by commission fees. Because of this, I held my stocks for years and let the dividends reinvest themselves in the same stocks (this part was free). I really wanted to work on diversifying my portfolio so I did some price comparisons and that is where Robinhood came in.
I decided I would start out small and test the waters. Make sure Robinhood was legit and reliable. So I deposited my first $20 and had fun choosing my first set of stocks. It was so easy to get started. And by signing up, I also received a free stock. The free stock received could be worth between $2.50-$200. The stock I got was Siri and it was worth $5.54. The free stock only needs to be held for 3 days before you're eligible to sell it.
I made several trades just to get my feet wet and I've been estatic with the results. If I count the free stock that I got from Robinhood, my account has netted 25% in 3 months! That's pretty awesome considering my savings account is earning less than 1%. Even if I don't include the free stock, I'm still up 5%. I still have a lot to learn, but since I won't be wasting money in commission fees, I have room for a margin of error on my part.
The Down Sides
There are a few down sides I've noticed so far. The first is the lack of research ability. If you enter any stock by name or abbreviation, you will be given a brief snapshot of that particular stock's stats, earnings, and recent news. It doesn't, however, allow you to search out stocks based on price or sector/industry. This means sometimes you'll have to do your research elsewhere.
The second is that dividends are deposited straight to your "buying power" account and cannot be automatically reinvested. Money sitting in this account is not earning you anything so you must remember this and reinvest accordingly.
Thirdly, you must invest in whole shares of stock. This stinks because I'd really like to get in on the action with some major stocks like Apple or Amazon, but at today's price of $1458, that is just not going to happen. With Capitol One, I was able to buy partial shares of any stock.
Thirdly, you must invest in whole shares of stock. This stinks because I'd really like to get in on the action with some major stocks like Apple or Amazon, but at today's price of $1458, that is just not going to happen. With Capitol One, I was able to buy partial shares of any stock.
Final Conclusion
Robinhood is an easy, affordable way to trade stocks and build a diversified portfolio.
