Robinhood App Review 2018 – The Real Cost of “Free Trades”
UPDATE 10/24/2016: Since this review was published Robinhood App has taken steps to improve user experience (UX), and add features. As is common when many new brokers, new features are consistently being released as they are developed. Some of the important features include Robinhood Gold, which offers margin and leverage for more buying power. While this does improve usability, the lack of Level 2 data and mobile only app still make this platform difficult for day trading.
UPDATE 5/12/2016: In this broker review, we’re going to discuss the popular trading app called “Robinhood”. Keep in mind that mobile apps change frequently some between the time we wrote this review and you are reading it there may be some changes on the Robinhood App interface. I get emails asking for a good Robinhood App Review several times a week.
UPDATE 1/30/2018: Robinhood has now introduced cryptocurrencies. More information below!
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 Suretrader (see our Suretrader Review here) or Interactive Brokers (see our Interactive Brokers review here) before deciding on a broker.
The Pros of Robinhood’s Free Trades Offer
- Free Trades, zero commissions
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 Robinhood App Free Trades Offer
- 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 an electric drill. 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 daytrade 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.
Robinhood App Review – 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 (See our TDAmeritrade Review Here) 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.
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.
From February 2018, Robinhood will be supporting the purchase and selling of the following cryptocurrencies:
It will also provide support for real time market data for the following cryptos:
Bitcoin Cash (BCH)
Bitcoin Gold (BTG)
Ethereum Classic (ETC)
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.
Screen shots of Robinhood