UPDATE 10/24/2016: Since this review was published Robinhood 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.
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 interface. I get emails asking for a good Robinhood Review several times a week. Robinhood 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.
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The True Cost of Robinhoods 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.
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Robinhood 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 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 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.
Screen shots of Robinhood
Reviews by Warrior Trading