If you’re ready to trade stocks, and you’d like to do it for free, Robinhood is the right app for you, hands down. It’s an online brokerage that lets you buy and sell stocks using an app on your phone, and unlike most discount and online brokerages, their trades are all free.
That sets you up for anywhere from $10 savings per trade, to $60 savings per trade. Yes, seriously.
What is a brokerage?
First of all, a really quick definition, since Robinhood is a brokerage, not an online advisor or robo-advisor. A brokerage is just a financial institution that facilitates buying and selling securities, aka stocks. At the end of the day, that’s all Robinhood lets you do: buy and sell stocks.
However, it does it a bit differently than most people, because oh hey, it’s free.
Why is Robinhood so different?
Typically, brokerages will charge a transaction fee to buy and sell stocks. Some of them will only charge a fee for buying, or for selling, but at the end of the day, that’s a big part of how they make their money. Not Robinhood, though.
Robinhood’s two founders, Vladimir Tenev and Baiju Bhatt, were roommates at Stanford, and they both went on to build technology platforms for major financial institutions when they graduated. During that time, they realized that they could build an online platform so efficient with brokerage that it could make money even without charging trading fees.
So they did.
How does it work, exactly?
Robinhood is an app, that you can get on iOS and Android – again, for free – as long as you’re a U.S. citizen with a valid U.S. residential address. Once you’ve opened your account, you can transfer in money from your bank account and use that money to place stock orders from your phone.
Each order takes all of about five taps on your phone, and is done using its technology platform, so you’re not waiting on some guy in an office to execute your trade. The system does it for you, which makes it a really fast process.
Which hey, if you’re buying and selling individual stocks, you need sometimes!
So how do they make money?
You guys, it warms my heart that when you hear me say “free,” your first question is automatically, “Well, how do they make money?” Seriously, I have all the warm fuzzies right now.
Robinhood anticipated that anyone savvy enough to want to buy and sell their own stocks would ask the same question, so it literally have a button on its homepage titled “Learn how we make money.” They’ve got an equally straightforward explanation, too.
Robinhood collects interest from anyone who chooses to trade “on margin,” aka borrow money from Robinhood to invest in the stock market. (Don’t try that at home unless you’re seriously advanced.) It also collects interest on the cash balances that users keep in their Robinhood account, before that cash is used to buy a stock.
Oh, and they’ve got some serious financial backing from both established venture capital companies like Google Ventures and Andreessen Horowitz, and A-list celebrities like Jared Leto, Snoop Dogg, Linkin Park, and Nas.
Don’t let anyone tell you that fintech isn’t cool again. Freaking Snoop Dogg, you guys.
Who should use it?
Robinhood is a full-on, look-ma-no-hands dive into the world of stock trading, so if you’re not ready to give up your investing training wheels, it’s probably not where you should start.
On the other hand, if you’re comfortable with the basics of investing, and you’ve been looking for a cost-effective way to start buying and selling stocks on your own? This is the right app for you, without a doubt.
Even then, you should make sure that you go into it with your eyes wide open about the realities of the stock market, and you should have definitely done your research. Whether you want to buy a few blue-chip stocks, or use it to invest in some niche market about which you have specialized knowledge, just remember that DIY investing comes with a whole lot of emotions.
And who could blame you, with the financial media being all “The sky is falling!” every two days?
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*This piece is meant only to expand awareness of available financial tools and products and should not be considered an official endorsement of the product or its outcomes by GenFKD.