Market concepts: What is the RobinHood trading platform?
You have probably heard of it: the RobinHood investment platform, with its 0% commission fees and completely free trading. Now, you are probably asking yourself how this works and how this business can survive without charging its customers. This article hopes to answer those questions. Equally important is the secondary question of interface beneficiary.
First of all, we will walk you through the pros and cons of the platform so that you can build your own opinion regarding RobinHood. This should grant you enough insight on whether this particular broker is suitable for you
RobinHood gives you the opportunity to invest in stocks, ETFs, options and the major cryptocurrencies without any fees. However, to make the commission-free platform possible, there is no human assistance provided. This can be a problem for customers who have complex questions or who simply prefer to interact with a physical person in case of uncertainties.
One must highlight that RobinHood is a very basic investment platform. If you are an investor who wants to do research, technical analysis, or obtain news on the same platform, you will be disappointed by the lack of depth RobinHood provides. If you want to use this fee-free platform and still do thorough due diligence, you will have to combine different providers of information and graphs. Plus, if you are unsatisfied with the current level of risk of one security, a margin-possibility is not provided on the basic subscription scheme of the platform.
The American start-up does not give you the freedom to invest in penny stocks, and the possibility to gamble on cryptocurrencies is only available in a limited number of states in the USA. Furthermore, you will not have access to over-the-counter traded securities, and this means you will only have the opportunity to invest in companies traded on major exchanges, such as the NYSE.
In addition, you will not be able to place your money in mutual funds, nor will you be able to set up a retirement account on this platform. This represents a major downside for RobinHood, as investments into retirement are tax free. On the other hand, the rate on speculation is one of the highest forms of taxes you can pay.
Another limitation is the absolute quantity of shares available for purchase. You are only able to invest in whole shares (you are unable to purchase partial shares). Plus, if you decide to invest in dividend-yielding securities, those will not be reinvested automatically, so you have to take action to replace that money. Automatic investments from your bank account are also not possible on this specific platform.
Another issue of RobinHood is its lack of availability in every location. As with all other platforms, and therefore not a relative disadvantage, RobinHood has an age restriction of 18+ to transfer to your electronic wallet.
But how do they make money?
In order to be feasible and survive, RobinHood offers a feature named RobinHoodGold. This is the premium version of the platform, which enlarges the range of possibilities for the investor. Different features of this premium subscription are the access to margin positions, aftermarket trading, and a more direct and easy withdrawal of your funds.
Who is this platform meant for?
We would not recommend using RobinHood to invest. The limited research options make it hard for investors to establish a proper due diligence, which should be the base of your investment decision. We would rather advise you to use a platform where you can buy separate parts of shares and where you can experiment margin trading with, for instance, a demo interface, allowing you to hone your skills risk free.
Editing by Tom Handels