Small Business Technology

How Does Robinhood Make Money Trading?

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What is Robinhood?

If you own a smartphone and have had even a passing interest in trading stocks, you’ve probably heard about Robinhood. This no-fee stock-trading app has taken the younger elements of the personal finance world by storm and has recently even gotten into the cryptocurrency game. While most brokerages charge $5-10 per trade (hardly worth it if your investment fund is just a few hundred dollars), this one is completely free. That’s great for clients, but it’s unheard-of in the brokerage world, mostly because it seems unrealistic. Companies that don’t make money stop existing—so how is Robinhood doing it?

How Robinhood makes money

Most importantly, it is 100% online—there are no brick and mortar locations inside big glass buildings in any downtown financial districts, and they have a small staff. They also don’t run expensive ad campaigns, relying mostly on their free stock offers (you get one at sign-up and more for referring friends) to spread the word. All this makes their overhead a lot smaller than traditional brokerage firms.

But they aren’t 100% free—you can choose to upgrade to Gold status for $6.00 per month, which allows you to spend up to double your money on margin trading and access after-hours trading. So if you want the option to trade with more money than you have, or if you’re a night owl, that may look good.

Gold is their main revenue stream, but it’s not the only one. The company can also make money by collecting interest on the cash and securities you have sitting in their accounts. You gave up the option of earning bank interest on your money in favor of getting stock profits from it, but your money didn’t leave the banking system—it’s just helping Robinhood keep your account open now.

The last thing that lets them keep going like this is having a lot of startup money. Venture capital firms really like the idea and have been investing steadily since the company began. There have been rumors that they are selling trading data to other brokerages to allow those brokerages to trade against their users, but their leadership has pointed out that this is highly illegal and denies that they are doing it.

Recent developments

In January 2018, Robinhood announced that it would be adding cryptocurrency trading options starting in February. Though it will initially only be available in a few states, they plan to expand.

The company also announced that it would be expanding beyond the app, and plans to be available as a web trading platform in early 2018.

Fun Fact

Baiju Bhatt and Vladimir Tenev’s first startup together was writing algorithmic trading software—essentially helping big, corporate traders to trade more efficiently. They quit and started Robinhood because they wanted to make a financial product for the average investor instead.

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Just another aspiring small business owner and amateur photographer blogging in an attempt to break down personal finance lingo.

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