App Review: Robinhood – Zero Commission Stock Trading

Let’s face it: Everybody in the US inevitably hears about the stock market through their day-to-day interactions and how it relates to some aspect of their life. Even if you are attending a liberal arts college in the middle of Oregon, you have a handful of friends that want to invest money they don’t have, follow the companies that make the products they use, and try to make it big like Warren Buffett. Come to think of it, are there any schools in Oregon? No matter how familiar people are with the stock market, investing comes down to having one thing. Money.

Growing up, people are born into the saying that it takes money to make money. Obviously true. The stock market is a gamble that with a little bit of education on what you are buying, you are still only slightly better off than the person throwing darts at a dartboard while blindfolded and drunk.  In our late teens and early twenties when we head off to college or into the workforce;  spending $4-7 per trade on the stock market is a great way to lose $500 in fees. This is the reason a lot of younger people steer away from investing until they have enough disposable income to put an actual dent in an investing portfolio, letting 10 years of stagnant returns on your money slowly increase your financial happiness. Now without these fees, would people start to invest a little money here and there? Gain a competitive edge to make more returns? Stop feeding the bigger companies that handle these stock trades since a majority of younger people tend to think that large corporations are killing America? Who knows. But a newer app that goes by the name of Robinhood is here to figure out.

Robinhood is an app-based trading platform that is the result of two Stanford graduates that left Wall Street simplify the stock trading process in which financial firms were making profit through trading fees that had no real purpose for the marketplace. Robinhood was invented to provide a platform that worked around these useless trading fees that weren’t required by the market, and the two secured funding from some of the venture backing corporations like Google Ventures and Andreessen Horowitz. The two set out to bridge the gap between that 1% that is remarkably played up in all socialist propaganda, and the poverty stricken United States that seems to be everybody else. But in reality, they want to empower people to secure their financial future with starting early in the stock market and having the ability to place money in companies that they trust. Being the “Robinhood” of stock market trading is surely an amazing way to market that one. Starting only in the iOS platform, the app was limited to a specific type of customers, although the amount of iPhone users in the world that like simple interfaces were easy to please. The app itself is simple and straightforward. You put money in, swipe up to buy stocks that you are interested in, swipe up to sell, and boom. An 18 year old can start trading stocks faster than he can go and buy $20 worth of scratchoffs at his local gas station. Almost. Despite having no webpage interface and restricting the use of the marketplace app to only that of smartphones, the company has finally spread to android and iOS, and they have secured over $66 million dollars to make this app successful in helping people trade money in a fluent and easy swiping motion through the processing power of a device in our pocket.

Now if you’re that person who is reading this and thinking: “The whole idea seems sketchy,” “This will never work. I trust my ScottTrade account,” or “Well, this will eventually fail. There is no way they can make money off of this,” congratulations. Over my past year of using Robinhood, you join the majority of pessimistic people that I’ve met who are loyal to their ways. Let’s introduce you to something in America that is called change. Hopefully trying out some of the disruptive technology that is hitting the world such as Uber and Robinhood will open your eyes to ways that you can save money on your own and become a more well rounded person. Below I will explain what Robinhood is, how it works, and eventually how this may be sustainable from the viewpoint of their business model.

Signing up for Robinhood isn’t as easy as entering your email and coming up with a password. The company approves each individual that signs up for an account, and the app is only available for US citizens with a valid Social Security number. This process takes around a week to get sorted out, so try not to worry about the fact that instant gratification won’t be granted in these beginning stages. Once this is complete, you have the ability to add a bank account to transfer money to your account manually or automatically. This is useful for people who want to automatically transfer money into their Robinhood accounts on a regular basis in order to trade when they want to. One issue with Robinhood is that the money transfer process takes 3-4 days to clear deposits, which does not help fickle minded people who want to impulsively buy stocks that seem to crash the next day. Who knows, maybe they do this as a favor to you.

Once your bank account has cleared and you verify the microdeposits that are sent, you have the ability to start trading on the app platform. One of the great things about Robinhood: They have a seamless user interface:

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As you open up the app, you get a screenshot of your performance since you have been in the market. When you want to be depressed for the day, it takes one click and a password login. You get to see just how much your stocks have dipped. On the bright side, this can be great when the DOW jumps up for the week. You have the ability to look at your progress over multiple time intervals, and by simply holding a finger at a certain point on the curve, you can follow minute-by-minute ups and downs. Depending on how in depth you want to follow the stocks that you own or are looking to buy, you have the ability to do so. As you scroll down on the homepage, you can see recent stocks visited, whether they are up or down, and if you want to buy or sell, all you have to do is tap on the
stock in question.

From here, you get a screen where all you have to do is enter the amount of shares you are looking to buy, and once entered, granted you have enough cash in the app to buy the stock, a swipe up will send the order to Robinhood and order within seconds if the market is open. If not, the order will be in limbo until it is, and the shares will be bought when the market becomes open. Robinhood offers a limited number of purchasing and selling options. If you own the stock and want to sell, the process is the same. These are as follows:

Market: Simple as that. You buy the stock for the price you have put in, give or take regular fluctuation. This is at market price.

Limit: A limit purchase allows you to specify the maximum amount you are willing to pay for a stock. The order will be put in, and when the stock drops to this point, the purchase will be made as long as the money is in your account.

Stop Loss: When initiating a buy-stop order, you allow yourself to buy a stock at a certain price and limit the amount that you will lose on the stock. Let’s say you want to buy a stock at $20, but you want to make sure that if the stock hits $18, all of your shares are sold at this price. This allows you to limit the amount of money you lose on the stock by selling it before you lose all of your money, cutting your losses. This may cause you to sell stock due to regular market fluctuations, but at the same time, it allows you to be conservative where you want to be. When selling a stock within the app, a stop loss will allow

Stop Limit: Allows you to limit the price that you want to sell a stock at, realizing that even if you have made $10/share on your stock and it raises to $50, you can set a sell-limit order to sell these shares at $47 with a lower limit of let’s say $45. If the shares are not sold at this price and the share price drops below $45, the shares will not be sold until they reach this price again. This allows you a buffer to analyze what you would like to do with your shares, and if the price rises this high again, it may keep going. A buy-limit order is used in a similar case in which you buy shares at a certain price with a limit to sell higher than the buy price. If these shares are not bought, the stock can be sold at the pricepoint to guarantee your money back. These are usually used for short sales.

When looking at an individual company, the app displays the number of shares that you own, your equity value in US dollars, average cost from what they were bought at, total return ($ and %), and return for the day. Although a limited version of trading techniques are present within the app, Robinhood is currently testing a beta version for users who want to upgrade to a margin account for a slight interest fee. This is one way that Robinhood aims to make money, and the option will hopefully try to expand their customer base to more serious investors that are looking for a variety of ways to maximize their impact in the stock market.

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The above photo shows how easy it is to get information about your user account. When clicking on the person icon in the top left of the home page, your available cash, buying power, and total monetary value of your account. Transferring money takes 30 seconds to enter the amount you would like to transfer, and users can link multiple bank accounts. This page let’s users pull up their tax documents and account statements with the click of a button. This function makes tax season a breeze when all you need to do is pull up a preloaded document to print out the 1099 form needed.

The only inconvenient feature that I have found with Robinhood so far is the fact that once a transfer is initiated from your bank account, the transfer takes 3-4 days to be fully complete and funded in your account. This is mitigated with automatic deposits that can be set on a variable time period, such as transferring $100/week or month and always having that cash reserve for yourself. But the 3-4 day wait is sure to upset Americans used to instant gratification.

As for how Robinhood is making money, it’s simple. First, their funding rounds have netted them over $66 million dollars from companies that. I’m sure a bit of this has gone towards ping pong tables and beer pong tournaments to pull in the talent they want to see on their team in their office, it shows that larger companies see faith in the future of the business model itself. Along with this, Robinhood is hoping to have many users sign up for marginal accounts, and while users transfer money into their accounts that stays uninvested, the company will invest the unused money for the time being as every other brokerage firm already does. The only area in which they are lacking income from a regular brokerage point of view is that they are not charging fees for placing orders, allowing people to maximize their returns.

As automation makes the workplace less labor intensive and more reliant on the technology behind these trades, I think we’ll see this shift in many brokerages and companies to keep their user base and the money that comes with it. Robinhood is pioneering the lead on this, however you can be sure that other brokerages will follow suit. Robinhood will hopefully have a fair share of the market by then. And when you are investing your money, please keep in mind that your profits are subject to capital gains tax. Whether you are just beginning out or are a veteran in the field, don’t let yourself get in trouble come tax season. All of your profits are taxed depending on the amount of time that you hold the stock in question. If you decide to sell for a profit while holding shares for less than a year, this is considered income and is taxed at your regular income tax bracket. Please keep in mind that this is usually a lot higher than if holding the stock for over a year, in which capital gains tax kicks in at 15% of the profits. Hey, somebody has to pay for healthcare, welfare, governmental salaries, and failing bridges.

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