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Home Startup Stories How Robinhood makes money? Robinhood Business Model

How Robinhood makes money? Robinhood Business Model

Robinhood is a Fintech company that lets you trade for free. Robinhood disrupted the trading industry with its freemium business model. Robinhood business model is to make money via its premium feature, Robinhood GOLD, by lending out your cash and by selling your order to market makers. It attained its unicorn status in 2017 and stands at an $8.3 billion valuation with 10 million user fans backed up with profound investors like Sequoia Capital, Ribbit Capital, etc.,

This article aims to address all your queries and concerns regarding Robinhood and how it makes money.

What is Robinhood? 

Robinhood is a brokerage service provider that enables you to trade stocks, ETFs, options, and crypto without a commission fee. You can buy for $0, and this cost structure advantage over the other apps like Scottrade and Fidelity (who charge $5 – $8 trading fee) made Robinhood super popular among young investors. 

Buying and selling stocks in the Robinhood app is simple as tweeting a tweet or swiping a tinder match.

Swipe right and buy. Swipe left and sell. Yes, that simple. 

The ease of use features, lucrative perks like free trading, and a brilliant, inspiring mission like democratizing finance for all have built a rebel brand image in Gen Z investors’ minds. 

The average age of Robinhood’s user is 31, and half of the investors are novice treaders with little or no experience. 

How does Robinhood work? 

Robinhood works like any other trading app. It’s a simple three-step process: 

  1. Load the app and open an account in Robinhood. 
  2. Transfer your funds to the Robinhood account and wait until it reflects. (PS: Robinhood has $0 account minimum)
  3. Start buying and selling stocks. You can also monitor your favourite stocks by adding them to the ‘Watchlist’.

How did Robinhood start? Robinhood founding story

Baiju Bhatt and Vlad Tenev, two Ex-Stanford buddies, found Robinhood in Palo Alto, California, in 2013. After graduating, Baiju and Vlad headed to New York and built top-notch software for renowned hedge-funds. Inspired by the Occupy movement, as New York times state, these experts returned to California with a magnificent dream of building software where anyone with a mobile phone could invest. 

While other sharks in the trading industry were charging $5 to $15 as a commission fee for each trade, Robinhood burst opened the disruption by charging no commission fee.   

Equipped with a mission to democratise stock market and a name – Robinhood that paints a picture of achieving a balance of wealth between rich and poor, half a million young American folks had signed up before the company came out of stealth mode in 2013. 

The app was officially launched in 2015, and you can access its android, IOS and Apple watch versions. 

Robinhood Valuation – The Funding story 

Robinhood is a private venture-capital backed firm and currently stands at an $8.3 billion valuation post its series F funding in May 2020. 

Timeline of Robinhood funding: 

Robinhood kick-started with a seed funding of $3 million led by Index Ventures in 2013. 

In 2014, Robinhood raised a Series A funding of $13 million led by Index Ventures while a few celebrities like Snoop Dog, Nasir Jonas, also jumped on-board. 

In 2015, Robinhood raised another $50 million as Series B funding led by New Ventures Capital. 

In 2017, Robinhood completed their Series C funding round by raising a whopping $100 million led by DST Global. Via this round of financing, Robinhood joined the unicorn club of startups as it attained a billion-dollar valuation. 

In 2018, Robinhood raised a $363 million Series D funding led by DST global. 

In 2019, Robinhood raised $323 million as Series E funding led by DST global. 

In 2020, Robinhood raised $280 million, another round of Series F funding led by Sequoia capital.  

Robinhood features

You can trade the following instruments in Robinhood: 

  1. Stocks
  2. ETFs
  3. REITs
  4. Options
  5. Cryptocurrencies

Robinhood Crypto: 

You can trade seven significant cryptocurrencies, Bitcoin [BTC], and Ethereum [ETH] included from 39 different states in the US.  

Crypto has undoubtedly added to our growth,” Baiju Bhatt, co-founder, and co-CEO of Robinhood, told CNBC.

Fractional Shares in Robinhood 

From December 2019, you can also invest in fractional shares via the Robinhood app. Fractional shares are nothing but buying a part of a significant percentage of a famous company. So, now, you can own a part of your favorite company, be it Apple or Amazon, with as little as $1. 

Robinhood resources to learn to trade 

To educate and provide expertise to our young investors, Robinhood stepped up publishing learning resources and podcasts. You can listen to the Robinhood Snacks podcast in Spotify or Apple or Google, which hit 10 million downloads in June 2020. 

Robinhood GOLD 

By paying a monthly fee of $5, you can avail Robinhood GOLD that supports: 

  • Bigger instant deposits 
  • Professional data research from Morningstar 
  • Level II market data from NASDAQ
  • Access to investing in Margin
  • Extended hours of trading – 30 minutes before and 2 hours after the market opens and closes. 

With a $5 fee, you can access $1000 margin, and when a $1000 margin is exceeded, you are charged an annual interest of 5%. 

Though Robinhood holds no account minimums, to work with marginal trading, you should have an account minimum of $2000. 

Cash Management

Robinhood provides cash management services where you can earn a 0.30% Annual Percentage Yield (APY) on your uninvested cash as of March 16, 2020. The interest is subjective to change according to the bank programs. Margin is not included in the uninvested money, and there are no minimum or maximum balance that you have to maintain. 

Your cash (uninvested cash in Robinhood brokerage account and the cash in our respective bank account) is FDIC insured up to $1.25 million (up to $250,000 per program bank). 

How does Robinhood make money? 

The 8.3 Billion dollar question, “How on earth are these Robinhood folks making money?”. 

Robinhood makes money via its premium feature, Robinhood GOLD, by lending out your cash and by selling your order to market makers.

Robinhood Gold 

As mentioned earlier, Robinhood GOLD is a premium feature. Robinhood makes money via this feature in 2 ways: 

  1. A flat monthly fee of $5 covers all the premium features and gives you access to a $1000 margin. 
  2. Annual interest of 5% for the Margin used above $1000. 

For example, 

Your account balance: $2000 

Margin used: $3000

5% of Annual interest would be calculated as ($3000-$1000)*5%/360 = 0.28 per day, which is added to the monthly billing cycle. 

Robinhood gives the user the buying power with a bare minimum fee to buy more, trade more, and earn money from the borrowed Margin. 

Interest revenue 

Like any other bank or a brokerage account, Robinhood lends out your uninvested cash and earns interest. The money is lent out to margin trades, invested in safe bonds, etc., The interest earned via lending out the money is not shared with the customer, and it becomes one of the primary sources of income for Robinhood.

For instance, you have $1000 idle cash in our account, and Robinhood’s interest rates are 2%, the brokerage would make $20 per year. Though the amount might be minimal, considering the 10 million user base, this still brings in considerable revenue to Robinhood.

Rebates 

According to the official Robinhood website, they make money from payment order flows from market makers. Meaning, whenever you place an order to buy or sell, Robinhood routes your request through high-frequency trading firms like Sigma Securities for which they offer a fee in return to Robinhood. Robinhood clearly states this controversial practice on its website as 

“When you buy or sell stocks, ETFs, and options through your brokerage account, your orders are sent to market makers for execution. To compete with exchanges, market makers offer rebates to brokerages. Market makers typically offer better prices than exchanges.”

According to a statement released by Tenev, Robinhood’s co-founder in 2018, Robinhood earns $0.00026 as rebates for every dollar traded, which infers it makes $2.6 for every $1000 you buy.

The analysis states that the revenue of Robinhood has increased by 227%, accounting to 69 million dollars in 2018, rebates contributing to 40% of the total revenue.

Besides the practices mentioned above, Robinhood also receives an interchange fee via debit card transactions. 

Summing up

Robinhood has had phenomenal growth since its inception. It holds its grounds high in democratising finance for all and has left other trading firms with no option but to introduce commission-free trading. With new features and resources, this unicorn would surge more heights in making investing more comfortable even for a teenager.

Most Frequently Asked Questions: 

Is Robinhood legit and safe? 

Yes, Robinhood is legit and safe. Robinhood is a securities brokerage regulated by the Securities and Exchange Commission (SEC).

What is Robinhood business model? 

Robinhood operates on a freemium business model similar to Facebook and Snapchat, where all the preliminary services are free. At the same time, you have to pay a flat fee of $5 to access Robin GOLD if you want to avail of advanced investing options. Your money is protected by the Securities Investor Protection Corporation (SIPC). The SIPC protects up to $500,000 for securities and up to $250,000 for cash claims. However, your crypto investments are not protected by SIPC. 

How to claim Robinhood’s free stock? 

Once you sign up, install the Robinhood app and activate your account, Robinhood sends you a free stock of up to $200. You will get a push notification and a confirmation email. You can claim the free share within 60 days, trade it after two days, ensuring to keep the cash value for the next 30 days. You can request more free stocks by referring your friends.  

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