Historically, stocks have been among the best-performing assets in the United States. In the past ten years alone, NASDAQ and S&P 500 indices have returned more than 300% and 200% respectively. As a result, many Americans are now investing in the stock market. If you are a new and experienced investor, this article explains how you can cut costs by investing with Robinhood.
What is Robinhood?
In the past, the investing world in the US was dominated by a few large players. The biggest among them were Fidelity, Schwab, E-Tradeo, and TD Ameritrade. These companies use a fee-based model, where they take a small commission for every order they execute. The chart below shows the average amount of commission charged by these brokers.
Buy and hold
- Over and over it has been shown that a buy and hold strategy is definitely the best strategy in the long run, especially when you go for broad index funds. Trading more often leads to worse results.
- The conclusion of this research says it all: "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was… They were accounts from people who forgot they had an account".
In 2013, Baiju Bhatt and Vladimir Tenev saw an opportunity to disrupt this industry by creating a free method for anyone to invest in stocks. They named the company Robinhood. Today, the company has attracted more 4 million users and has received more than $500 million in VC funding. In the last round, the company was valued at almost $6 billion.
Through the company’s web and mobile applications, investors can invest in stocks, ETFs, options, and cryptocurrencies for free.
Robinhood investing how do they make money
- Interest: it makes money from the interest generated from the customer cash and stocks.
- Data to market makers and trading venues: it makes money by receiving rebates from market makers like Citadel.
- Robinhood Gold: this is a margin trading service, which they charge customers $5 a month.
You can also check the other Robinhood fees.
Why Invest with Robinhood?
In the past, the company has received criticism for selling the free trades to market makers, who can then bet against the customers. However, according to research, most brokers generate money from selling this type of data to market makers and high frequency traders. Here are a few reasons why you should consider investing with Robinhood.
- The apps and web platforms are free to set up.
- No commission for trades.
- Access to professional research from top providers like Morningstar and Morgan Stanley.
- Free access to market news from top publishers.
- Technical analysis tools.
- Access to margin trading.
- Ready-made watchlists
- Access to Nasdaq level 2 data.
Why not invest with Robinhood
- Investing is not about getting notifications on your cell phone. You want to reduce stress in your life, especially when it comes to finances.
- You shouldn’t really be trading like a monkey on speed. I’ve done it myself, and you can get the impression of making money, but in the long run you will not beat the market. No one does.
- You already have a brokerage account that you’re happy with. If you’re into financial minimalism you don’t want to open dozens of different accounts.
- A low information diet is likely to lead to more happiness. News is to the mind what sugar is to the body.
- Technical analysis suffers from a data mining bias, subjective interpretation and the problem that "people will give greater weight to information that agrees with a previous conviction than information that is contrary".
- Trading on margins is a great way to get rekt.
- You’re not in the US.
Robinhood outside of the US
If you are not a US citizen or resident, you cannot sign up with Robinhood. There are some alternatives such as Interactive Brokers, which doesn’t have a fancy app, but it does have low trading fees of 1$ and is accessible to EU residents.
Investing With Robinhood
Robinhood is developed to target the millennials. As such, the mobile and web platforms are designed with simplicity in mind. To start, all you need is to provide your email address, answer a few questions, deposit money, and start investing. The whole process can take you less than 15 minutes. However, before you invest, it is important to know a few things.
Robinhood lack of assets
One rather big downside of Robinhood is the number of financial assets you can invest in. Robinhood offers just stocks, ETFs, options, and cryptocurrencies. This means you options are limited if you want to do auto-investing and enjoying a good diversified portfolio. Therefore, Robinhood seems to be more focused on trading than on good buy-and-hold strategies.
Decide the type of investor you are
In this, you should think about your style and the general type of investor that you are. If you are a technology investor, you should focus only on technology companies like Salesforce and Apple. If you like retail, you should focus on companies like Walmart, Amazon, and Lululemon. Similarly, if you are a transport investor, you should focus on companies like United Airlines and Delta.
In addition, you should decide on the stage of the companies you want to invest in. If you love growth stocks, you can invest in companies like Twilio and Chipotle. If you are an income-focused investor, you should specialize on companies like Boeing and Illinois Tool Works.
Next, you should look at the duration you want to hold your investments. In this, you could be a day trader, who leaves trades open for just a day, or a swing trader, who leaves trades open for a few days. Alternatively, you can be a long-term investor like Warren Buffett.
After this, you should work to refine your investment strategy. This is in a similar way to how hedge funds do. There are long-short hedge funds who buy companies they hope will move up and short companies they expect will go down. Similarly, there are long-only and short-only investors. There are others who focus on macro issues and others who focus on special situations like mergers and acquisitions. If you are a newbie investor, you should spend a lot of time creating and testing the strategy you want to specialize on.
Finally, you should think about the funds that you will use to invest. Since markets are always risky, you should only invest using money that you can comfortably afford to lose. For this reason, you should be careful about investing money you have set aside for food, rent, and other general necessities.
Robinhood has revolutionized the world of investing. In fact, many of the old brokers like Fidelity and Schwab have started to lower the fees. As an investor, this is a good thing, because these commission fees tend to add up with time. Therefore, as you begin your investing journey, you should consider using Robinhood while realizing the risks that come with all types of investing.