Is Robinhood a Scam?

Wall Street Survivor

Robinhood was born out of the friendship of Baiju and Vlad.

That’s right — two roommates from Stanford went on to build separate investment hedging software solutions in New York City.

Actually, that sounds about right!

Baiju and Vlad founded Robinhood because they saw an opportunity.

What was that opportunity?

That opportunity was to gift the next generation of traders precisely what they were looking for…

…commission-free trades and a $ 0 starting point.

Since 2013, Robinhood has grown into a household name with millions of investors.

The primary focus of Robinhood is to make the stock market simple.

But how does Robinhood make the stock market simple?

Robinhood lets people move money with elegantly designed systems and apps.

The payoff?

People that would have never invested are now investing (especially you so-called “Millenials”).

You can now invest without paying commissions and with virtually no money.

However, with any great idea, there are always skeptics.

After all, high cash entry points and steep trading fees are staples of the American stock market.

So, is Robinhood a scam?

You are about to find out (in less than 5 minutes!).

Robinhood Overview


Robinhood has built the backbone of the company off of the idea that investing should be for everyone.

So, what does this look like in practice?

Everyday people can invest, regardless of current knowledge or wealth.

Let’s say you have $ 5 to your name.

You can take your $ 5 to the stock market (via Robinhood) and invest in Apple, Amazon, Google, or any company you desire!

With fractional shares, you don’t need to buy an entire stock.

Instead, you can own a percentage of your desired stock.

Do you own an Apple or Android smartphone (of course, you do)?

You can download Robinhood, and access no investment minimums and fee-free trading.

Heck, you can even trade cryptocurrency, if you want.

Robinhood is classified as a securities brokerage, which means that the firm can buy and sell different stocks on behalf its clients.

Stock brokerages are authorized to fulfill the orders of clients.

Traditionally, securities brokerages charge a fee per order.

However, Robinhood does not charge based on the same model.

Instead, they charge a flat rate for a monthly Gold subscription, which gives you more information about the market.

This means that while you feel like you’re downloading an app and signing up for Robinhood…

…you are becoming Robinhood’s client, and they are your new brokerage.

How Robinhood Protects Your Money


Since Robinhood is a securities brokerage, the company must submit to the same regulations as firms like TD Ameritrade.

The Securities and Exchange Commission (SEC) regulates Robinhood.

The SEC was created in 1934 to regulate the markets to protect investors against harmful practices and promote full disclosure of information.

In short, the SEC has the job of ensuring that companies like Robinhood are not ripping off investors.

However, they also make sure that companies do not lie to stock markets.


Additionally, the company guarantees your money.

That’s right — Robinhood guarantees your funds, up to $ 500K for securities and $ 250K for cash.

These protections are brought to you by the Securities Investor Protection Corporation (SIPC).

Therefore, your money is definitely safe with Robinhood, in that sense.

Financial Regulation

While companies don’t have to become members of FINRA, as the “new kids on the block,” Robinhood thought that this would be important to gain trust.

FINRA, or the Financial Industry Regulatory Authority, is a non-governmental company that tries to regulate and enforce the rules of the New York Stock Exchange.

FINRA investigates companies and ensures that the market and that brokerages associated with the market maintain integrity.

Conclusion: How Robinhood Protects Your Money

You are protected with Robinhood!

All of these regulations and practices that Robinhood participates in means that the company isn’t a scam in a technical sense of the word.

They have submitted to regulation and have worked to make sure that they are playing by the rules of the market.

Robinhood’s World of Investing


The problem with Robinhood, far from being any actual scam, is probably the way that Robinhood paints the world of investing.

They are often targeting novices and amateurs who may never have traded a stock before in their life.

Their target audience is investors who don’t have much experience in the stock market, and probably aren’t looking to invest big amounts of money.

This is certainly a noble mission.

Like the character that they’re named after, this makes it sound like they are helping the poor get a cut of the wealth management that usually on the rich have gotten.

There is definitely nothing wrong with educating people about the stock market who don’t know much.

However, we should take a closer look at how Robinhood casts the world of investments.

We might learn a lot from the way that their platform works, and from the things that they leave out.

Individual Stocks and Crypto

Robinhood will not let you trade with mutual funds or ETFs, and they focus on things like individual stocks and even cryptocurrency.

There is a certain allure to individual stocks.

After all, it seems simpler.

Why get caught up in a complicated mutual fund or ETF when you could just buy a piece of Tesla or Netflix?

People love Tesla and Netflix!

And Robinhood knows this.

While you might not pump money into a cryptically named mutual fund, you might toss a few bucks at some of your favorite publicly traded tech companies.

Of course, as any seasoned investor will tell you, dealing with individual stocks drastically turns up the dial on both your risk and your reward.

Individual stocks are volatile, and while a huge company like Amazon or Apple might seem like a safe bet, the risk of loss goes up with individual stocks.

Not to mention companies that look flashy right now, but might be in for bigger losses down the road.

Individual stocks are vanity stocks.

You might play with a small portion of your money, just because you like a certain company and want to be a part of it.

Unless you’re an expert trader–and even if you’re an expert trader–you’re going to want to balance your portfolio with much safer options.

But without mutual funds or ETFs, it’s going to be tougher to do this in a meaningful way.

Robinhood plays to flash and instant gratification.

Within minutes of getting the app, you can end up with a piece of your favorite company.

And with partial shares, it’s easy to toss the price of a cup of coffee at it.

Another way that this flash shows up is with cryptocurrency.

Love or hate crypto, there’s no doubt that the option to trade crypto is Robinhood’s attempts to play to a younger, cooler audience.

Notifications and Celebrations

With no minimums or brokerage fees, Robinhood is trying to maximize engagement.

You can trade all day every day, and you won’t spend any brokerage fees on moving money around between different stocks.

The app celebrates your trades with confetti and sends you notifications when stock prices move.

These default settings are playing to the dopamine in your brain, trying to wrap up your emotions into the stock market.

Now, this doesn’t mean that Robinhood is bad!

Getting your emotions caught up in something helps you care about that thing.

And caring about money isn’t a bad thing.

But you have to understand that confetti and notifications can lead you to move things around and make moves before you really know what you’re doing.

And this can be good!

Robinhood’s platform is an excellent training ground for the stock market.

If you’ve launched $ 20 into the app, well you’ve spent the price of a movie and popcorn to get what you’ve paid for–a few hours of entertainment.

Conclusion: Robinhood’s World of Investing

None of this means that Robinhood is bad.

In fact, Robinhood is exactly what they say they are.

A low-cost, no-fee way for younger people to get into the stock market.

While Robinhood might not be your retirement guru guiding you to passive stock income, Robinhood can definitely give you some hands on financial education at a price point that won’t gouge your wallet.

How Does Robinhood Make Money?


Before participating in the dealings of any company–especially a company that is taking money from you–it’s a great idea to have a general idea of how they’re making their money.

When you go to a coffee shop, you pay more than the cost of the commodity, goods, and services.

You pay for the fourth economic object–an experience.

This experience cost allows the company to make money.

When you hire a traditional broker, they may charge annual fees and commissions.

They’ll tell you exactly what amounts and percentages of your money they’ll be taking.

But Robinhood is free to sign up and doesn’t charge a trade commission?

How do they make money?

Well, Robinhood charges amounts for domestic and international wire transfers.

But ACH transfers–what most people would use–are completely free.

They do make a solid $ 75 from each person who transfers their portfolio to another investment management broker.

This high transfer cost ensures that Robinhood makes money when you leave, but it also helps keep smaller dollar amounts at Robinhood.

If you’ve only got a couple hundred bucks invested, you probably aren’t tossing out $ 75 to move your account.

Robinhood also offers a Gold subscription service for $ 5 bucks a month, which allows people to get access to margin and more information about the service.

Margin is basically the practice of borrowing money to buy securities.

It can be risky, because if you get calls wrong–especially on the individual stocks that Robinhood is pushing–you can owe money.

But margin is a great way to generate more investment capital.

Robinhood also makes money off of the uninvested cash of customers that they can put in interest-bearing bank accounts.

By reinvesting the money that Robinhood customers have left lying around, Robinhood can keep the interest.

Selling to High-Frequency Trading

Robinhood get’s up to 40% of it’s income from a somewhat surprising source.

They sell the trades of customers to high frequency firms.

They generated around $ 69M in order routing revenue, through a common Wall Street practice of payment for order flow.

High frequency trading is a bit controversial because it might allow bigger investors to cash out over smaller investors.

Is Robinhood a Scam?

The Verdict: No!

Robinhood is not a scam.

While it’s certainly important to note the ways that Robinhood makes money and to think about the limitations of the platform, neither of these things mean that Robinhood is dishonest or a bad company.

Robinhood is exactly what it claims to be–a company that is lowering the startup costs and brokerage fees to help investors with smaller amounts of cash get into the game.

Routing trades through high-frequency traders and generating interest on extra money might seem odd, it’s not really that different from charging flat subscription fees or brokerage rates.

Obviously, any company that you work with to get access to the stock market is going to need to make a profit.

Robinhood wants to do it in ways that don’t prohibit smaller investors from getting involved.

Additionally, while Robinhood doesn’t have mutual funds and focuses on high-flying individual stocks and crypto, you still have the choice in what you buy!

You can spread your money around the bigger companies to defray some risk.

You don’t have to go all in on a flashy startup to try and quadruple your money.

Like with any brokerage solution, Robinhood is going to give some advice but then ultimately get out of your way and let you play the market how you think is best.

You’ve got to be willing to perform your own research.

You need to do your best to use Robinhood as practical education and a hands on experience, but this will need to be supplemented with some more abstract education about risk and how to best invest to turn a profit.

The Best Ways to Use Robinhood

Have a Plan

The difference between picking stocks, day trading, and gambling is all in how much money you expect to lose.

If there is a possibility of you taking life-altering financial hits, then you’ve stepped into the world of gambling.

Definitely don’t do that! Trade responsibly.

Know where you’re at in life.

Most people that use Robinhood are using the platform because the low startup costs and no trading fees help them maintain their money.

This means you probably aren’t throwing $ 10K at the app.

You might be tossing a few hundred bucks to start, at most.

It’s important to have a financial plan that extends beyond just stock trading.

If you have a stead income, and are making payments on any debts or loans, and know how much you’ve budgeted for each month–it is a lot easier to get a trading app and make smart decisions about where your money is going.

You’ve got to know what you have and where it is going.

Be Patient

Some people use Robinhood to day trade, because the low fees help you move things around quickly without taking hits.

Especially if you’re going to day trade with a low amount of money, you don’t want to lose your income through small charges here and there.

But for people that aren’t interested in day trading, you’ll have to be intentional with how the app gets used.

After all, the confetti and notifications are going to be there.

If you don’t want to get wrapped up in the emotions of your stocks, you can turn off notifications and unsubscribe from contact with Robinhood.

You can check it only every once in a while.

This can help you avoid feeling the pain of a stock dipping in a day.

This can be especially helpful if you have some stock that you really like, like Apple or Microsoft.

You may want to buy the stock and then just set it down and wait for a while.

The temptation with a service like Robinhood is to move stocks around too often at every little speedbump.

That’s a great way to lose money, because you’ll often be selling after a stock has dropped and you’ve felt pain, and you’ll be buying after a stock has gone up and it looks hot.

Study and Research

Robinhood gives you a ton of access to the stock market.

It allows you to get into the game.

It lets you get some hands-on learning experience.

It doesn’t turn you into an expert investor.

For that, you’re going to have to do your research.

You’ll need to study the way that the market works and the best practices that are out there for stock trading.

Robinhood is best used when paired with a hunger for knowledge.

You can trade on the app, but then you can do your research online to learn more about investing, and then you can take those best practices back to the app.

Conclusion: Robinhood is Not a Scam

Robinhood is a quality company that lets you get into the stock market for the price of a nice dinner.

Give it a try and you can learn a ton about investing and make some money along the way!

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