Trading and Investing

How Does Robinhood Make Money?

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October 1, 2021
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    Robinhood Markets is expected to soon go public on Nasdaq under the ticker HOOD. It is already well accepted and popular amongst the new generation of traders. Due to this, Robinhood, a commission-less brokerage, will be opening up to $35 billion worth of stock with a single stock priced between $38 to $42.

    Robinhood is a fintech company that provides trades of stock exchange trades and cryptocurrency on online brokerage without any commission charges. It provides both mobile-based and web-based applications. But the question remains: if Robinhood does not charge a commission from traders, how does Robinhood make money? Let’s explore Robinhood’s business model and the key revenue model below!

    Robinhood’s Business Revenue Model Explained

    Robinhood makes money by charging market makers and frequency trading firms. The firm makes revenue off of each transaction by routing its user orders to market makers, a process known as payment for order flow (PFOF), which records 75% of the company’s revenue.

    The other revenue generation for Robinhood is from the interest charged on the securities and margin loans. Robinhood also offers premium chargeable features such as margin trading and professional trading on Robinhood Gold premium subscription. 

    Following this model alone, Robinhood has seen exponential growth in the past year. What started at nearly $17 million in revenue in 2019 grew 320% to reach $720 million in 2020!

    How Much Did Robinhood Make in 2021?

    The first-quarter growth for Robinhood in 2021 showed a leap of 340% growth resulting in $420 million. Since the onset of the COVID-19 pandemic, the market has seen an influx of investors, so the number of new accounts opened on Robinhood grew from 5.1 million in 2019 to 12.5 million in 2020. At the end of July 2021, it still showed steep growth reaching 22.5 million active accounts.

    The recent trend of rising interest in retail trading of stocks has further benefited Robinhood, exhibiting a revenue spike. The average revenue per user hiked from $65.70 in 2019 to $108.90 in 2020. As the first quarter of 2021 wrapped up, analysis shows a further revenue growth to $137 per user. 

    The cryptocurrency domain is one of the fastest-growing investment parallels on the platform and contributes close to 47% of revenue generation at Robinhood. The revenue generated from the cryptocurrency business has multiplied 20 times in the first quarter of 2021 close to $88 million. Along with the revenue growth, the other divisions of Robinhood are also growing at a high rate with other revenue surging to 3 times as compared to the first quarter of last year. 

    The evaluation shows that Robinhood’s transactional revenue has grown from 75% in the first quarter of last year to 81% in the first quarter of 2021, making it more dependable on transaction revenue.

    How to Make Money on Robinhood 

    Now that we’ve understood how Robinhood makes money within their own revenue model, let’s pivot to the user-side of things and understand how you can make money on Robinhood. 

    If you are new to the world of stocks and trading and are hoping to make money on Robinhood, you may be on the right platform as it makes the journey enjoyable with easy-to-use applications. The two major ways for users to make money on Robinhood are dividends and asset appreciation, that is, buying at a lower price and selling at a higher price.

    Let us look into these two methods to understand the process better. 

    1. Dividends

    A dividend is essentially the revenue generated when a corporation or firm decides to distribute generated profits among the shareholders rather than reinvesting it in the company. On Robinhood, you can make money with your investments by holding stocks in the company that pays out dividends. 

    Robinhood also has a key feature that allows you to reinvest the revenue generated through dividends back into the shares. This is a smart move that allows you to earn compound interest. You can access this step using the reinvestment feature of Robinhood. 

    2. Asset Appreciation 

    To be a successful investor, understanding the nature of the market and predicting its downs is necessary. Because this knowledge will help you follow the “buy low, sell high” philosophy of trading. 

    Researching the stocks that you are investing in is important to reduce the risk. Robinhood provides a feature that lets you run an analysis rating of listed companies. This unbiased rating done by an independent investment research company can be helpful for first-time investors to get a hang of the market. It must be noted that the rating list also includes the best performance target benchmark assigned for each company. 

    Robinhood Gold premium membership will give you further access to more market research insights which helps in making informed choices. 

    The Robinhood Market Risk Factor

    Even though Robinhood has been able to pull great revenue generation, the near-term risk is difficult to avoid. In addition to the S&P 500, the market could experience a peak of about 90% compared to the lows in March 2020. With this ongoing inflation, the U.S Federal Reserve is expecting a hike in rates by the year 2023.

    Robinhood is a platform largely aimed at first-time investors, hence its revenue generation can be overly affected by market movements and corrections. Critics also opine that the basic Robinhood business model of payment for order flow isn’t efficient enough for investors as it can result in much lower value on their trades. 

    Besides, the practice of payment for order flow is illegal in countries like the U.K. As this procedure is gaining a lot of criticism, the SEC has been looking into it and this might even lead to a ban in the US. 

    Final Thoughts

    If you are new to stock trading, Robinhood is a commission-free platform that is easy to use and supports your decision-making with useful research and insights. That being said, it does have risk factors like any other online brokerage. While the payment of order flow is considered a standard method of revenue generation, only focusing on this method could lead to a downfall in the future. As Robinhood is focusing on its expansion in Europe and Asia, this model of business would pose a high risk and impact its revenue generation. Diversifying to other forms of revenue generation is indeed necessary to realize stability. 

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    How Does Robinhood Make Money FAQs

    1. Does Robinhood charge you for opening an account?

    Robinhood is a commission-free platform. It does not charge you any fee for opening an account, maintaining it, or transactions made through it. It is free now and promises to maintain that policy in the future too.

    2. Why does the stock price differ in Robinhood?

    Robinhood does not add any fee to the stock prices. The price difference is solely due to the market movement. To protect your market orders from drastic price variation, Robinhood adjusts the range of the market orders by 1% for the buyers and up to 5% for the sellers.

    3. Is Robinhood taxed?

    All dividends from the stock market profit you receive from Robinhood are taxed. The rate of the tax will depend on how long you have held the share. If the assets owned are sold within one year of purchase, short-term tax rates are applicable. Whereas the asset is sold after one year of purchase varying on the duration long-term tax is applicable.

    4. How long does it take to buy or sell on Robinhood?

    Robinhood is a platform that facilitates your trading. Every time you make an order to buy or sell stocks, it sends your order to market makers who execute the transaction. All the trading details are further sent to Robinhood security which closely works with the cleaning house to record the trade. This procedure may take from 2 to 4 days.

    5. What is the advantage of investing in cryptocurrency through Robinhood?

    Robinhood has a list of a few different cryptocurrencies like Bitcoin, Etherum, Dogecoin, etc that you can purchase or sell using the platform. The major advantage of investing in cryptocurrency through Robinhood is the lack of any service fee unlike other traditional methods of investments.

    6. How do I get my money from Robinhood?

    You can withdraw your money from Robinhood by transferring the cash to the bank of your choice of account and clicking the submit option to transfer the required amount. You can withdraw up to $50,000 per business day.

    Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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