Robinhood: An App That Aims to Reinvent Stock Trading

In the mid-1990s, the advent of graphical web browsers and secure connections paved the way for online stock trading and investing, which in turn prompted retail brokerages to lower their fees as well as their commissions, minimum account balances, and other traditional barriers to entry. In other words, the internet can be credited with making the world of Wall Street more accessible.

Retail stock brokerages these days operate with overhead expenses that are considerably lower than they used to be. In fact, the bulk of stock investing and trading these days is conducted on a self-directed manner via a web platform or mobile app. Trading commissions are now as low as $7, and just about anyone can get started with just a few hundred dollars. Nonetheless, retail brokerages encourage their clients to be active traders, which can result in a considerable accumulation of commissions.

Enter Zero Commission Trades with Robinhood

Until Robinhood came around, the concept of a retail brokerage with zero trading commissions was a bit of a panacea. Robinhood is a neat mobile app that offers all the features of an online brokerage but without transaction fees for executing trades.

In the past, a couple of online retail brokers have offered delayed trade execution in exchange for very low transaction fees, but Robinhood goes a step further with real-time data and instant trade execution for free. The only delay faced by Robinhood clients is that their deposits are subject to a three-day waiting period, which is quite reasonable since major online brokerages that charge commissions do the same.

Why Mobile Trading Makes Sense

Although the free trading offered by Robinhood is very enticing, this is not even the best feature. The mobile platform itself is very impressive when compared to what is currently offered by the major brokerages, which tends to be a very diluted version of their web platforms.

The mobile nature of Robinhood is its most powerful advantage. By catering solely to smartphone and tablet users, Robinhood can substantially cut down on expenses, and the real-time trade execution encourages active traders.

In the beginning, Robinhood made money mostly from the interest collected from account balances that are not committed to a market position. Later, the brokerage introduced margin trading, which essentially lets clients borrow funds that they can use to enter the market; tapping this form of credit comes at a cost to clients.

Recently, Robinhood added another profit-making dimension to bolster its bottom line. Although the company is well-funded by the likes of Google Ventures and Andreessen Horowitz, Robinhood is now monetizing its app through a special option for serious traders. For just $10 per month, Robinhood do not have to wait for their deposits to clear and can even participate in after hours trading to a certain extent. Furthermore, Robinhood Gold members pay just $10 a month to access a dynamic margin line that becomes available when their accounts have a balance of at least $2,000. This margin, which the company describes as a credit card for stock investors, grants a 200 percent leverage for trading.

The Robinhood Gold option is ideal for savvier investors who wish to be more active in their trading, and the margin offered by the company is not excessive, which shows their concern for measured stock trading.