An investor has multiple arenas that they can play on or multiple brokerage and service providers they can use. With so many out there, it can make one’s decision on which one to choose extremely difficult. Due to continuous technology advancement – investing has become easier, cheaper and more intuitive than ever before. Research tools are now available that try to customize a stock or portfolio to your characteristics and long/short term goals. We wanted to analyze an application/service providers for the readers, and that my friends is – Robinhood.
Robinhood is a member of FINRA and SIPC, as well as having real-time quotes occurring on stock exchanges. Currently they offer brokerage accounts but do not offer IRA-based accounts for investors. Therefore, taxable accounts only at this time through their system/application! Their application on Apple and/or Android is very intuitive and has a very seamless use process. In fact, a few of our co-workers are using them, and we cannot lie, the app has somewhat of a sexy appeal. To be honest, we really liked it!
Their company is approximately 7 years old and was discovered/created in the technology hole of Palo Alto, home of many other technology based companies. Surely, with all the positive vibes around the stock, we figured we had to learn more about this new app! Thus, below we will list out the pros and cons of what I see with the application and service provider, whom uses APEX as their clearing of transactions. We have also updated this post in April of 2020, to address changes to the application.
PROS of Robinhood [Updated June 2020]:
1.) $0 Commissions: The obvious reason why individuals have been using this platform – NO cost at all to trade/transact with Robinhood. Phenomenal, if you ask us. This is very intriguing for the young investor. Especially one who does not earn or have large cash flow to make big purchases. For example, if you have $35 and want to buy one share of AT&T (T) or if you have $28 and want to buy one share of KMI, you can buy them fee-free. You don’t have to worry about your expense fee on the transaction or expense ratio % when you make a trade. Thus, this is something that we always keep in mind with our brokerage, as $6.95 a trade on $1,000 is 0.695% fee essentially. Here, 0% fee, a very big pro.
2.) Application Friendly: The application is sleek. Bar none. The technology based company really shines in this aspect. Robinhood’s team makes it easy to start & complete a transaction and review individual stocks. Security over the app is significant and Robinhood makes use of the finger print reader to access on your smartphone. Further, it appears to be very, very easy to monitor the market, create watch lists, etc.
3.) Main Order Types: You have your main order types – Market, Limit, Stop-loss and Stop-Limit. This can be a pro and a con depending on how complex of an investor you are. We consider this a pro. This reduces the # of transactions to choose from without limiting the basic investing options offered by other brokerages. Thus, this would be considered a pro for a basic/beginning dividend growth investor.
4.) Fractional Trades: This is Robinhood’s newest feature and one of our favorites. This was a feature on the old Capital One Investing brokerage account and we LOVED it. Robinhood introduced the ability to purchase fractional shares of stock. For example, let’s say you only have $50 to invest today but want to purchase shares of Johnson and Johnson, which is trading above $140 per share. You can now purchase .357 shares of the company.
This is a HUGE feature for investors. But what excites me the most is that it allows people that are new to investing, with potentially less dollars to invest, to begin investing in companies. If you were able to save $50 on groceries this month on Ibotta or sell some items around your house on Facebook Marketplace, you could take the extra cash and start investing them directly into great stocks regardless of the share price. How cool is that?!
5.) Pays for Things: What do we mean by this? Well, if you’re an investor that typically transacts, lets say two times per month at $7.00 (rounded) each trade. That’s $14/month for trading fees X 12 months = $168/year that Robinhood could save you.
Think of what you could spend or what typical monthly expenses you could cover with the extra cash? You could buy a tablet for $300 and trade for a year on Robinhood. In the end, this would virtually pay for that device. Does that make sense? Or if you upgrade your phone for $200 and using this App would pay for it. It’s interesting when you view transaction fees from a different lens.
6). Diversification: This is an added benefit only available because of Pro #1. How many times have you found yourself with limited capital and wanted to purchase multiple stocks. For example, if I (Bert) had $500 and suddenly saw a downturn in the market. I would be able to purchase all five Top Foundation Stocks for $100 without having to incur excessive trading fees ($6.95 * 5 = $35.95 if I traded through a different broker).
If there were commissions, I would not purchase all five stocks and would opt for one, more than likely. The $0 commission allows investors to spread their money and diversify their portfolios through smaller purchases without being penalized. For example, an investor with a $1,000 can own a portfolio that is as diversified as an individual investor that has a $100,000 portfolio.
7.) High Yield Account (Updated): Robinhood has finally joined the High-Yield Savings account category! They currently offer an insured, .35% high-yield savings account with debit card, with no fees at over 75,000+ ATMs! If you can’t beat the competition, join them.
8.) Fun Referral Program: What makes their referral program “fun” is that you and your referral receive a random free share of stock! If you are interested, here is my shameless plug/link: Sign up! You can receive up to $500 worth of stock. Evidence of my sign up bonus!
9.) Dividend Reinvestment Plan (NEW June 2020): Robinhood finally allows Dividend Reinvestment (DRIP)! However, you must be enrolled/accepted into their fractional shares program in order to turn on this setting. Therefore, this has officially moved from the Con of not having it to a Pro of having the ability.
CONS of Robinhood [updated JUne 2020]:
1.) No retirement accounts: As dividend and regular investors, one would love to have this feature to bring all accounts to Robinhood. Although, if you were to use this and wanted a retirement account, you’ll have to have multiple brokerages. Checking multiple sources can become burdensome and time consuming, which can come at a premium for some of us as we balance a full-time job, blogging and life!
2.) Limited Trade options: As discussed in the pro section above – you do not have the ability to trade
options, foreign domiciled securities, bonds or mutual funds. *2020 Update – you can now invest into options, cryptocurrencies and exchange traded funds (ETFs), stepping into the right direction!
3.) Potential Technology Glitches – Robinhood could not have picked a worse time to experience technology issues in 2020. When the stock market fell dramatically March 2020 and investors were looking to transaction, the company’s platform experienced technology issues. This didn’t happen just once either. The company announced that the issues were remediated; however, you won’t truly know until the next time the market falls and trade volume explodes. Until the company demonstrates their ability to not have technology glitches on these kind of days, we must list this as a con!
Robinhood Target Audience
We would say the target audience for Robinhood can be clear cut and can fit into this arena/genre of individuals:
1.) Young, Technology Based individuals: Individuals who want everything on an Application on their phone, Robinhood could be of high usage for you. This is huge because you cannot access the application from a web address.
2.) Individuals with limited capital but want to be a part of investing: This is easy with $0 trades. If a stock is $5, then that’s all you’ll need to own a share. For example, I think of my (Lanny’s) mom here, where it’s hard for her to save money, and we have to save a lot to make the fee palatable. Here, she could essentially save $35 and buy one share of AT&T (T) stock, adding to her dividend income. It’s interesting and may be useful for her.
Think of young investors or want to be investors in college. In college, resources are at a premium and having an app, like Robinhood, would have allowed me to begin investing at a much younger age. Can you imagine what our projected annual dividend income would be if we started investing as teenagers?! Surely, our annual dividend goals would hopefully be much higher!
3.) Individuals who Transact Frequently on the Buy Side: This could pay for devices, as individuals could save $100’s in trade fees a year. Think new phone/tablet, etc. as discussed above.
Overall, Robinhood has a combination of an individual brokerage account, advanced technology and with NO fees. If you are an investor looking for those benefits, with no retirement account option, this is for you. If this is YOU, we would strongly consider opening a trading account through Robinhood!
What does everyone else think of this system? Do you use it? Anyone have any other reactions to using them or pros/cons to add? Always curious here and we thank you again for coming by to read our post!
Photo Credit: www.robinhood.com
*Disclosure: there may be affiliate links above*