Millennial investors have been flocking to easier ways to invest for cheap. And with the accessibility of online or app-trading for younger investors, investment apps seem to be the way of the future.
In fact, investment app Robinhood doubled its growth from the previous year to 6 million users in 2019 - trumping online brokerage E*TRADE ( ETFC ) with their 3.7 million (as of last year). With its commission-free model, Robinhood has attracted investors who are looking for a cheap, easy way to invest on their mobile devices. But, the question begs - how does Robinhood actually make money?
What Is Robinhood? Robinhood is an online investment and trading app launched in 2013 that boasts a commission-free model and keeps costs low for investors to trade stocks, ETFs, options and even cryptocurrency without paying commissions. The app was originally developed for Apple ( AAPL ) phones and tablets but has since launched an Android version as well.
In the wake of the 2008 financial crisis , Robinhood was conceived out of a desire to "democratize America's financial system" and disrupt online investing by providing a platform for the younger generation of jaded investors to trade commission-free. Named after the fictional character Robinhood - who robbed the rich to feed the poor - the investment app was designed to give the next generation inexpensive access to trading that could help them get involved earlier in the market. Taking on a proverbial "not like the other guys" mentality, Robinhood has attracted a large millennial base to use the low-to-no-fee app - especially for high-frequency traders.
As of 2019, Robinhood offers a variety of investment vehicles including stocks, ETFs, cryptocurrency and options. The company has been valued at around $5.6 billion, following a recent Series-D investment round influx to the tune of $363 million, according to CNBC.
And, according to a recent report by JMP Securities in 2018, Robinhood is estimated to have around $1,000 to $5,000 in average assets per account - still way behind those of their competitors like Fidelity and TD Ameritrade ( AMTD ) . Still, according to the company as of May 2018, Robinhood has allegedly saved customers over $1 billion in commission fees.
But as a company boasting no commissions for trades, how does Robinhood actually make money to earn their near $6 billion valuation?
How Free Investing Works Naturally, apps like Robinhood or even Acorns offer lower-cost investing with minimal or nonexistent commissions on trades - but how do they do it?
Commission-free investing might sound like a free (or at least very minimal cost) venture, but the reality is that apps like Robinhood make money through a variety of other means - including through interest, rebates and making customers pay for premium accounts to gain access to exclusive investment options.
How Robinhood Makes Money Given its commission-free model and free account set up, how does the investment app actually make money?
1. Interest According to one the co-founders of Robinhood, the app makes a large portion of its money from interest made by lending out investor's idle cash - basically making money off of uninvested funds in customer's accounts. According to their site , Robinhood makes money from "interest from customer cash and stocks, much like a bank collects interest on cash deposits" as well as "rebates from market makers and trading venues."
Additionally, Robinhood charges for some other services - including live broker trading via phone (which will put you back $10 per trade) as well as some foreign stock transactions for around $35 to $50.
But Robinhood also reportedly makes a decent bit off of trades in other ways - including making money off of orders.
According to the Wall Street Journal in late 2018, "If a customer buys 100 shares of Apple for $200 each - a $20,000 purchase - Robinhood could get up to $5.20 for routing that order to electronic-trading giant Citadel Securities LLC, according to calculations based on a recent Securities and Exchange Commission filing," the article reads . According to The Journal's analysis of SEC filings, that's compared to some 9 cents that Schwab ( SCHW ) would make for the order, and 16 cents that TD Ameritrade would make.
2. Premium Accounts Robinhood Gold, the company's premium account, allows investors up to $1,000 of margin - allowing them to trade with more than they have in their cash balance on the app.
This is accomplished through margin lending.
3. Marginal Interest and Margin Lending A major source of income for the investment app is the company's margin trading service via Robinhood Gold - which starts at $6 a month, according to their site. The margin account's minimum portfolio value is $2,000 - however, there are different tiers.
If you want additional margin loans, you can pay $6 a month for an another $1,000 - and can continue borrowing money as the margin will be 50% your account balance (which is unusual for brokerages).