Investing with Robinhood: The Allure and Controversy
What Is the Robinhood App and Service Model?
This is the first in a series of blogs about Robinhood. The financial market and technology community has been abuzz recently with the story about Robinhood, an app that allows mobile trading. Despite its popularity among its users, however, recent allegations have arisen that claim that this Robinhood steals from the poor and gives to the rich.
What the Robinhood App Does That’s Different
The company behind the Robinhood app, Robinhood Markets, Inc., is an American financial company. Robinhood is a FINRA-regulated broker-dealer, which is duly registered with the U.S. Securities and Exchange Commission. Revenue is mainly derived from three main sources: (1) interest earned on customers’ cash balances; (2) selling order information to high-frequency traders (which is a practice that is currently under SEC investigation); and (3) margin lending.
Even though the Robinhood app has been around since 2015, the app only recently sprung to national news this past month due to a trading controversy concerning dwindling GameStop stock. While many remember that Robinhood’s original claim-to-fame was the ability to offer commission-free trading of stocks and exchange-traded funds, the service also allows instant deposits, which credits basic users up to $1000. While the funds would originally take approximately three days to appear via ACH transfer, Robinhood now also offers deposits of up to $50,000, instantly, although it is only available to its premium-tier subscription plan holders.
The Draw to the Robinhood Service Model
In response to Robinhood’s service model, many major brokerage players such as E-Trade, Charles Schwab, and Ameritrade also announced that they were eliminating trading fees. Robinhood is also relatively well-known among cryptocurrency traders and currently boasts a waitlist of more than 1.25 million traders who want to use its commission-free trading services for cryptocurrency transactions. Additionally, in 2018, Robinhood announced entrance into the banking sector by offering checking and saving accounts, debit cards, and other “cash management” services. In our next post, the controversies surrounding Robinhood will be dissected.
Key Takeaways on the Robinhood App
It is important to know what the Robinhood app is, because:
its service model caused other companies to eliminate fees related to trading;
it is a major player in cryptocurrency trading; and
it was recently involved in a controversy over GameStop stock that led to widespread criticism overs its handling.
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