Is Robinhood a good brokerage? A frugal review
Updated on 10/30/21.
Robinhood is a brokerage platform that launched as a smartphone app in 2015. It was one of the first brokerage platforms developed specifically to optimize trading on a smartphone interface, whereas traditional brokerages had rather rudimentary smartphone apps. Robinhood’s original claim to fame, however, was in offering commission-free stock and ETF trading. This was unheard of in the industry at the time, and it wasn’t until years later when other major brokerages began offering commission-free trading as well.
Today, Robinhood remains extremely popular among retail investors, namely younger investors, first-time investors, and “meme” investors, and although it is no longer unique in offering commission-free trades, it is still renowned for its ease of use and accessibility. As of 2020, Robinhood is estimated to have about 13 million users, with about $20 billion in total assets under management. Robinhood is currently a privately-owned company, although it is expected to go public in the future. How does Robinhood compare to more traditional brokerage platforms, such as Vanguard, Fidelity, Charles Schwab, and TD Ameritrade? Find out in my Robinhood review.
History
Founded in 2013
App officially launched in 2015
Began offering free stocks to new users and new referrals in 2017
Introduced commission-free cryptocurrency trading in 2018
Introduced fractional shares and automatic dividend reinvestment in 2019
Introduced cash management accounts in 2019
Introduced automatic recurring investments in 2020
Introduced access to certain initial public offerings in 2021
Features: 3/5 stars
Robinhood’s bread and butter feature is that it offers commission-free stock and ETF trades of stocks and ETFs listed on major U.S. exchanges. However, only long positions in stocks and ETFs are allowed. Robinhood does not offer over-the-counter (OTC) stocks, commonly known as “penny stocks”. Other features include:
Offers fractional shares of many stocks and ETFs.
Offers commission-free cryptocurrency trades. Robinhood currently supports buying and selling of 7 cryptocurrencies: Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic, and Litecoin. It is unique amongst brokerages and cryptocurrency exchanges in allowing trading of traditional equities and cryptocurrencies in the same account.
Offers simple and multi-leg options trading, up to level 3.
Market and limit orders types available.
Has a cash-management account which can earn interest on uninvested cash.
Offers dividend reinvestment and automatic investments.
Interface: 5/5 stars
One of Robinhood’s most notable traits is its smartphone app interface. It is intuitive, easy to use, and very responsive. The main page shows account balance, buying power, and current positions. Below that it displays a customizable watchlist. Clicking on any ticker will open a new page with a rudimentary chart, stats, news about the company, and analyst ratings. Tapping the trade button will show various order types as well as the options chain (if available).
Main screen. Behold my incredible account balance.
Watchlist
Available order types
Individual stock page
Robinhood’s options interface is, in my opinion, exceptional for a smartphone app. Robinhood makes it incredibly easy to see the entire option chain, look up the “Greeks” of individual options, and place single and multi-leg option trades with just a few taps. Most other brokerage platforms have yet to come up with a decent way of displaying an option chain on a smartphone, and placing option trades is often convoluted and unintuitive. If you’ve ever tried to look at an option chain with any other broker’s phone app, using Robinhood for the first time will be a breath of fresh air. Robinhood’s smartphone option interface remains light-years ahead of its competition.
Easily scroll through the entire option chain showing all strike prices
One click shows Greeks for any particular option
Entering a spread trade immediately shows the P/L chart
If I were to rate Robinhood purely based on the interface of its smartphone app, it would easily get 5/5 stars. In fact, I find myself using the Robinhood app just to check option prices.
Limitations: 1/5 stars
Unfortunately, Robinhood has a number of significant limitations. Despite its popularity, I do not consider Robinhood to be a fully-featured brokerage platform, nor is it a fully-featured cryptocurrency exchange. Some of these limitations include:
Does not support mutual fund, index fund, fixed-income asset (bonds), or futures trading. Lack of mutual fund and bond support makes Robinhood a non-starter for most serious, long-term investors, although it is possible to build similar portfolios using ETFs instead.
Does not support some advanced order types, such as conditional orders.
Does not support short selling stocks. Only long positions are allowed.
Only allows up to level 3 options trading (multi-leg options). Does not allow level 4 trades (selling uncovered/naked calls or puts). This is probably a blessing in disguise for novice investors.
Does not provide access to underlying cryptocurrency coins! Cryptocurrencies bought through Robinhood cannot be withdrawn to a private cryptocurrency wallet or be exchanged for another cryptocurrency. Cryptocurrencies obtained elsewhere cannot be transferred to a Robinhood account for trading. Robinhood’s cryptocurrency trading occurs in a closed, “walled garden” environment, where the user does not have full control over their assets. For this reason, I strongly advise against using Robinhood as a cryptocurrency exchange until it offers deposit and withdrawal functionality.*
Very limited charting capabilities for traders interested in technical analysis.
Very limited customization options for app or website interface.
Margin trading requires a Robinhood Gold subscription plan, which costs $5/month in addition to margin interest.
Robinhood offers in-app and email customer support only. There is no telephone support.*
To be fair, some of these limitations, such as advanced order types, lack of level 4 options, and no short selling are very unlikely to be relevant to new investors.
Fees: 5/5 stars
Robinhood’s main attraction remains commission-free trades on an easy-to-use smartphone app platform. Although most brokerages now offer commission-free stock and ETF trades, Robinhood remains unique in offering commission-free trades on options and cryptocurrency as well. For example, Fidelity charges $0.65 on every option trade, and Coinbase charges a hefty % based fee on every cryptocurrency purchase:
Crypto exchanges like Coinbase charge hefty %-based fees…
… brokerages like Fidelity charge $0.65 commission on option trades
Therefore, Robinhood still has a leg up on its competition when it comes to fees. Robinhood does charge certain fees for some amenities, such as overnight checks, mailed paper statements, as well as the previously mentioned Robinhood Gold subscription. A full list of Robinhood’s fees can be found here.
Controversies: 0/5 stars
Robinhood has faced some significant controversies recently.
Payment order flow. Payment order flow refers to the way that a broker routes your order through market makers so that you obtain the best possible price. A market maker, in layman’s terms, is the “broker’s broker” - the entity that actually fulfills an order on Robinhood’s behalf. Robinhood is believed to route its orders through its preferred market makers in exchange for compensation, which is how they can offer you commission-free trades in the first place. This means that instead of finding you the best possible price on the market when your order is placed, Robinhood may instead route your order to another market maker for a slightly worse price. Getting the best possible price for a trade is something known as “price improvement”, and many brokers will provide their price improvement data, but Robinhood does not.
My Fidelity account, showing price improvements.
In the absence of commission, Robinhood generates much of its revenue from payment order flow, but is not transparent about it, whereas some brokerages offer transparency. When Robinhood first launched, many people felt that commission-free trades were too good to be true. It is likely that any commission savings on Robinhood are offset by lack of price improvement on order execution. They are currently subject to a class-action lawsuit on this matter.
Service outages. Robinhood has experienced several service outages, preventing users from making any trades at all. This is especially damaging to options traders, whose positions can be extremely time and price sensitive. For example, Robinhood suffered multiple outages in March 2020, including an all-day outage on March 2, 2020, in the midst of significant volatility during the COVID-19 related stock market crash. This is all the more devastating for an internet-based brokerage where there is no way to reach an actual broker to execute trades on your behalf. This event precipitated one of my friends to leave the Robinhood platform entirely, as inability to close out options positions can be incredibly dangerous.
Robinhood users were not pleased on 3/2/20
Poor customer support. In June 2020, a 20 year old student committed suicide after seeing a -$730,000 balance on his Robinhood account, when in reality, his account had about $16,000 in it. He was thought to be trading option spreads, and in a spread trade, his maximum loss is actually capped by the difference in the strike prices of the two option legs. Unfortunately, this was not displayed correctly by the Robinhood app. This event is all the more tragic because his actual losses were just a fraction of his displayed account balance, and any other brokerage platform would have displayed it as such (I know this from personal experience when one of my SPY spreads on Fidelity went south - the maximum loss is capped just as designed). This simple display error might have been easily recognized by a more experienced options trader, or a customer support representative at the brokerage. Unfortunately, the student spent all night sending increasingly frantic emails to Robinhood which went unanswered, and he was unable to escalate his inquiry due to lack of any phone customer support. This event made national news and his family are suing Robinhood.
Restriction on trading. During the 2021 GameStop short squeeze, Robinhood restricted the trading of certain stocks, including GameStop. I discussed this briefly in my GameStop article as well. While Robinhood’s motivations in doing so remain unclear, many people on popular internet forums theorized that it was done to protect Citadel LLC, a financial services company and one of Robinhood’s market makers, who also had significant investment in Melvin Capital, one of the hedge funds most affected by the squeeze. Therefore, Robinhood was accused of market manipulation in order to protect its own market maker and its wealthy hedge fund backers, in direct contrast to its mission and slogan of “Investing for Everyone”.
Robinhood email 1/28/21. We won’t let you buy certain stocks in order to “best continue serving you”. Riiiiight….
This action led to an unimaginable moment: Ted Cruz publicly agreeing with AOC on his twitter account:
When these two agree, you know your actions were egregious.
“Gamification” of trading. Due to its overall popularity stemming from its marketing, commission-free trading, accessibility, and interface, Robinhood has been accused of promoting the “gamification” of trading rather than traditional investing principles. This is not a specific controversy per se, but a common general criticism of Robinhood.
Final verdict: 2/5 stars
Overall, my opinion of Robinhood is mixed at best. It offers unparalleled accessibility and ease-of-use. Its smartphone app is very slick, and its options interface is the best available on a smartphone. Its biggest selling point, commission-free trades, is still its bread and butter, and although most of the industry has now adopted commission-free stock and ETF trades, commission-free options and cryptocurrency trading remains industry-leading.
Unfortunately, the lack of mutual fund and fixed-asset support is a deal-breaker for many conservative, long-term “buy and hold” investors, and ultimately the platform encourages trading rather than investing. On the other hand, the lack of many advanced trading features also makes it unattractive for real professional traders. It is also not a true cryptocurrency exchange, with an extremely limited selection of coins and no deposit or withdrawal function. Therefore, it sits in a weird niche in the brokerage marketplace, and it’s easy to see why its user base trends towards a younger, perhaps more impressionable demographic which is more likely to be involved with speculative and “meme” stock investing. Finally, its spotty track record and numerous controversies don’t inspire confidence. Unfortunately, my verdict is that Robinhood’s limitations are too much for its perks to overcome.
For serious investors, I would recommend a “real” brokerage with better features and customer support. I do have a Robinhood account, but I do not use it actively. Instead, my brokerages of choice are Vanguard and Fidelity, although there are many other quality brokerages available. I recently wrote an article comparing three popular retail brokerages (which are not Robinhood).
Regardless, if you want to give Robinhood a try, consider signing up with my referral link. There’s no downside, and we’ll both get a free stock in return! Thanks for reading, and happy investing!
*Updated on 10/30/21: In a blog post on 9/22/21, Robinhood announced that it will implement cryptocurrency wallets which will allow send and receive functionality. This function is not yet live, but users can join a waitlist to be among the first to test it. On 10/5/21, Robinhood introduced 24/7 phone support. This feature is now live in the app, although it appears that you cannot call Robinhood directly. Instead, you can request a call from Robinhood, and Robinhood will show your estimated wait time.
