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In terms of how Robinhood makes money, it’s a little uncertain since they’re not a public company…but, it’s estimated they earn their money from their 6 million users in a few ways:
One: They make money from their Robinhood Gold service, starting at $5 per month, which offers you additional features, like margin trading, level 2 market data, research reports, etc.
Second: They charge a 5% interest rate on their margin accounts
Third, they make money from un-invested cash you have sitting on their platform.
Fourth, and probably the most controversial…is that Bloomberg says that almost half of Robinhood’s revenue came from a practice of routing order flow…
This is pretty much the practice where Robinhood itself doesn’t execute the stock trade, but they instantly outsource it to another company that pays for the right to execute those trades. Those firms usually earn a very, very small percentage off the trade…according to Bloomberg, that was $0.0024 cents per share,” but with $150 billion in trading volume, it adds up.
Besides that, they’ll make some eventual interchange fees with their cash management debit card, and I’m sure they have a few other things in the works…but I have no clue whether or not they’re actually a profitable company, and what they plan on doing to eventually expand into banking and lending services, etc.
In terms of where we go from here…well, IDEALLY, Robinhood fixes the glitch and sweeps it under the rug – and then keeps a close eye on for anyone else trying to exploit any faults or glitches within the system.
Like I said…mistakes and glitches happen, no one expects Robinhood to be perfect. But how they handle those mistakes is going to be an indication of how they’ll handle FUTURE issues, as well…which is inevitable, and it happens to every business out there.
I wouldn’t be surprised if Robinhood – and many of the other brokerages out there – changed the way Margin Accounts are handled. Realistically, there’s no rational reason why everyone is given the same access to margin…because if you have $2000, agree to pay for Robinhood gold, and a 5% margin interest rate, you can borrow up to 50% of your purchase to invest. In NO other industry would you be able to do that…so it doesn’t make sense that this would be the case for an asset like stocks, at least without a little more thorough background check.
Finally…let me say this. I have nothing against Robinhood, I use them, and I think they’re an overall great platform. If it wasn’t for them, I bet NONE of us would be seeing free stock trades today – we almost certainly owe that to them, and they’ve absolutely shaken up the entire industry in such a great way.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com