Robinhood Review: is it worth it? [2021]

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Published: January 17, 2021 by Andrew

Is Robinhood really worth it? Apparently the answer is yes: after all, the company has spent millions of dollars on marketing to present itself as the champion of traders and the sworn enemy of banks and trading applications that charge fees.

Even the name refers to the famous Robin Hood who stole from the rich to then distribute the booty to the poor.

But how are things in reality? An investigation by the SEC and, sadly, a suicide have highlighted all the limitations of the Robinhood model.

In this article we explain the pros and cons of Robinhood. To learn more, let’s compare Robinhood with other trading platforms that do not charge fees and have millions of customers.

An example? The famous eToro that even allows you to automatically copy what the best traders in the world do. In practice, thanks to eToro, beginners can get the same results as the best traders in the world and, if they want, they can also learn by observing live what the professionals do.

You can sign up for free on eToro by clicking here

What is Robinhood?

Robinhood is a trading platform that allows you to trade without paying fixed or variable commissions.

In practice, with this platform it is possible to buy and sell:

  1. Stocks
  2. Funds
  3. Etf
  4. Options
  5. Cryptocurrencies
  6. Gold

Who needs a trading application that does not charge commissions? Especially to those who have very little capital to invest and in fact Robinhood is aimed mainly at trading beginners.

Why can’t a beginner pay commissions? Let’s compare Robinhood with Directa, a very popular trading platform in Europe, because it invests heavily in marketing.

Well, Directa applies a fixed commission of 5 euros per transaction. If you start with € 250, you can make a maximum of 50 operations and then the entire capital will be burned. It must be said that at least Directa’s commissions are transparent.

This is why beginners who start trading online with small amounts do not have to pay commissions and in theory Robinhood could be a solution.

Robinhood Fractional Shares

In addition to trading fees, there is also another problem that afflicts those who want to start with a small capital: the cost of some shares is very high. To buy one Amazon share (a single share) it takes more than $ 3,000. If you start trading with 250 euros, you cannot afford it.

For this reason, Robinhood created Fractional Shares. As the name implies, these are shares of shares.

To simplify, Robinhood buys a stock and splits it into many shares which it then sells (at a profit) to its customers. In this way it is possible to make transactions even with a dollar.

This is undoubtedly a great advantage for those who do not have a lot of capital to invest. Unfortunately, it must be said that these Fractional Shares are a completely illiquid instrument and cannot be transferred.

Margin

The second tool that Robinhood makes available to traders with small capital is Margin.

In theory it is an advantage but must be used with extreme caution because the effects of any mistake can be truly catastrophic.

What is Margin in Trading? It is a practice in which the broker (in this case Robinhood) lends money to the trader so that he can buy stocks on the market.

If the operation goes well, the trader collects the capital plus the profit and can therefore repay the capital received on loan. If it goes wrong, he still has to return the entire capital received (and there are no discounts).

Robinhood does not lend 100% of the amount necessary for an operation but requires the trader to invest directly with a share. This share is called the margin.

The risk of margination is high, very high: if things go wrong you can find yourself with an immense debt that must still be paid.

Unfortunately, in June 2020, a young man named Alexander Kearns committed suicide after losing more than $ 730,000 in a margin option deal with Robinhood. The story is made even more cruel by the discovery that the young man was actually earning with other operations but that he had not realized it due to the complexity of the Robinhood interface.

Following this tragic event, the authorities intervened and forced Robinhood to make the interface more intuitive. A number of Robinhood’s other trader suicides are under the magnifying glass of investigators who have not yet officially established a link with the trading platform.

How does Robinhood earn?

If Robinhood doesn’t charge commissions (and has built all of its marketing on this very element) how does it pay the bills? Market transactions cost money, even if it doesn’t make customers pay for them directly. And then there are the software costs, operating costs, and colossal marketing investments that have allowed this platform to manage $ 20 billion with a few years of history (it was founded in 2013).

Robinhood makes money from various sources: first, there are transactions that still require the payment of commissions. Just read the terms and conditions to find out (obviously 99% of traders don’t read them). Then there are interest: when Robinhood lends money to traders, it collects interest.

These are the declared sources of entry. Unfortunately, however, Robinhood’s major source of revenue is much less transparent: the platform earns (a lot) by selling information on customer transactions to high-frequency trading companies that are able to execute them before the customer.

This practice came to light as a result of an investigation by the SEC (America’s Security and Exchange Commission) and will likely result in the payment of a heavy fine by Robinhood or a complaint. According to the investigators, the companies to which Robinhood sells data in a non-transparent way are Citadel Securities and Two Sigma Securities.

But why is the practice so bad for the customer? Suppose that he decides to buy a share and places the related order. The share costs 1 dollar. Robinhood passes the order to the high-frequency trading company which actually buys the stock for $ 1 and immediately sells it for $ 1.01. Probably the buyer of this share will be the same Robinhood customer who will find himself paying a higher price.

Alternative to Robinhood

The fact that Robinhood has a number of problems (we have introduced them but we will see them in detail later) does not mean that online trading is to be avoided, quite the contrary.

Trading, when done right, can be a very profitable investment. As those who have managed to be successful know well, the difference is often the online trading platform.

For this very reason, we’ve decided to review some of the best alternatives to Robinhood. They are all simple to use, safe and reliable platforms.

How do these platforms make money? In a transparent way: it gives a very small difference, called the spread, between the price at which it is possible to buy and that at which it is possible to sell a security.

Platform: etoro
Min. Deposit: 200€
License: Cysec
  • Social Trading (Copy the best)
  • Simple and intuitive
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: xtb
    Min. Deposit: 400€
    License: Cysec
  • Free demo
  • Whatsapp Group
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: iqoption
    Min. Deposit: 10€
    License: Cysec
  • Free demo without limitations
  • Minimum deposit low
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: ubrokers
    Min. Deposit: 250€
    License: Cysec
  • Free Training
  • Zero Commissions
  • ➥ Start
    1star 1star 1star 1star 1star
    Platform: trade
    Min. Deposit: 100€
    License: Cysec
  • Free demo
  • Free course trading
  • ➥ Start
    1star 1star 1star 1star 1star
    75.80% of retail CFD accounts lose money
    Platform: forextb
    Min. Deposit: 250€
    License: Cysec
  • Free trading course
  • Free trading signals
  • ➥ Start
    1star 1star 1star 1star 1star

    eToro

    eToro is actually the best alternative for those who want to start trading online from scratch.

    In addition to being a safe, reliable and completely free platform, eToro offers a more unique than rare possibility: that of copying, in a completely automatic way, what the best traders in the world do.

    eToro has in fact developed an innovative software, the famous Copytrader, which allows to identify the traders who in the past have obtained the highest profits with minimal risks.

    These traders can be selected for copying by the user: it will be the eToro software that will take care, in real time, of executing all the operations carried out by the professional traders he is copying in the user’s account.

    It is a particularly effective form of automatic trading that allows everyone to immediately obtain the same returns as a professional trader. In addition, copiers also have the ability to learn by observing what the best do and can even interact directly with them.

    You can sign up for free on eToro by clicking here

    ForexTB

    ForexTB is the other great option for those who want to start trading online without making mistakes.

    The platform is simple to use, without commissions and with the possibility of being followed on the phone, for free, by a true trading expert.

    The help that this expert can give is truly precious (it makes a difference, literally) and we advise everyone to follow the advice received to the letter.

    If you are looking for a coach to guide you in trading, you will probably pay him at least 500 euros per hour. And it is very likely that he is also a half-charlatan. With ForexTB you have a real expert at your disposal and it’s free. Not even for the phone call you have to spend, since he calls you.

    For those who want to learn trading thoroughly, there is the possibility to download an excellent course, completely free.

    The course is valuable because it explains everything you need to know to be successful in trading without taking excessive risks.

    The success of this course was impressive, it was probably one of the most downloaded trading books in Europe in recent months. Why? Because it’s free, it’s useful, it’s comprehensive, and most of all it’s easy to read even for a beginner.

    You can download the ForexTB book for free by clicking here

    The advantages of ForexTB are still many. Just to name at least one other, we point out the availability of a free and unlimited demo platform, particularly useful for gaining experience before starting to trade with real money.

    You can sign up for free on ForexTB by clicking here

    The problems of Robinhood

    We have presented some alternatives that really work for those who want to start trading online without making mistakes and, of course, without paying commissions.

    Robinhood’s idea of not charging commissions to its users is excellent, paying fixed commissions is always wrong, but there are some elements in its offer that could harm traders, especially the less experienced. Here’s what they are.

    Trading is not gambling

    One of the most serious problems encountered with Robinhood is not directly attributable to the app. The fact is, many would-be traders who sign up on Robinhood think it’s some kind of gambling or game.

    This type of approach is very dangerous, for various reasons:

    • Trading is not complex, but without any basic knowledge it is impossible to get a positive result. A minimum of study is always necessary.
    • Trading also requires a minimum of experience, to be accumulated with a demo platform (which Robinhood does not offer).
    • If you trade with instruments such as margin, trading losses can explode.

    Unfortunately Robinhood has never done absolutely anything to limit the approach of most of its customers, indeed it has probably also encouraged it.

    Terrible stories like that of the young suicide Alexander Kearns arise from this type of approach to online trading.

    The most serious platforms invest a lot to make the trader understand how trading works and above all to explain that it is not a bet. Robinhood should too.

    The sale of the customer data

    In the section on How Robinhood Earns, we have already explained that most of the revenue derives from the sale of customer transaction data to high-frequency trading platforms.

    With this mechanism, clients pay more for shares – it would probably have been cheaper for them to pay commissions directly with some traditional broker.

    The US authorities intervened: FINRA (Financial Industry Regulatory Authority) fined Robinhood with a fine of more than $ 1 million in December 2019. The SEC is also investigating and at least another $ 20 million in fines are expected.

    Security problems

    On several occasions, hackers have managed to penetrate Robinhood’s security barriers and empty user accounts. In 2020, according to official sources, the victims of these thefts would have been more than 2,000. Independent analysts have come up with even more tragic estimates.

    Technical problems of Robinhood

    Robinhood suffers from periodic glitches that knock out some features. In some cases, the blackout was total. Particularly painful for traders was that of March 2, 2020, as it was the day the Dow Jones set the daily gain record: Robinhood traders were unable to trade on the best day ever!

    Several judicial proceedings are underway with very high claims for compensation.

    The suicide of Alexander E. Kearns

    If up to now we have talked about improper practices, hacker thefts and technical malfunctions, now we have reached the most painful point, also from a human point of view: the suicide of a twenty year old boy.

    In his farewell letter, the young man blamed Robinhood for his act of allowing him to take so many risks that he accumulated a $ 730,000 debt that he was unable to pay.

    Following the Robinhood affair, he promised some changes but has not yet done anything concrete.

    Read also: Forex Course

    Robinhood

    Conclusions

    Robinhood has revolutionized, at least in appearance, the world of online trading: it offers the possibility even for beginners to trade without paying commissions. Currently the service is only available in the US but it seems that it will soon be accessible also for Europe.

    However, there are some shadows, such as the opaque business model, which came under investigation by the SEC.

    Furthermore, many times Robinhood traders end up viewing online trading as some kind of game or bet and thus lose money, sometimes even catastrophically.

    Online trading can be a very profitable investment but those who want to operate without errors must carefully select the trading platform and must devote time to study and practice.

    In this article we have presented trading platforms without commissions and with transparent conditions, particularly suitable for beginners such as eToro and ForexTB.

    What is Robinhood?

    A trading app available for Android, IoS, Apple Watch and Web

    Is it possible to use Robinhood in Europe?

    Not at the moment, it’s only available in the US. Soon it should also be available in Europe.

    How does Robinhood earn if it’s free?

    By lending money to its customers and, above all, by reselling the data of their operations (practice repeatedly sanctioned by the competent authorities).

    What is the best alternative to Robinhood?

    Probably eToro which even allows you to copy, in a completely automatic way, what the best traders in the world do.

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