1) Large number of users
2) Large number of younger users (Millennials love Robinhood)
3) High amount of use per user (due to no fees)
They are still a growth company. If they add IRAs (they said they would soon), Website (currently in closed beta), Options (currently in closed beta), and OTC (not sure if they will), then they'll likely be the top broker for individuals.
Managing both my banking and investments at Schwab allows me to keep $0 in my checking account, and make use of their overdraft transfer feature to debit my investment account whenever I make a purchase or bill payment from it. If there's insufficient cash in my investment account at the time of the debit, I have the option to cover the remaining amount with margin borrowing, which usually ends up costing cents in interest since I generally sell a few shares to cover for it in the same day (trades take 2 days to settle though, so some interest will still accrue). I feel that's a tiny price to pay for the ability to keep myself fully invested as much of the time as possible, and practically speaking, I rarely ever have to resort to margin borrowing anyways since I time my bills to match my direct deposits (which go directly into my investment account).
Essentially this means I only have 1 account to worry about to manage all my finances, and don't have to juggle money around between a checking account for spending and investment account for growth. This might not sound like it'd make much of a difference, but I honestly can't imagine ever going back to managing my finances the old fashioned way with multiple accounts. Needless to say, I can't see myself switching to a new brokerage that doesn't also offer cash management features of the same caliber (and AFAIK, Robinhood doesn't, but I'd love to be corrected).
If you buy a 30k car/tuition one day (depending on how much you have invested, this could be a lot of leverage!), and the market crashes by 50% the next day, would you be ruined? It's possible that even if the stock immediately recovers from some flash crash, you'll have insufficient collateral and the positions will be closed. (Locking in huge losses at the worst time during some irrational panic)
I suppose this is no more risky than buying something on a credit card, then selling a stock to pay off the card after a month. Still, Schwab can't get your credit card balance and close a position in real time, whereas they can with this leverage strategy.
> It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year)
Essentially you should have a 6 month runway. If you have 25K cash and 50K costs per year then the $25K will buy you 6 months to get yourself over a layoff/health issue/etc.
Just a small point because it's a rule I live by and you freaked me out for a moment thinking the advice/goalposts had move way beyond what I've saved for.
In both scenarios, let's say we have 60k in stocks to start.
Starting point: 60k stocks
Scenario A: 1 car, (30k car loan), 60k stocks
Scenario B: 1 car, 60k stocks, (30k debt in margin account)
Let's say the market drops by 50%, then recovers by 100% overnight.
Scenario A: 1 car, (30k car loan), 30k stocks
Scenario B: 1 car, 30k stocks, (30k debt in margin account)
Position is closed, so now Scenario B is: 1 car
In the morning, the world goes back to normal:
Scenario B: 1 car
While we had the same amount of debt in both cases, in scenario A, there's no instant way for the car loan provider to instantly declare that you don't have liquidity at midnight.
It's definitely more risky than that. With the credit card strategy your maximum loss is whatever the interest rate on the credit card is. The stock market could drop by a much larger amount.
You might also be able to mail checks written against a brokerage account with that option enabled, but mailing checks sounds like a pain. I know that Vanguard's brokerage account allows both check writing (with a $250 minimum) and direct deposit, but that doesn't quite do enough for running your life out of one account.
>whenever I make a purchase or bill payment from it
FWIW, if you have access to credit cards, you should pretty much always use a credit card rather than a debit card.
This is pretty much exactly what I used to do, but the user experience of managing cash from my investment account directly is dramatically better than having to juggle cash between different accounts through ACH, in my experience. Even if I didn't value staying fully invested as much as possible, I'd probably still choose to keep those extra few months of expenses as cash in my investment account just for that experience alone. Though admittedly Schwab wouldn't be the best choice for that usage pattern, because their interest rates for cash are rather pathetic.
> FWIW, if you have access to credit cards, you should pretty much always use a credit card rather than a debit card.
Agreed. The only things I pay for with debit directly are things that won't let me use a credit card, like for rent.
Schwab's margin rates are on the high side, starting from 7% and up, but even then if you're borrowing for 2 days at a time the cost ends up being negligible (about ~$1 for every ~$3000 borrowed). At the very least, it's much better than most overdraft fees/lines of credit. Though if Interactive Brokers were to offer a bank account, I'd be very tempted to switch with their amazing margin rates.
What's stopping me from using IB is the $10/month commission minimum. It's waived at $100k account balance, so I plan on switching over then.
IB just started offering some kind of debit card. I don't use it, but I keep getting notifications from them about it.
Can you do bill payments directly from an IB brokerage account? I think that might be the final missing piece for me, but I'd love to be wrong about that.
Contrast that to Wealthfront, Betterment, or Acorn - they're all built on the "buy and hold" philosophy. They use technology to automate allocation, tax reduction and rebalancing, while investing solely in index funds. How these two trends play out is fascinating to watch.
One idea I often hear is that the more money that is being managed passively, the easier it is becomes for an active manager to "abuse" gaps in the market (i.e. when all these funds liquidate all their assets the same time, across the board -- not looking at whether you're selling Google or SmallCapX).
If everyone is passive, price discovery would be harder but not impossible. But there will always be traders who think they can gain an edge by going active, right?
Their pr message is priceless but a sham. The users are the real product, with all that we know goes with that.
To be fair, the other brokerages probably do the same exact thing and get $7 on trades.
Am I wrong? Is there downside for the typical consumer in all of this?
Where's your source on this because that is blatantly illegal- so I don't believe you.
I have the Robinhood app but haven't made any trades yet. I had to turn off push notifications for things like "Snapchat declined 5% today". That kind of thing is what causes people to trade on their emotions, a great starting point for losing money in the long term. Instead of buying low and selling high, they end up doing the opposite.
I think Robinhood is great for that! Zero commission means you can afford to buy small amounts without worrying about fees eating into your principal too much.
You can put in $250 every pay period and buy a share of $SPY without losing ~3% to fees.
With commissions involved you'd want to wait until you could afford a larger trade, at which point you've lost time in the market.
There's a broad spectrum of public companies obviously, but it's hard to see $AAPL as speculative in the same sense that people call penny stocks or cryptocurrencies speculative (i.e. much, much more risk involved in the latter two). Investing in large cap equities isn't the stupidest thing you could be doing as a new investor - that award would certainly go to buying derivatives.
And indeed if I have criticism of RH it's that they're trying to appeal to all investor types at the same time, new and experienced alike. It's easy to see how new investors can get confused when RH offers the ability to sign up for cryptocurrency trading and options trading, two things new investors obviously should not be doing (though admittedly there's obviously a questionnaire involved before you can be approved for options trading, not sure about cryptocurrencies).
More than 90% of my investments go into index funds and 10% into individual stocks, but if hindsight was 20/20 it would be 100% into my individual stocks and I’d be retired on my own private island today.
In which case, of course, you should invest entirely in the highest rate-of-return investmentd that the rest of the market currently undervalues.
The problem is people are prone to overrate their own foresight.
But yes most people are better off buying index funds. That's where most of my money goes.
I don't think Robinhood is terrible. I just think someone who doesn't know what they're doing would be better off starting with Betterment or Acorns, which are just as user friendly as Robinhood.
Viewed another way, I would say the Vanguard fund costs are low for a reason. It seems unfair to expect a Mercedes experience for a Honda worth of expense ratio.
If you sign up with Vanguard, you still have to pick which fund(s) to buy. If you don't know anything about investing, that can be a daunting task. With Betterment, the only decision you have to make is the percentage split for stocks vs. bonds.
With regards to my friends though, my priority was to get them to invest in the first place, and the user friendliness of Betterment helped a lot.
The lack of financial education in the US really makes me sad sometimes. And it pisses me off that companies like RH will take advantage of that.
This is literally what happened to me. I lost out on 20%+ in gains because I procrastinated a year after reading about how much Betterment fees eat into your gains. In hindsight the amount of money I missed out on was WAY more than any fee Betterment would have hit me with.
I think for most people this actually ends up producing better long term returns.
Even a slight difference in fees is worth thousands in the long run.
Robinhood's encouragement of the instant gratification, poorly researched trades is going to end badly for many of it's customers when we enter a bear market.
Edit: I also forgot an increasingly important diversification by asset manager as well.
Vanguard has long offered commission-free trades of their ETFs and mutual funds. Same for many index fund providers.
I played with the Robinhood app before as well, but stopped using it after a couple weeks because it's just more of a novelty than a dedicated investment platform with all the features I want. I can see how some people that don't want all the complicated financial markets stuff would enjoy it though. If people think $0 trading is a short-cut to becoming a millionaire day trader though, they are in for a very bad time.
So rather than putting even more in these I wanted to research and invest directly in a handful of stocks long term. I used to use Scottrade for this. That’s not too bad $7/trade ($14/round-trip).
If I’m making a sizable enough investment that won’t matter too much. But what if I only had $24 this week? I could buy one share of Ford on Scott-trade, but then I’m upside down until the price doubles (e.g. forever upside down).
With Robinhood I can make buys no matter how small the purchase.
I have on occasion though found them useful where I get a notification that X stock is down Y% today. Most of these have been bad market days and I’ve said, “Nice, I’m long on X and it’s on sale today so I’ll pick up a few more shares.”
So on the one hand I understand how these could lead to a rash decision from some I don’t think Robinhood is trying to get people to buy high and sell low.
And this is exactly why these sorts of people will continue to remain low-net-worth individuals. Far be it for me to tell anyone what to do with their money to have fun, but these are exactly the sort of people who should be targeted for an easy to use solution that just auto deposits some amount of money into an index fund or target retirement date fund every pay period. It might not be "fun", but they'll be pretty happy later in life when they actually have retirement savings.
I was living with my sisters kid and set him up with a Robinhood account and stuck a few hundred in it. I explained things a bit and he was still sure he could time the market just with SPY and QQQ. He could not. I guess it is good people have a playground to learn that they really don't know what they are doing before they become my uncle.
When the market gets more volatile or if there’s a sharp downturn, that would become a big issue. Not sure they had to address this yet because since 2014 their founding year the market had been on a smooth, upward trajectory. A recession however is already around the corner.
The number of times this ever happens is outweighed a millionfold by the frequency of times where people incorrectly believe this to be the case.
What happens in the vast majority of cases is that people believe they’re making money, but after fees are actually losing to index funds. Or people believe they’re making money, but lose their shirts the moment the market turns sideways. Or people do succeed due to completely random chance, but the level of risk they took on to make that return is significantly higher than other investments with comparable returns.
Reminder from Random Walk Down Wall Street; Professionals rarely beat the S&P 500 Index on a time horizon. It's statistically likely, that if a professional fund does beat the index one year, then it will underperform the next year.
Fidelity’s internal survey revealed that best performance correlated with low account activity http://www.businessinsider.com/forgetful-investors-performed...
On a side note, zero-fee instruments are not that rare for brokerages nowadays. Fidelity itself lists 3,691 mutual funds https://www.fidelity.com/fund-screener/research.shtml and 93 ETFs https://www.fidelity.com/etfs/overview as fee-free, and I think they're not even the leader in the space.
Other services that are built around long term investing provide additional features like automatic rebalancing and dividend reinvesting. An API could allow you to emulate those as well, but at that point, it seems like you might as well just use a robo-advisor instead of building your own on top of an API.
This is telling to me. If they have opt-out notifications nudging users to make various day-trades, they're in shady territory. Kind of the opposite of Robin Hood.
It's not as good as Betterment/Wealthfront/Hedgeable because you can't rebalance, reinvest dividends, or get fractional shares.
If so, with VTI trading at $140, you would need about 250 shares to buy a share with each dividend.
"When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase can't be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services."
Right. I mean you can't do this on Robinhood.
I admire people for investing their money actively instead of in an index.
It is the closest you can come to the capitalist spirit without actually doing anything. (Not a slight - not everyone needs to "do something" in the sense of starting a business - but being an active investor is very close to the same.)
Actively investing takes guts and a kind of entrepreneurial risk-taking.
Because you make more money in index funds with comparable security?
Bonds used to be the principal way to save and invest in the past when interest rates were much higher. Its honestly a bit of a shame that as a society loaning money to the government is such a poor investment - it more reflects on the failings of the state if there is literally nothing profitable they can do with money to justify a competitive return. States can do pretty much anything a company can and more, and in a perfect world would be the best managers of capital. Thats where concepts like single payer healthcare come from, after all.
And add to that that not everyone wants to be a capitalist. Index funds are specialization of labor - let the teachers teach and the doctors save lives while their money is invested and managed by people who are good at tracking markets.
That being said, financial advisory in general is adjacent to such prestigious professions as televangelists and online poker in my mind - the most successful in the business have almost no correlation with actually sane analytical expertise and more to do with who can advertise the best. Fundamentally it is all making educated guesses, and until shit hits the fan people flock to whoever boasts the most rather than whoever is nuanced and rational, at least until after a stock crashes or a market tanks.
Thanks for taking the time to reply! I'll reflect on what you've written.
It's good that most Robin Hood investors are young and don't have much to lose. I hope they learn their lesson before they put they are old enough to put their retirement investments at risk.
Hyperbole much? There's plenty of capitalist spirit in placing your trust in the outcomes of markets. Specialization is a perfectly rational economic decision, and requires you not specialize in other things. There's no reason to believe a medical doctor for example is going to excel at active investing, or that society would be better off if we required it.
The wonderful thing about markets is that we can all benefit from the specialization of others. Specialization (and competition) produces cheap pencils, cheap food, and even stocks that are closer to fairly valued. It is a fundamental misallocation of human capital -- I'm better off further pursuing specialization in server administration than trying to stare at stocks and newsfeeds to separate information from noise.
RobinHood is aggressively going after the young and naive "investors" who will quickly be parted from their money.
Obligatory Tweet: https://twitter.com/robinhoodapp/status/756262680537759744
Yes, commission free trading is a complete gimmick and probably bad for you. But they have a $5bn company and I don’t. That is far more value creation than simple armchair criticism.
Yes, it’s “just” a trading app. But simplicity is hard and they have threaded that needle incredibly well. They are selling a commodity service but they know how to reach an audience that none of the incumbents can come close to touching.
My real thought is: what other industry can you do this to?
Not necessarily. It's not value creation when you are creating a bubble and letting people do things they probably shouldn't be doing.
Did it end up to be "value creation" when banks were allowing people to buy houses with 0% down and variable interest rates?
Because from what I hear other people saying about Robinhood, they are making money from interest on margin trading. Meaning they are encouraging their users to be trading on margin and then act like "trading is free, see no commissions!". Yeah that's great until you have millions of people invested long on margin and then the market tanks and they end up losing more than they even had.
So yeah, not too sure about the value creation here...
Use interactive brokers if you want a good price. Flat fee is higher but the trade routes are great.
That's FUD (and I'm an Interactive Brokers user). That sort of routing flashes your trade to groups before it hits the exchange, and they have the option to take it. By regulation they can only take it at or better than top of book price. If they don't take it, it will hit the exchange.
Look, Interactive Brokers is a great brokerage. Very usable software and API, best in class commissions and margin rates, and you get direct routing and their smart router works pretty good too from what I understand. But don't oversell it by bashing RH.
I actually assumed they were selling order flow. They have a ton of dumb money that many firms would die to interact with.
Also, for most people who trade 100-1000 shares it doesn't really matter.
Better to just pay a flat fee and get better routing.
IB doesn’t sell their order flow but they do take payment from dark pool operators & liquidity providers.
After 2 months of waiting I emailed support, and they said my account raised a flag and that's that. Nothing more I can do.
With Capitol One Investing going away I wanted to send my portfolio over.
Stock trading shouldn't have the same customer support issues Google is known for.
it might be invite-only, not sure, but I have been using their web app for 3 weeks.
Will probably never really use it over the Android App, but glad it exists.
I think RH is great way to learn and enter into stock markets. You only learn by trading and losing money.
I also think they shouldn't have entered crypto now. Its too early and it just makes RH look more of YOLO traders/gambers targeted app.
Or are they somehow insured against that risk? I'd find that hard to believe.
I imagine it's for the reason you stated until they get the security protocols in order. Not sure how they're getting around SEC approval, unless it's something sort of like an IOU loophole where you can only sell the IOU, but not redeem it for the coins yet per their terms of service?
I have no clue.
As far as monetization goes, even if robin hood was $5-10/month it'd still be fun for a beginner investor like myself, i just dread the idea of per-trade fees on my single-stock purchases.
For example, every exchange can have the same quote, but a different liquidity fee.
And despite having a small fraction on the market share and a small fraction of the markets available, RH raised at the same value as IB'S market cap. The only reasons I can think for this is that RH has a plan on how to become scummy like etrade, or SV doesn't know how to value brokerages.
It looks that the RH Financial LLC is good enough capitalized but I wonder why they split up into 3 different entities? Or is that usual practice?
The latest SEC filing for RF Financial: https://www.sec.gov/Archives/edgar/vprr/1701/17016683.pdf
So, places where an user's exp with the business is individualized- like in this case.
Maybe that isn't their intended audience, though.