By: Eitan Lavian | Business  | 

Robinhood: Release the Inner Investor

When we receive money, whether it be as a birthday present or a paycheck, most of us initially react by asking ourselves what we’re going to buy next, always looking to spend more. This hasn’t always been the case, though. Bankrate, a financial-advice website shows that today, in contrast to generation X-ers (ages 36-51) and Baby Boomers (ages 52-70), millennials have the lowest number of active investors. Bankrate also notes that only one in three millennials (33 percent) is currently investing in the stock market, versus Generation Xers at 51 percent and Baby Boomers at 48 percent.

While it seems that older millennials understand the financial value of starting to invest one’s money at an early age leads to major financial gain, the general population is far from actually doing so. It isn’t entirely clear as to why the younger population is reluctant to invest their money. Researchers from Gallup assume the 2008 market crash and the market’s latest volatility contribute to this surprising this phenomenon, and Ally Invest believes anxiety is the major reason. Furthermore, the added commission fees do not help. Regardless of what’s causing the issue, with the help of their application, Robinhood, co-founders Vladimir Tenev and Baiju Bhatt, may help make a change.

Tenev and Bhatt were roommates at Stanford University. The two were closely involved in selling trading software to hedge funds and took issue with the fact that, in comparison to Wall Street firms who essentially pay nothing in order to trade stocks, a normal American is charged up to $10 for each trade. They were convinced that a project, like Robinhood, specifically tailored to the needs of the average individual involved with the financial markets is far more important than helping wealthy investors. The two decided to launch Robinhood, an online investing platform aimed at democratizing access to the American financial system, allowing one to buy and sell stocks, exchange-traded funds, options and cryptocurrencies with zero commission.

Released in Dec. 2014, the application started off as an invite-only platform, but with over 700,000 users on the waiting list, the company finally offered its services to the public in March 2015. That Nov., the company facilitated over $1 billion in transactions. In 2017, the company was valued at $1.3 billion, and has since quadrupled its valuation to approximately $5.6. The company intends to go public sometime in 2019.

Sleek and simple in design, the application caters to more than four million users with a sign-up process that takes only a few minutes. Users then link their bank account to transfer the amount of money they prefer and are then asked a series of questions to distinguish those who are investing for their first times in the hopes to limiting their financial risk. It also provides advice on whether one should buy, sell or hold a stock, and offers a timeline of the stock’s performance history.

Robinhood makes money in three simple ways. Firstly, like other brokers, Robinhood earns interest on un-invested cash in customers’ accounts, similar to a bank collecting interest on deposits. The company passes through any regulatory fees that incur with a trade, although the fees may be worth fractions of a penny, they still add up. According to co-CEO Vladimir Tenev, the company earns 2.6 cents per $100 traded. The company also offers Robinhood Gold, a margin trading service starting at $6 a month, in which customers are able to buy stocks with funds borrowed by a brokerage — a feature similar to the way one makes purchases with a credit card. The company illustrates this package by providing an example: For customers borrowing over $50,000 there’s an interest rate of 5 percent APR. If you borrow $125,000, you’ll be charged interest on $75,000 ($125,000 minus $50,000). The daily rate for borrowing $75,000 will be $10.42 ($75,000 times 5 percent, divided by 360).

Although it might sound to some as though one is guaranteed to make money, Robinhood does have its cons. Unlike other investment services, Robinhood tends to add $0.20 on each stock when placing an order. In addition, many have criticized the app’s slow software, noting many instances in which they have missed trades. However, if one is eager to invest, interested in the idea of owning shares of a company, or is just looking for a way to gain experience in the financial markets, it may very well be worth one’s time to download Robinhood. Keep in mind that you should only invest what you are willing to lose.



Photo Credit: Wikimedia Commons

Photo Caption:  The Robinhood logo