Robinhood is a free stock trading app that is sweeping the globe. It's already worth more than $5 billion on paper, just closed another massive round of funding at a valuation of $6 billion or more, and its user base is expanding faster than ever.
But how do you make money using Robinhood? In contrast to traditional stockbrokers, who profit by selling your orders to a high-priced market maker, Robinhood earns interest on the cash and assets in your account.
How to Make Money on Robinhood?
Robinhood provides a variety of financial solutions that can be utilized to earn money. Here are a few examples:
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1. Through Dividends
It is likely that you will pay your dividends with stocks and ETFs purchased on Robinhood. Dividends are normally paid quarterly and are automatically deposited to your account's cash balance.
However, the same dividends can be used to purchase further shares. Robinhood allows you to use this dividend reinvestment function if you have your fractional shares activated.
You will earn compound interest on this reinvestment. So you can look for and invest in dividend stocks offered by a company that assures dividend payments.
2. Asset appreciation
All investors profit by following the general investment idea of "buy low and sell high." This means that you buy a stock or an ETF at a low price and then sell it for a profit later.
To profit from asset appreciation, you must have the market on your side. As a result, if the overall market is down, all investments will suffer.
3. Crypto investing
Users can also make money by trading in cryptocurrency on Robinhood. Cryptos, on the other hand, allow you to profit from asset appreciation.
Given the volatility of the cryptocurrency market, you are likely to profit. However, it is also possible that it will cost you money. As a result, investments should only be undertaken after extensive investigation.
4. Robinhood IPO Access
Robinhood allows its users, or regular investors, to invest in IPOs and profit from them. Users can look up which IPOs are available and request the number of shares they want to buy. The rest is analogous to asset appreciation.
5. Interest on Savings
Robinhood's cash management tool allows consumers to earn interest on their idle cash. The platform allows users to earn interest on their account deposits.
Furthermore, it serves as a one-stop shop for consumers to pay bills, send checks, be paid, and earn interest. Robinhood collaborated with FDIC-insured institutions to develop these features.
How Much Can You Make With Robinhood?
If you had purchased $10,000 in Apple stock when Robinhood first launched in February 2015, it would today be worth $14,360. That's a 56 percent return in around 25 months ($340 each month).
In comparison, the same money put in an ETF that tracks the S&P 500, such as SPY, would be worth $14,345. There's not much there, but keep in mind that the money you don't invest with Robinhood will earn interest somewhere else.
To make more money on Robinhood, you must invest more money. There are a couple simple ways to accomplish this:
- Keep the free money in your account and only pay interest on it. How much is it? Apple now offers a dividend yield of 5%, which implies that the $10,000 investment from above would bring in an extra $500 every year.
- Put your money in a bank that pays interest. Ally Bank is arguably the best option here, as their savings account now yields 1.35 percent and offers a $150 sign-up bonus. Their checking account earns interest as well, but you must deposit more than $15,000 into it.
- Put part of your money in a high-yielding savings account with a trustworthy bank, such as Barclays or Synchrony Bank. They both pay 1% interest and give a sign-up bonus of up to $200. If I recall properly, the initial transfer is free, but the return transfer is not.
You can do this to put more money into Robinhood and spend the interest you'll earn on it, but there's a catch: due of the way Ally works with external banks, you can't buy stocks with an external bank account. After moving cash into Ally, you must withdraw them from the external bank.
What About Stocks, ETFs, Options etc?
Robinhood only allows you to invest in individual stocks; there are no ETFs or options trading. You can purchase partial shares of stock, but your account must be funded before you can place an order!
Remember that Robinhood is only available as a mobile app, so you'll need an iOS or Android device to utilize it.
Robinhood makes money by selling Gold memberships. Robinhood Gold is a premium membership service offered by Robinhood. It costs $6 per month and allows you to borrow up to double the amount in your account (in this case, $20,000) and sell stocks short (bet that the price goes down).
You can also trade on margin, which means you can buy stocks using money that isn't in your account.
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How Long Does it Take to Make Money on Robinhood?
Making money with Robinhood happens practically instantly. When your stock increases in value, the value is reflected in your account shortly after the market closes (5 minutes before midnight UTC).
If you sell a stock for more than it is worth, the money will be sent into your account within one business day. You can immediately use that cash to purchase another stock.
If you own a stock for less than a day, I believe it is considered a short-term gain, and the tax rate is similar to your regular income tax bracket. If you keep it for more than one day, it is taxed at 0%.
What About Commissions on Robinhood?
Robinhood does not charge commissions when you purchase or sell stocks. Because other brokerages charge $7 each trade (plus $20 in many cases if you're not an active trader), this may be the only way they make money.
Robinhood Gold costs $6 per month and allows you to borrow up to double your account balance (in this case, $20,000) and sell stocks short (bet that the price goes down). You can also trade on margin, which means you can buy stocks using money that isn't in your account.
How Long does it Take for Money to Leave Robinhood?
If you sell all of your stocks, the money will leave your account in around 5 business days. During that period, the funds will be held in limbo because Robinhood is unable to send them outside of their site.
There is no charge for this, but if you sell enough shares to reduce your account balance to less than $2,000, Robinhood will levy a $10 account closure fee.
What’s the Catch With Robinhood?
The main disadvantage of Robinhood is that you cannot trade ETFs or options. You can only purchase individual stocks and have access to US markets (no international stocks).
Furthermore, in order t trade, your account must be funded at all times. If your cash balance goes below $2,000, you will be charged a $10 account termination fee.
How do I Double My Money on Robinhood?
There are several methods for doubling your money on Robinhood.
If you play the Robinhood Gold game and borrow more money, you can sell a stock short and effectively double down if it falls in value.
You'll have to pay interest on that Robinhood loan, so unless you can borrow and sell rapidly, this isn't an effective strategy to double your money (before the price goes back up).
If you own a stock for less than one day, it is considered a short-term gain, and the tax rate is the same as your regular income tax bracket. If you keep it for more than one day, it is taxed at 0%.
If you short a stock or buy on margin, you can double your money if the price falls by 50%. So, if you buy one share of Google for $1,000 and it falls to $500, you've quadrupled your money! Of course, there is a risk here, so proceed with caution.
Conclusion on How to Make Money on Robinhood
Robinhood is an excellent way to begin stock trading. Their $0 commission fees are wonderful, they have an excellent user experience, and it is quite simple to get started. But keep in mind that you'll need at least $2,000 to avoid the cost!