How Robinhood Really Makes Money

TL;DR

Free trading apps make money through various methods such as uninvested cash, margin accounts, paid subscriptions, lending shares to short sellers, directing order flow, and venture capital funding.

Transcript

• So in this video today I'm going to be answering one of the most common questions that I get every single day, either here on my YouTube channel or over on my investing blog. And that is the question of how do these free trading apps out there actually make any money? And the thought process behind this makes a lot of sense because a lot of us we... Read More

Key Insights

• 🥶 Free trading apps have disrupted the brokerage industry by offering commission-free trades and zero minimum account balances.
• 🤑 They make money through strategies such as interest on uninvested cash, charging interest on margin accounts, paid subscriptions, lending shares to short sellers, directing order flow, and venture capital funding.
• 😀 These apps have reduced costs by limiting customer service, adopting digital statements, and eliminating retail locations.
• 👻 Market makers play a crucial role in providing liquidity, allowing investors to buy and sell stocks easily.
• 😀 Free trading apps are regulated and insured by SIPC, ensuring a secure and safe trading environment.
• 😀 Venture capital funding supports these apps' growth and expansion, enabling them to offer free stocks and invest in advertising.
• 😀 Affiliate marketing is another revenue stream for free trading apps, allowing them to earn commissions through referral links.

Questions & Answers

Q: How do free trading apps make money if they don't charge commissions?

Free trading apps earn money through various means such as interest on uninvested cash, charging interest on margin accounts, offering paid subscriptions for advanced features, lending shares to short sellers, directing order flow to market makers, and receiving venture capital funding.

Q: Are free trading apps safe to use?

Yes, free trading apps are safe to use as they are regulated and insured by SIPC, similar to traditional brokerages. They have strict security measures and follow industry standards to protect user information.

Q: How do free trading apps offer stocks for free?

Free trading apps offer free stocks as part of their referral programs. These programs are funded by venture capital investments, which support their customer acquisition and advertising efforts.

Q: Why don't free trading apps charge commissions like traditional brokerages?

Free trading apps disrupted the brokerage industry by eliminating commissions and offering zero minimum account balances. They found ways to cut costs by reducing customer service, digitalizing statements, and eliminating retail locations.

Summary & Key Takeaways

• Free trading apps like Robinhood, M1 Finance, and Webull offer commission-free trades and zero minimum account balance.

• These apps make money through uninvested cash held in brokerage accounts, interest earned from margin accounts, paid subscriptions for additional features, lending shares to short sellers, directing order flow to market makers, and venture capital funding.

• They have cut costs through limited customer service, digital statements, and the absence of retail locations.