How Does Robinhood Make Money?

Historically, trading was expensive. Decades ago, Wall Street would charge hundreds for a single trade. With the rise of discount brokerages, fees have steadily come down. Now commission-free trading is the norm. Robinhood pioneered commission-free trading - but if they don't charge commissions, how do they make money?

Freemium Gold

Robinhood like a lot of companies gives out their app for free (just take it!). This helps attracts more users and enables faster growth.

The "free" part is only applicable to their base service. Robinhood also has a paid service, Robinhood Gold. Paying $5 a month unlocks features such as margin and after-hours trading.

This two-tier model is known as "Freemium".

Idle Money

Most investors have a couple bucks laying around in their account. Robinhood takes advantage of your idle cash by investing it to earn interest. You don't earn much on a few dollars, but Robinhood has over 10M users. The idle cash adds up fast.

Selling Data

The most profitable way Robinhood makes money is also it's most controversial. Robinhood makes half their revenue by selling order flows to high frequency traders (HFTs). With this data, HFTs will know in advance how Robinhood users are trading. Knowing about incoming buy orders, HFTs can jump in, buy first and sell to you for a slightly higher price (and vice versa).

What's The Cost?

Free is never free. Companies have to make money somehow. The price you pay isn't always going to be cash. It could be your information, your attention, or your time. It's always good to know what you're paying so you can decide if it's worth it.

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