Robinhood for Financial Independence: Key aspects when considering this app for trading stocks as part of your journey
This Christmas I got a copy of “The Simple Path to Wealth” by JL Collins, and I’m excited to dig in and really understand index investing even better than I currently do; I have no doubt that at the end of it, all the arguments and logic will support it as an investment strategy will make complete sense as the cornerstone of most people’s portfolios.
At the moment the bulk of my net worth is in my 401k and already allocated to index funds, but I do also really enjoy investing in some individual stocks using a Robinhood account. Their claim to fame is that they offer zero cost stock trades. It was created by two gentlemen who had experience on Wall Street building high tech trading platforms, and they recognized the real cost of trading stocks was actually pennies versus the typical $4.95+ that most platforms charge to buy and sell stock.
Nothing is free: So how does Robinhood make money?
It’s a smart and reasonable question to ask: So how does Robinhood make money? I originally went out on a limb to begin using Robinhood because I noticed they were backed by a number of big players, such as Google Ventures. I have now been using it for several years and have been thoroughly impressed and happy with my experience. I know the gentlemen on Stacking Benjamins have long been skeptical of Robinhood because the company has never provided complete clarity on how exactly they are making money.
I suspect these are some of the core avenues that they making money:
- Selling the trading information – I’ve read they sell the trading information from their platform – article . When I perform market orders I also sometimes wonder if my trade was truly executed at the best available price, however at the end of the day it may look off by a matter of cents, and I’m still saving dollars versus buying stock on other platforms.
- “Robinhood GOLD” – appears to be a lending aspect of Robinhood, which supports margin lending and temporarily borrowing funds to trade stock and take rapid advantage of opportunities. For small account this service looks to cost $6/30 days, but larger accounts can be charged up to $200/ 30 days for access to such services
- Trading international shares – international stocks based on exchanges outside of the United States appear to have costs ranging between $35 and $50 per trade.
I have a full list of Robinhood fees and schedules here if anyone would like to explore and understand them in more detail.
Why do I choose to buy individual stocks?
I am a curious researcher at heart, and I enjoy learning about companies and analyzing them. I am a self-confessed nerd, and I really enjoy looking at various factors such as:
- Price to earnings ratios (P/E ratios), and forward P/E ratios
- Cash on hand, and debt load
- Profit margins
- Dividend yields
- Return on Equity
- Areas where the business is investing for the future
I also feel a thrill when I do buy the stock, knowing that I’m steadily and actively building my “perpetual money-making machine” brick by brick. The beauty of zero cost is that it now becomes economical to buy a single share of stock when your paycheck arrives e.g. one share of Verizon for $50, where historically you would have paid another ~10% or more in fees for such a transaction at traditional brokerages.
At the end of the day I am investing after-tax dollars with Robinhood, and this will likely always remain a relatively small part of my net worth versus retirement accounts and indexing.
Robinhood for Financial Independence: These are my two suggestions
- Steadily accumulate and diversify for the long-term
Simply because there are no costs to trade stocks, doesn’t mean that you should go crazy buying and selling whenever you feel like it. I prefer to steadily accumulate stocks into a portfolio of companies I consider to be high quality and with a reasonable likelihood of growing well into the future. There are some exceptions, but by and large I’m focused on buying and building up over time. I don’t pretend to be the next Warren Buffet, but I do really appreciate and respect many of his general philosophies with investing. Buying quality companies and holding them for the duration is how I try to invest in my own account. I also like to get greedy when others are fearful, and I like to buy more than usual when there are market corrections and some companies appear to be “on sale”. I’m also focused on diversifying across at least a few companies and industries, and I want to spread out potential risks that could suddenly surprise even companies that we may consider well-managed.
2. Always avoid the fees
I think minimizing fees is just an important rule of thumb to stick with in general when it comes to investing. Robinhood GOLD sounds cool and interesting, but I’m not prepared to borrow money to invest in stocks, and pay at least $6 / month for the privilege to do so. A nice feature that they offer free of charge is to get access to up to $1000 of capital as soon as you execute a transfer to Robinhood, even if it will actually take a handful of business days to officially be withdrawn from your external bank account and applied to your Robinhood account. This can be a nice feature if there is a market correction and you want to pounce on what you determine to be “good value” for a company.
Index only? You decide
So, there you have it, my experience and impressions of Robinhood in a nutshell. I can totally understand the logic of always choosing to use index fund investments, but personally I get a lot of enjoyment from getting a little more hands-on with stock investments on a small scale.
If anyone is considering Robinhood as a piece of their own journey, if you want to sign up here we would both receive a single bonus stock because of the referral. This is most likely to be something small, like Ford which is currently trading for less than $8 a share, but every little bit counts towards build that investment portfolio out.
I hope you find it useful as you consider whether it makes sense for your situation.
Disclaimer – I am not a financial advisor, and I recommend that you consult with a financial professional before making any serious financial decisions. The content on FIandFlyFree.com is for informational and entertainment purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.
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