Robinhood offers commission-free trading, which means the app doesn’t charge any fees to buy and sell stocks, ETFs, and other securities. At first glance, that seems like it should be enough to keep the company in business and profitable—and it probably is! But how does Robinhood make money? We’ll take a look at how they make money to find out.
The different ways Robinhood makes money
1. Robinhood makes money through interest on the cash and securities in user accounts.
2. They also make money from selling order flow to high-frequency trading firms.
3. In addition, they earn revenue from rebates on S&P 500 trades, and from monthly subscriptions for their premium services.
4. They also collect fees for option contracts and margin accounts.
5. Finally, they generate income from advertising partnerships with companies like Goldman Sachs and TD Ameritrade.
Why does Robinhood offer free trades?
To understand how Robinhood makes money, it’s important to know why the company offers free trades in the first place. After all, nothing is truly free. So, why does Robinhood offer free trades?
There are a few reasons. One of them is that the company wants to build up its customer base and make more money from higher-volume traders down the line.
In addition, by allowing people with small amounts of funds to trade for free, Robinhood hopes that these people will become regulars and stick around even after they’ve hit their account limits and start paying fees.
Finally, by not charging anything at all for trading stocks, Robinhood can undercut its competitors and lure away their customers
Summary and Conclusion
Though it may seem like Robinhood is a free app, they actually make quite a bit of money. Their main source of income is from something called payment for order flow. When you place an order through the app, they sell that order to a larger firm that then executes it. In return, those firms pay Robinhood for sending them the order. In addition to this, they also earn interest on the cash and securities in user accounts, and they sell premium memberships.