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The Benefits of Day Trading on Robinhood

Robinhood Day Trading

robinhood day trading

The Benefits

For those who are hoping to engage in day trading on Robinhood, it is possible, by a technicality. While most veteran day traders tend to use alternative brokers, the Robinhood application does provide a number of unique benefits to beginners, such as its lack of fees, friendly user experience, and educational opportunities.

Remember, there are government-enforced regulations on who can be officially recognized as a “Pattern Day Trader,” and unless you have $25,000 in a trading account, then you will be limited to just three trades (buys and sells) over the course of five business days; that five day period is also a rolling period. This means that if you make a day trade on a Tuesday, it will count against your day trade number until the following Tuesday. Check out our article on Day Trading Rules that Beginners Should Know to learn more about the “PDT” rule.

With this being said, if any of you new investors out there are lacking the funds to launch a day trading operation worth tens of thousands of dollars, like most other normal human beings, Robinhood is probably going to be the single greatest platform to start investing on. Here are a few reasons why.

Commission-Free Trading

Robinhood forever altered Wall Street, in the rubble of a beleaguered financial sector, when 2013 saw the company introduce commission-free trading. Up until this point, all brokerages charged traders a typical $5 or $10 per transaction in order to spin a profit off of what can be considered a fraction of a penny “tax” on trade executions that FINRA charges firms to recover the costs of supervising and regulating these firms.

Robinhood was the first broker, largely app-based, to not pass this fee, or really any fees, on to customers for sales with a notional value of $500 or less. In addition, they didn’t require an account minimum of $500 to $1,000 like most other established firms. This all went along with their founding mission to “provide everyone with access to the financial markets, not just the wealthy.” Hence, the company’s name is inspired by a folk hero who took from the wealthy and gave to the poor.

However virtuous their ambitions may be, the Robinhood business model does attract a fair amount of criticism. As reported by the Wall Street Journal, the firm makes money, in part, by sending customer orders to high-frequency traders in exchange for cash. It’s a controversial but legal practice in the brokerage industry called payment for order flow.

“The revenue we receive from these rebates helps us cover the costs of operating our business and allows us to offer commission-free trading,” Robinhood co-founder Vlad Tenev said in an Oct. 12 blog post.

The company adds that Robinhood Securities has relationships with a number of market makers and sends your order to the one believed to be most likely to give you the best execution quality. Rebates aren’t considered when your brokerage orders are routed.

All in all, Robinhood won’t charge you fees to open your account, to maintain your account, or to transfer funds to your account. Generally speaking, as long as your buys and sells are around or less than $500, you more than likely will not incur any fees, and if you do, they will be as nominal as possible. For more information on potential Robinhood day trading fees, we encourage you to look up a page on their website titled Trading Fees On Robinhood.

It’s also important to note, many other brokers, including Charles Schwab, E-Trade, Fidelity, and more, have rather recently rolled out their own commission-free trading opportunities for account holders.

User-Friendly Application

The Robinhood application’s simplistic and effective user face makes the practice of trading stocks virtually seamless for newcomers – reminiscent of our favorite social media apps, there is even a fairly fun and friendly “swipe up” feature to execute trades. Keep in mind, you don’t need to be on your phone to buy and sell, you can access your account from any device hooked up to the internet.

Brokerages have always been infamous for their difficult to use and complicated trading platforms that read like an unknown foreign language to beginner traders. Robinhood broke the barrier by creating both an accessible (free trading, no commission) and user-friendly experience targeting an untapped, burgeoning demographic of young investors.

Don’t just take our word for it, according to CNBC, the median age of a Robinhood user is 31 years old, the platform has grown from 1 million account holders in 2016 to 13 million as of October 2020, and the average account size ranges from $1,000 to $5,000. To discover more about how they so effortlessly attract beginner traders, watch the video below.

Access to a Variety of Markets

Do you find yourself interested in trading stocks, options, or crypto? Why not all of them. Part of Robinhood’s continued success, and what keeps them ahead of the competition, is its frictionless delivery of various market places to users. This provides aspiring day traders an easy to navigate, all in one trading platform for the three biggest markets being traded.

These markets are neatly placed on your home screen within the app, allowing you to easily stay up to date on all of them from the comfort of your smartphone.

Speaking of markets, we must add that well-known penny stock trading personality, Timothy Sykes, has his own gripe with day trading on Robinhood – you can’t buy or sell OTC’s. Over-the-counter (OTC) refers to the process of how securities are traded for companies that are not listed on a formal exchange such as the New York Stock Exchange (NYSE).

Most of the companies that trade OTC are not on an exchange for a reason, points out Robinhood in a document discussing the topic. Some are companies that will never turn into anything. Some might be horrible investments with no real chance of making you any money at all. And, it might be hard to separate the wheat from the chaff. You might not get accurate information from them, or you may get no financial statement at all.

“Wham! Just like that, a ton of low-priced stock opportunities are totally off the table,” claims Sykes. “You’re removing a huge part of the pool of potential opportunities!”

Okay, so you don’t have the ablility to purchase dirt-cheap stocks from companies that Jordan Belfort, the notorious “Wolf of Wallstreet,” would have loved to unload on uninformed investors only to leave them in the dust when the “business” almost inevitably failed. Alright, maybe not inevitably, but it’s probably best for somebody just starting their stock market journey to veer away from these high risk, albeit high reward, situations anyways.

Education

On the topic of information, due to the app’s popularity amongst beginner day traders, Robinhood has taken initiative to provide educational tools for users. Account-holders have access to a “Learn” tab that offers a large list of answers to frequently asked questions, along with a more exciting “Snack” feature that issues a daily dose of financial news tailored to your positions and interests.

If you’re a fan of podcasts, give Snacks Daily a listen for an entertaining breakdown of each day’s top 3 business stories in 15-minutes; pairs perfectly with your commute, workout, or morning oatmeal ritual. The energetic hosts make this insightful show the most fun market news you can get and perfect for the Everyman looking to understand what’s happening in business, tech, & industry.

Overall, education has been so overlooked by traditional platforms and Robinhood continues to innovate the financial market with its unique tools and resources.

Leverage and Margin Trading

Leverage is an investment strategy of using borrowed capital to increase the potential return on an investment. Leverage can also refer to the amount of debt used to finance an asset. If you have an investment plan and believe strongly in it, you might want to invest as much money as you possibly can in that plan.

Day trading uses money as a vehicle to turn a profit. By being able to leverage (borrow) more money than you have in your trading account, you can potentially make a greater return. Robinhood allows you to leverage your trading account, which means if you fund your Robinhood account with $5,000, you are eligible to be given the leverage to use a total of $10,000; therefore borrowing the difference, which in this case is $5,000.

This useful tool within the platform can help catapult profitable traders to much larger returns based on their ability to trade with more money than what they initially had. Robinhood further discusses its leverage practices in an article titled Increasing Your Margin Available.

However, keep in mind that those who invest poorly must deal with the negative effects. Investment returns can never be guaranteed. All investments carry risk.

Here are just a few of the more negative potential outcomes when using financial leverage: amplified losses from unsuccessful investments, individuals and businesses must pay interest on borrowed money, leverage allows people and businesses to lose more money than they have, potentially bankrupting them, and taking on debt reduces access to additional debt until the original debt is paid.

More specific to day trading on Robinhood, if an investment performs poorly, the lender may make a margin call, forcing the investor to sell enough securities to repay their debt or use other forms of debt financing.

Robinhood Gold Subscription

With the first month free, and for just $5 every month thereafter, an upgrade to Robinhood Gold, gives you access to premium features such as professional research and Level II market data, and instant transfers up to your Portfolio Value starting at $5,000 (up to a max of $50k), rather than just $1,000 with a standard instant account.

Additionally, if Robinhood approves your account for margin trading, you will be able to trade on margin with Gold. The free trial only covers the $5 monthly fee and does not cover your margin interest. This means that if you borrow over $1,000, you’ll still pay interest at the end of your billing cycle.

In all honesty, Robinhood Gold probably isn’t terribly necessary for beginner investors, especially those starting off with smaller account sizes. Federal regulations require you to have a minimum of $2,000 of Portfolio Value (minus any cryptocurrency positions) in your Robinhood brokerage account just to be able to engage in margin trading. Either way, for only five bucks a month, it isn’t hard to argue that the paid subscription could pan out to be very much so worth the price.

Robinhood Setbacks

This article wouldn’t be a truly objective piece on the Robinhood day trading experience without addressing a number of concerns users have voiced.

Execution Time

Many investors who trade through online brokerage accounts assume they have a direct connection to the securities markets. But they don’t. When you push that enter key, your order is sent over the Internet to your broker – who in turn decides which market to send it to for execution.

While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fast-moving markets. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time your order reaches the market, the price of the stock could be slightly – or very – different.

Considering Robinhood executes trades through market makers rather than directly with the public exchanges, this business model can add noteworthy time between when a trader presses “buy” on their phone and when the shares are actually purchased, in turn, potentially affecting the price at which the stock was actually bought or sold.

“We have relationships with a number of market makers in an effort to optimize speed and execution quality,” explains the company. “Our routing system automatically sends your order to the market maker among these that’s most likely to give you the best execution, based on historical performance. We perform regular, rigorous reviews of the market makers’ execution quality by looking at factors like execution price, speed, and price improvement.”

When measured at the time of order routing, the majority of Robinhood customers’ orders get executed at the NBBO (National Best Bid and Offer) or better. For example, in the third quarter of 2020, 97.53% of customers’ market orders for S&P 500 stock were executed at the NBBO or better, with an execution speed of 0.065 seconds from routing to execution (for orders during market hours under 2,000 shares; excludes orders in locked, halted, or crossed markets). These figures are according to a Robinhood document titled Stocks Order Routing and Execution Quality.

Customer Service

The company believes that email is the most effective way to engage with account holders, or at least they must because this is pretty much the only means by which they can be reached. “Wanna see how great and reliable Robinhood is? Go ahead – try to reach a human being there. Good luck,” says a critical Sykes.

“Supporting and communicating with our customers — both those new to investing and those with more experience — is a critical part of our responsibility to them,” said Alex Mesa, Head of Customer Experience at Robinhood, in a statement dated August 11, 2020. “We’ve more than doubled our support team since January and we’ll continue to grow our teams to provide timely, helpful responses to our customers.”

Dangers of “Gamifying” Trading

Some critics cite concerns that providing such a fun and interactive user experience inadvertently gamifies investments that should be treated as serious financial decisions, as they are just that, serious financial decisions that could cause an investor to lose everything they have.

“We don’t agree that Robinhood gamifies the market,” says a company spokesperson. “Robinhood is focused on delivering a simple and engaging mobile-first experience that makes investing more accessible, easier to understand, and more personal. We have added delight to investing and continue to be very thoughtful about modern-design as part of the in-app experience.”