How Does Robinhood Make Money? Should You Invest in Robinhood?


The biggest mistake I see is people jumping on the next big thing without any knowledge. You hear from one of your friends that he is using Robinhood, a free brokerage fee app, so you decide to download it and make some stock market trading without knowing what the app is and how it can let you make investments without paying fees. You do not know where to put your money in, so you decide to copy others portfolios.

RobinHood is free because the app outsources your retail orders to hedge funds which only sell you stock at the highest price. In addition, outsourcing your orders gives the opportunity to hedge funds to see the flow of money in the market and potentially shorting the stock, or increasing the price of the stock by moving billions of dollars to it. Therefore, if you think that using free service is good, it is only possible because you are the product, not the customer.

When the S-1 filing of RobinHood was published. S-1 filing is when companies prepare to go public by publishing their finances before they can be listed on a national stock exchange. The S-1 filing showed that more than 50% of Robinhood users are new to stock market investing. This can potentially allow hedge funds to have more control over the market by knowing where is the money flowing.

What do you need in a brokerage account?

Brokerage that has the lowest fees, allows you to invest in different markets, has excellent customer service, and can execute your orders immediately.

Should you buy Robinhood?

Let’s review the facts:

Users

Robin hood has successfully doubled and tripled its users every year since 2014:

Year2014201520162017201820192020
Users40K300K700K1.9M3.3M5.1M12.5M
Source: Robinhood S-1

Income statement

There is no dought that Robinhood is generating high revenue. Due to the high number of first-time traders, it is safe to assume that Robinhood high revenue was due to many users trading during the lockdown. In 2020, the company have received 108.9$ per user in order flow:

It is clear that Robinhood business model is quite successful, and it seems that the average revenues per user will be even higher by 2022. Despite that, the company has suffered a loss of 106.6 Million in 2019 and a low income of only 7.4 Million in 2020.

Conclusion

It is difficult to predict the future of Robinhood, and it seems to be risky to buy at IPO:

  • There is not enough information provided to make firm decisions.
  • There is no guarantee that this business will be around for the next ten years.
  • How will Robinhood perform after the pandemic (Since most of its users are new)?

Robinhood business model by selling order flows and their new premium subscription does allow for high revenue. However, it is still unpredictable if Robinhood can sustain and increase its earnings in the next few years. The best option is to wait and see how it will turn out.

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