Enhanced Investor's Robinhood Guide
What is robinhood and why should I care?
Put simply, Robinhood is the only commission-free trading platform for traders in US equity markets. Even though large brokerages continue a race to the bottom in terms of commissions, those fees can add up quickly especially if you are starting out with a small account. Let's say you are starting out with a $1000 account. As a new trader, It is unlikely nor recommended you will or should go "all in" taking $1000 position for every trade. But for the sake of simplicity, let's say you do. Well most large brokerages charge $4.95 - $6.95 per a trade. Round-trip, that adds up to about $10 - $14 per a trade. If you took a $200 position, you are down 5% by the time you close before the stock does anything! On a $1000 position, it's a little better but being down 1% is still not favorable. It can easily change your trading behavior to start "bag-holding" or sticking with a position instead of cutting your losses.
That sounds good but are there any catches?
Unfortunately yes. The app is only available on mobile devices such as iOS and Android (although we do have a guide here on how to setup Robinhood on desktop). When searching for momentum stocks, traders often have to shuffle between screens on a small device which is not ideal. Trading is a different game and you don't want to tax your mental capacity on mundane things like waiting for screens to load or flipping back and forth between screens to compare charts.
The lack of technical indicators can also hinder traders because it's important to put price action into perspective and indicators can help you do that. When decisions need to be made in a split second, even a small delay can turn a profitable trade into a losing one. We recommend pairing this with another platform like ThinkorSwim that has many preset indicators. For more advanced traders, the Enhanced Investor team has created custom indicators in our store. You can check out our blog to see how our custom indicators have performed.
The platform is only made to buy stocks. Users don't have the ability to short-sell. That is not a big deal in a bull market but if the market ever turns downwards, then upwards momentum will likely be much more limited.
Lastly, there is not access to after-hours or pre-market unless you sign-up for Robinhood Gold, a monthly subscription that gives you more margin and access to trading outside normal trading hours of 9:30 AM to 4:00 PM EST. Although unlike the larger brokerages, pre-market starts at 9:00 AM EST versus 4:00 AM EST and after-hours end at 6:00 PM EST versus the more standard 8:00 PM EST.
That does not seem so bad, are there any other downsides?
While Robinhood has gotten better lately, they have had issues with maintaining server up-time. In the past there were days in which the platform was unavailable for hours after open, causing users to lose money. For that reason alone, the platform is recommended for new traders and/or traders with small accounts. Another issue is the volatility restriction. For certain volatile stocks like the 3x ETF ones (JNUG, DWI for example), Robinhood restricts frequent trading even if you are not violating the pattern day trader rule!
Anything else I should watch out for?
Yes. A complaint we often see from new traders excited to take their first stock position, is using market orders without realizing that orders can be set to limit orders. For stocks with a large spread, it can cause your entry price to be a few percentage points higher than expected. It does not sound like much, but that is actually a lot. Some strategies hinge on taking a few percentage points and playing it safe. See our glossary for the difference in order types.
I was offered Robinhood Instant. What is that?
Robinhood Instant is a margin account. Robinhood without the "Instant" upgrade is a cash account. Cash accounts are not subject to the pattern day trading rule (described in our glossary) while margin accounts are. Margin is your broker lending you money to open new positions instead of waiting three days for stocks to "settle" and your buying power to be restored.
The key takeaway to this review is that Robinhood is a great tool for some traders as long as you are aware of the limitations. Overall, the positives outweigh the negatives for small accounts. If you have any other questions, join our chat and direct message any of our moderators or administrators.