How does Robinhood stock broker make money?
Robinhood seems interesting. Some say it's a gimmicky site with a nice UI not an investing or trading platform. From investopedia: 1. For now, the app stays afloat for mainly two reasons. First, the business itself is extremely lean: no physical locations, a small   staff, no massive public relations campaigns and only one operating   system platform to maintain. Robinhood also generates interest off of   unused cash deposits from user accounts according to the Federal Funds   rate. 2. Second, venture capitalists such as Index Ventures, Ribbit Capital,   Google Ventures, Andreessen Horowitz, Social Leverage,and “many   others” have invested more than $16 million in the app. 3. According to Barron’s, Robinhood plans to implement margin trading in   2015, eventually charging 3.5% interest for the service. E*Trade   charges 8.44% for accounts under $25,000. Phone assisted trading will   also be available at $10 per trade in the future. 4. Originally, Robinhood planned to make money off of order flows – a   common tactic used by discount brokerages in the 199﻿0s to generate   revenue. According to the company's FAQ, Robinhood backpedaled on the   idea because it executes orders through a clearing partner and, as a   result, receives little to no payment for order flow. The company is   willing to return to its original plan in the future if it receives   order flows directly or begins to generate a lot of revenue from them. "Yes, there is a lot they are leaving out, and I would be extremely skeptical of them because of the ""reasons"" they give for being able to charge $0 commissions. Their reasons are that they don't have physical locations and high overhead costs, the reality is that they are burning venture capital on exchange fees until they actually start charging everyone they suckered into opening accounts. They also get paid by exchanges when users provide liquidity. These are called trade rebates in the maker-taker model. They will start offering margin accounts and charging interest. They are [likely] selling trade data to high frequency trading firms that then fill your stock trades at worse prices (Robinhood users are notorious for complaining about the fills). They may well be able to keep commissions low, as that has been a race to the bottom for a long time. But if they were doing their users any actual favors, then they would be also paying users the rebates that exchanges pay them for liquidity. Robinhood isn't doing anything unique as all brokers do what I mentioned along with charging commissions, and it is actually amazing their sales pitch ""$0 commissions because we are just a mobile app lol"" was enough for their customers. They are just being disingenuous." "Disclosure: I don't have an iPhone, so I don't use RobinHood.  That being said, I have a less ""they're-out-to-get-ya"" view of what they're doing. As a small business owner (2 businesses), employees cost the most.  If you can create a solid business with few (or no) employees and let robots run it, you will drastically reduce your costs.  Joe Polish said it similarly with sales letters, something along the lines of they never complain about a headache, need to take a year off to discover themself, or just need a personal day.  Robots are the same; they do not have human limits.  Most simple trading can be done and maintained by well written code and AI, there's very little need for humans to do anything other than build it.  Think about the efficiency of bitcoin versus all the central banks combined; how many people are employed by central banks? Robinhood states that they are using technology in these ways to minimize costs and they're using a system that doesn't need physical branches (this doesn't mean they will never have them, just that they don't need them).  Robinhood does not indicate that they allow everything to happen for free; only stock trading.  I worked for a large trading firm once and observed that stock trading wasn't the bulk of where they made their money anyway; trading options, futures, index funds, etc are where the big money was and Robinhood says nothing about those being free.  Like the CQM mentioned too, they'll be charging for margin as well. In a way, the individual stock trader is dead; many people - including this forum - prefer index funds, so more than likely, Robinhood will strike up a deal with an index fund company or create their own (this is just easy, passive income with an expense ratio).  In this category, the markets are their playground, but they do need to attract enough people to their platform, thus free stock trading is a good way to do it. As for selling your information for advertising, that is always a possibility, but they have quite a few other options that would be good for most investors (index funds, affiliating with financial fund companies, etc) where they can start before ever needing to dip their toe in selling information.  This isn't to say they won't do it, but that there are few other options they have. The major concern I have for Robinhood is ongoing security.  Just building it and letting it run kind of assumes that there won't be major compromises in the future and as AI evolves, superior AI might be able to crush older AI." Charging very high prices for additional standard services: See Commission & Fees: https://brokerage-static.s3.amazonaws.com/assets/robinhood/legal/RHF%20Retail%20Commisions%20and%20Fees%20Schedule.pdf Link is down in the footer, to the left...
In my experience they charge you coming and going. For example, if a brokerage firm is advertising that their commissions are only $7/trade, then that means you pay money to buy the stock, plus $7 to them, and later on if you want to sell that stock you must pay $7 to get out of the deal.  So, if you want to make any money on a stock (say, priced at $10) you would have to sell it at a price above $10+$7+$7=$24. That kind of sale could take a few years to turn a profit. However, with flat-rate fees like that it is advantageous to buy in bulk. Nothing. Stockbrokers set up nominee accounts, in which they hold shares on behalf of individual investors. Investors are still the legal owners of the shares but their names do not appear on the company’s share register. Nominee accounts are ring-fenced from brokers’ other activities so they are financially secure. stocks represent ownership in a company. their price can go up or down depending on how much profit the company makes (or is expected to make).  stocks owners are sometimes paid money by the company if the company has extra cash.  these payments are called dividends. bonds represent a debt that a company owes.  when you buy a bond, then the company owes that debt to you.  typically, the company will pay a small amount of money on a regular basis to the bond owner, then a large lump some at some point in the future. assuming the company does not file bankrupcy, and you keep the bond until it becomes worthless, then you know exactly how much money you will get from buying a bond. because bonds have a fixed payout (assuming no bankrupcy), they tend to have lower average returns.  on the other hand, while stocks have a higher average return, some stocks never return any money. in the usa, stocks and bonds can be purchased through a brokerage account. examples are etrade, tradeking, or robinhood.com.   before purchasing stocks or bonds, you should probably learn a great deal more about other investment concepts such as: diversification, volatility, interest rates, inflation risk, capital gains taxes, (in the usa: ira's, 401k's, the mortgage interest deduction).  at the very least, you will need to decide if you want to buy stocks inside an ira or in a regular brokerage account. you will also probably want to buy a low-expense ration etf (e.g. an index fund etf) unless you feel confident in some other choice. There are 2 main types of brokers, full service and online (or discount). Basically the full service can provide you with advice in the form of recommendations on what to buy and sell and when, you call them up when you want to put an order in and the commissions are usually higher. Whilst an online broker usually doesn't provide advice (unless you ask for it at a specified fee), you place your orders online through the brokers website or trading platform and the commissions are usually much lower. The best thing to do when starting off is to go to your country's stock exchange, for example, The ASX in Sydney Australia, and they should have a list of available brokers. Some of the online brokers may have a practice or simulation account you can practice on, and they usually provide good educational material to help you get started. If you went with an online broker and wanted to buy Facebook on the secondary market (that is on the stock exchange after the IPO closes), you would log onto your brokers website or platform and go to the orders section. You would place a new order to buy say 100 Facebook shares at a certain price. You can use a market order, meaning the order will be immediately executed at the current market price and you will own the shares, or a limit price order where you select a price below the current market price and wait for the price to come down and hit your limit price before your order is executed and you get your shares. There are other types of orders available with different brokers which you will learn about when you log onto their website. You also need to be careful that you have the funds available to pay for the share at settlement, which is 3 business days after your order was executed. Some brokers may require you to have the funds deposited into an account which is linked to your trading account with them. To sell your shares you do the same thing, except this time you choose a sell order instead of a buy order. It becomes quite simple once you have done it a couple of times. The best thing is to do some research and get started. Good Luck. "Some rich people want to make money without working. So they give their money to a company like Apollo Global Management, and then Apollo Global Management takes the money that they were given and decides how they will turn that money into more money, which they can give back to the person who gave it to them. That money they give back is called return, or ""return on investment."" That's how the person who gave the money, makes money -- from return on investment. The company's only real purpose is to make money with the money you give them. The company takes the money and sometimes they let other companies borrow that money, either for a long period of time or short period of time. They have different things called stocks, bonds, commodities and other things that they trade back and forth, and they only hope that they will make money doing it. It is sort of like they are going to work and playing the lottery every day, except, they do a lot of math to try and figure out how they can win the money from other companies as quick as possible. Instead of buying lotto tickets, they are buying those things I mentioned, stocks, bonds, commodities, and other things. By buying or selling these things, they are betting that a company will either make or lose money. It is basically like a game, with you and other people and companies, all as players. You are betting that the other players in the game will either make or lose money, based on what you see other players doing. As a player, you can win big or small, and you can lose big or small. There's a thing called the SEC. To play the game, you have to follow the rules that the SEC makes, or you will end up in jail! They are like the police, they are looking for people who do bad things. When you are older, you can make a lot of money if you work at a company like Apollo, but you can make more money than a lottery winner if you own a company yourself like Apollo." "A simple way to ask the question might be to say ""why can't I just use the same trick with my own shares to make money on the way down? Why is borrowing someone else's shares necessary to make the concept a viable one? Why isn't it just the inverse of 'going long'?"" A simple way to think about it is this: to make money by trading something, you must buy it for less than you sell it for.  This applies to stocks like anything else.  If you believe the price will go up, then you can buy them first and sell them later for a higher price.  But if you believe the price will go down, the only way to buy low and sell high is to sell first and buy later.  If you buy the stock and it goes down, any sale you make will lose you money. I'm still not sure I fully understand the point of your example, but one thing to note is that in both cases (i.e., whether you buy the share back at the end or not), you lost money.  You say that you ""made $5 on the share price dropping"", but that isn't true at all: you can see in your example that your final account balance is negative in both cases.  You paid $20 for the shares but only got $15 back; you lost $5 (or, in the other version of your example, paid $20 and got back $5 plus the depreciated shares). If you had bought the shares for $20 and sold them for, say, $25, then your account would end up with a positive $5 balance; that is what a gain would look like.  But you can't achieve that if you buy the shares for $20 and later sell them for less. At a guess, you seem to be confusing the concept of making a profit with the concept of cutting your losses.  It is true that if you buy the shares for $20 and sell them for $15, you lose only $5, whereas if you buy them for $20 and sell for $10, you lose the larger amount of $10.  But those are both losses.  Selling ""early"" as the price goes down doesn't make you any money; it just stops you from losing more money than you would if you sold later." Some good answers already, but let me add a TL:DR version. Brokers work like a special type of bank account where you can deposit or withdraw money. The major difference is that they also give you the ability to buy/sell investments with the money in your account which you can do by either calling them or using their website. Important: Many investments you will make through a broker(e.g. stocks) are not insured against losing value like the money in your bank account. "Also, in the next sentence, what is buyers commission? Is it referring to the share holder? Or potential share holder? And why does the buyer get commission?  The buyer doesn't get a commission.  The buyer pays a commission.  So normally a buyer would say, ""I want to buy a hundred shares at $20.""  The broker would then charge the buyer a commission.  Assuming 4%, the commission would be  So the total cost to the buyer is $2080 and the seller receives $2000.  The buyer paid a commission of $80 as the buyer's commission.   In the case of an IPO, the seller often pays the commission.  So the buyer might pay $2000 for a hundred shares which have a 7% commission.  The brokering agent (or agents may share) pockets a commission of $140.  Total paid to the seller is $1860.   Some might argue that the buyer pays either way, as the seller receives money in the transaction.  That's a reasonable outlook.  A better way to say this might be that typical trades bill the buyer directly for commission while IPO purchases bill the seller.  In the typical trade, the buyer negotiates the commission with the broker.  In an IPO, the seller does (with the underwriter).   Another issue with an IPO is that there are more parties getting commission than just one.  As a general rule, you still call your broker to purchase the stock.  The broker still expects a commission.  But the IPO underwriter also expects a commission.  So the 7% commission might be split between the IPO underwriter (works for the selling company) and the broker (works for the buyer).   The broker has more work to do than normal.  They have to put in the buyer's purchase request and manage the price negotiation.  In most purchases, you just say something like ""I want to offer $20 a share"" or ""I want to purchase at the market price.""  In an IPO, they may increase the price, asking for $25 a share.  And they may do that multiple times.  Your broker has to come back to you each time and get a new authorization at the higher price.  And you still might not get the number of shares that you requested.   Beyond all this, you may still be better off buying an IPO than waiting until the next day.  Sure, you pay more commission, but you also may be buying at a lower price.  If the IPO price is $20 but the price climbs to $30, you would have been better off paying the IPO price even with the higher commission.  However, if the IPO price is $20 and the price falls to $19.20, you'd be better off buying at $19.20 after the IPO.  Even though in that case, you'd pay the 4% commission on top of the $19.20, so about $19.97.   I think that the overall point of the passage is that the IPO underwriter makes the most money by convincing you to pay as high an IPO price as possible.  And once they do that, they're out of the picture.  Your broker will still be your broker later.  So the IPO underwriter has a lot of incentive to encourage you to participate in the IPO instead of waiting until the next day.  The broker doesn't care much either way.  They want you to buy and sell something.  The IPO or something else.  They don't care much as to what.   The underwriter may overprice the stock, as that maximizes their return.  If they can convince enough people to overpay, they don't care that the stock falls the day after that.  All their marketing effort is to try to achieve that result.  They want you to believe that your $20 purchase will go up to $30 the next day.  But it might not.   These numbers may not be accurate.  Obviously the $20 stock price is made up.  But the 4% and 7% numbers may also be inaccurate.  Modern online brokers are very competitive and may charge a flat fee rather than a percentage.  The book may be giving you older numbers that were correct in 1983 (or whatever year).  The buyer's commission could also be lower than 4%, as the seller also may be charged a commission.  If each pays 2%, that's about 4% total but split between a buyer's commission and a seller's commission." "There are a few people that do this for a living. They are called ""market makers"" or ""specialists"" in a particular stock. First of all, this requires a lot of capital. You can get burned on a few trades, a process known as ""gambler's ruin,"" but if you have enough capital to weather the storm, you can make money. Second, you have to be ""licensed"" by the stock market authorities, because you need to have stock market trading experience and other credentials. Third, you are not allowed to buy and sell at will. In order to do your job, you have to ""balance the boat,"" that is buy, when others are selling, and sell, when others are buying, in order to keep the market moving in two directions. It's a tough job that requires a lot of experience, plus a license, but a few people can make a living doing this." Prop (proprietary) traders trade using huge amounts of a bank's money (i.e. other people's money) so the reason why they have such low commissions (and they certainly do) is that the firms for which they work negotiate low commissions as the quantities and volumes (as they also trade very frequently) will be high and so the total commission will be very high. There is no such thing as a prop trading account unless you are a big bank with a very large bank roll (tens of millions of USD) so you cannot open one to enjoy those benefits unless you have enough money that you can negotiate your commission with brokers. 25k CAD is definitely not enough money to even start a conversation about those sorts of commissions. note: prop traders are generally banned from trading intraday with their own money by their employers and the law as it is a massive conflict of interests. Those who do and get caught face lengthy prison sentences. I feel like the author doesn't have a clear message. On the one hand he is saying that Robinhood users should be long-term passive investors, the he turns around and criticizes it for not completing trades fast enough and having too much slippage.  I think that we need to be very specific about our goals. If the goal is to make as much money as possible, sure, Robinhood is a poor tool. However, the vast majority of people are only at the point that they need to save more. If then our goal is to get more people to save more then it is a great tool. It lowers barriors and makes it fun. More importantly, the limits of Robinhood are obvious to anyone who starts to take the next step and increase their gains. Most of stock trading occurs on what is called a secondary market. For example, Microsoft is traded on NASDAQ, which is a stock exchange. An analogy that can be made is that of selling a used car. When you sell a used car to a third person, the maker of your car is unaffected by this transaction and the same goes for stock trading. Still within the same analogy, when the car is first sold, money goes directly to the maker (actually more complicated than that but good enough for our purposes). In the case of stock trading, this is called an Initial Public Offering (IPO) / Seasoned Public Offering (SPO), for most purposes. What this means is that a drop of value on a secondary market does not directly affect earning potential. Let me add some nuance to this. Say this drop from 20$ to 10$ is permanent and this company needs to finance itself through equity (stock) in the future. It is likely that it would not be able to obtain as much financing in this matter and would either 1) have to rely more on debt and raise its cost of capital or 2) obtain less financing overall. This could potentially affect earnings through less cash available from financing. One last note: in any case, financing does not affect earnings except through cost of capital (i.e. interest paid) because it is neither revenue nor expense. Financing obtained from debt increases assets (cash) and liabilities (debt) and financing obtained from stock issuance increases assets (cash) and shareholder equity. Upselling you is how they make money.  That's the price of the free content. Test their recommendations.  Pretend to buy the stocks they say.  How do they do?  Do they ever say to sell the stocks after their buy recommendations? There are lots and lots of opinions out there.  I doubt people really hear about the good ones because (a) the good ones have paid newsletters and/or (b) the good ones aren't telling a soul because they're absolutely cleaning it up. Warren Buffett doesn't announce his intentions.  He's been buying for a while before anyone finds out. "The answer posted by Kirill Fuchs is incorrect according to my series 65 text book and practice question answers. The everyday investor buys at the ask and sells at the bid but the market maker does the opposite. THE MARKET MAKER ""BUYS AT THE BID AND SELLS AT THE ASK"", he makes a profit form the spread. I have posted a quiz question and the answer created by the Financial Industry Regulatory Authority (FINRA). To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker. The response is ""bid 15, ask 15.25."" If the order is placed, the market maker must sell: A)   800 shares at $15.25 per share. B)   800 shares at $15 per share. C)   100 shares at $15.25 per share. D)   800 shares at no more than $15 per share. Your answer, sell 800 shares at $15.25 per share., was correct!. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share." As others have said, it depends on the brokerage firm.  My broker is Scottrade. With Scottrade the commission is assessed and applied the moment the order is filled. If I buy 100 shares of XYZ at $10 a share then Scottrade will immediately deduct $1007.02 out of my account. They add the commission and fees to the buy transaction. On a sale transaction they subtract the commission and fees from the resulting money. So if I sell 100 shares of XYZ at $11 a share I will get 1,092.98 put into my account, which I can use three business days later.