Free trades sound too good to be true — how does Robinhood make money? If you pay nothing to place a trade, someone else is covering the cost. That is the deal Robinhood offers: buy and sell stocks and pay nothing in fees. So who is actually paying? The answer is worth knowing before you tap buy.
Robinhood is a mobile stock trading app built around commission-free trades. Vladimir Tenev and Baiju Bhatt founded the company in 2013 with a simple pitch. You should not pay a fee just to place an order. That pitch caught on fast with millennial investors. Traditional brokerages long charged commissions on every trade, and their platforms were rarely easy to use.
Robinhood did not invent commission-free trading. Other companies tried it first and failed to make it stick. So far, it seems to be the first to do it well.
How Robinhood Works?
Can Robinhood Actually Be Profitable?
You might be wondering, how does Robinhood make money if they are offering free trades? And you’d be right to wonder that. It’s always good to understand what business model companies are using. That shows you if they are exploiting your data in any way.
Thankfully, the way Robinhood makes money is not by selling your data.
Before we get into how Robinhood makes money, let’s look at their cost leadership.
They control costs by keeping far less overhead than traditional brokerages. They run with far fewer staff than legacy brokerages do. They do this by not spending as much on things like marketing, offices, account managers, and customer support. Modern technology in electronic trading has also driven down transaction costs. That makes a broker like Robinhood possible.
How Does Robinhood Make Money?
But you pay no commissions, so where does the money come from? It flows through several channels behind your free trades. Robinhood earns transaction-based revenue, including payment for order flow. That is money for directing your stock orders to third parties. It also earns net interest income on customer cash and margin loans.
Add subscription revenue from its Robinhood Gold premium plan. Crypto trading brings in money too. From your side, it still feels like a freemium business model. Our business model guide explains how the pieces fit.
Revenue From Interests
You might have heard, if it’s free, you’re the product. Well, this is somewhat true for Robinhood too. In the case of Twitter, the product to them is your data. In the case of Robinhood, the money-making product is the unused cash deposits in your account.
Robinhood earns interest off the money sitting in your account.
Here is what happens to that cash. From your side, it just sits in the account and nothing changes. But those balances do not idle inside the company. The funds earn interest there, and Robinhood keeps that income. It is called net interest income, one of the revenue streams named above.
So let’s say you have $500 just sitting in your Robinhood account and interest rates are 2%. They would make $10 off having your money sitting in their account per year. That might not sound like much, but multiply that across a large customer base. You can see how it adds up quickly. Also, these are just example numbers. They might make more than 2%, and the average account value might be much higher than $500.
They also earn interest when you borrow money on margin. Margin means you are borrowing from the broker to invest more than your own cash allows. The broker charges you interest on that loan. But many of their users are millennials, so margin borrowing is likely a smaller slice of their revenue. That kind of borrowing usually needs a bigger balance behind it.
Revenue From Premium Subscriptions
Robinhood offers a premium ‘Gold Subscription plan’ with the following benefits to the users:
- More buying power with margin trading.
- Extended trading hours. With Gold, you get to trade 30 minutes before the market opens and 2 hours after the market closes.
- You also get to skip the three-day waiting period for deposits and make trades instantly.
But what is buying on margin?
Buying stocks on margin lets you borrow money from your brokerage. You can buy more shares than your cash alone allows. As you probably know, the more money you have invested, the more potential you have to earn.
10% of $1000 is double what 10% of $500 is. So brokerages let you borrow money to increase your earning potential. They charge interest on what you borrow, which is one way they get paid for it.
What’s the catch?
If you make a bad bet and a stock goes down, you can lose more than you invested. You still have to pay back the principal you borrowed, so it’s a riskier way of investing. Also, brokerages require a minimum account balance before they let you trade on margin.
How Much Does Gold Cost?
Robinhood Gold is a paid monthly plan. You can see the current price and upgrade within the app.
Robinhood also makes money through payment for order flow. This is basically where they earn a profit for directing stock orders to third parties. The practice grew into the industry’s dominant revenue model and became a major enforcement topic. It sits alongside net interest, subscriptions, and crypto in Robinhood’s revenue mix.
Additional Features of Robinhood Business Model
Desktop
Toward the end of 2017, you could also use Robinhood on a desktop instead of the mobile app.
Cryptocurrency
You can buy cryptoassets commission free through Robinhood. That means you pay no trading fee when you buy or sell. You have been able to trade crypto on the platform for years.
Options Trading
You also get options trading as part of the free plan.
Recent Product Expansion
You can now do far more with Robinhood than trade. The 2024-2026 product expansion brought you retirement matching, prediction markets, tokenized equities, banking features, and AI tools. Together, they cover money tasks you used to handle elsewhere.
Retirement matching adds extra money to what you put away for later. Prediction markets let you take a position on the outcome of real-world events. Tokenized equities give you stock market exposure in token form. Banking features cover more of your everyday money, while AI tools give you automated help in the app.
You probably signed up to trade. Now the newer products give you less reason to move money out. Your money also gives Robinhood more ways to earn.
Bottom Line?
If you are a young investor, Robinhood’s ease of use and free stock trades probably appeal to you. And if you follow the money, it has a sound business model. That model earns enough to make big venture capital firms want to invest large sums in it.
Since their launch, they have grown fast enough to land in just about every major finance or tech publication. You have seen them featured in TechCrunch, Bloomberg, Forbes, Fast Company as well as CNBC. If you check the money trail, they drew major venture funding and later became a publicly listed company.
But is Robinhood safe?
When Robinhood first came out, some people were sceptical if you should trust a company that offers free trades. What if they go bankrupt? What happens to your money? Since they didn’t spend much on marketing, there wasn’t much content to make people feel better about investing with them. I know, I myself was a little weary at first.
Robinhood is also a member of SIPC. That gives the securities in your brokerage account protection, even if the broker itself fails.
But here’s the honest verdict. You are dealing with a large broker that is publicly listed and regulated. Still, you should know the company has faced major regulatory actions since those early days. You may also have hit trading halts or outages on its platforms. So you should treat it like any mainstream broker. Weigh that regulatory and reliability record before you trust it with large sums.
However, they have been criticized for making investments so easy that you may make impulse decisions.
Go On, Tell Us What You Think!
Tell us what you think? Do you use Robinhood? Have you ever wondered how does Robinhood make money?
