Trading on Robinhood: What You Need to Know

Robinhood is a popular trading platform that offers commission-free investing in stocks, options, ETFs, and cryptocurrencies. It also provides access to IPOs, fractional shares, recurring investments, and margin trading. Robinhood aims to democratize finance and make investing accessible and easy for everyone. However, trading on Robinhood also comes with some risks and limitations that you should be aware of before you start. Here are some of the pros and cons of trading on Robinhood, as well as some tips and resources to help you make the most of your experience.

Pros of Trading on Robinhood

• Low Cost: Robinhood does not charge any commission fees or account minimums for trading stocks, options, ETFs, and crypto. It also does not charge any deposit or withdrawal fees for crypto, although network fees may still apply. Robinhood claims to offer the lowest cost to trade crypto on average, compared to other platforms¹.
• Variety of Assets: Robinhood allows you to trade over 5,000 stocks and ETFs, including some of the most popular and trending ones, such as Tesla, Amazon, Apple, and more. You can also trade seven cryptocurrencies, such as Bitcoin, Ethereum, Dogecoin, and Shiba Inu, and monitor the price movements of ten other altcoins. Additionally, you can trade options contracts and ADRs (American Depositary Receipts), which are a way to invest in foreign companies²³.
• 24/7 Trading: Robinhood offers the 24 Hour Market, which is the only place among U.S. retail brokers where you can trade some of your favorite stocks and ETFs 24 hours a day, 5 days a week. This gives you more flexibility and opportunities to trade on your time and your terms⁴.
• Advanced Features: Robinhood provides various features and tools to enhance your trading experience and strategies. For example, you can use margin investing to increase your buying power, if eligible. You can also use recurring investments to automate your purchases and dollar-cost average your positions. You can also use fractional shares to own a piece of any stock or ETF for as little as $1. Moreover, you can use IPO Access to get in on companies going public at the IPO price, before they start trading on the market⁴.
• Security and Protection: Robinhood works hard to keep your data and assets safe and secure. It protects your account from unauthorized activity with multi-factor authentication and encryption. It also keeps most of your coins in cold storage, which means they are stored offline and away from hackers. It also has crime insurance against theft and cybersecurity breaches. Furthermore, it offers the Robinhood Protection Guarantee, which promises to reimburse you for any losses due to unauthorized activity on your account⁵.

Cons of Trading on Robinhood

• Lack of Control: Robinhood does not give you full control over your private keys or your crypto wallet. This means that you cannot use your crypto to buy goods or services, or participate in other crypto activities, such as staking, lending, or DeFi (decentralized finance). You also cannot transfer your crypto to or from other platforms or wallets, unless you use the Robinhood Wallet, which is a self-custody web3 wallet that supports crypto, NFTs, dapps, and more. However, the Robinhood Wallet is still in beta and not available to everyone yet.
• Delays and Outages: Robinhood may experience delays or outages when trading stocks, options, ETFs, and crypto, especially during periods of high volatility or demand. This can affect your ability to execute your orders, access your funds, or view your portfolio. For example, in March 2020, Robinhood suffered multiple outages that prevented users from trading during a historic market rally. Robinhood has since improved its infrastructure and capacity, but there is no guarantee that such incidents will not happen again.
• Tax Implications: Robinhood does not offer any tax-advantaged accounts, such as IRAs or 401(k)s. This means that you may have to pay taxes on your capital gains, dividends, interest, and crypto transactions. Robinhood will provide you with a 1099 form that summarizes your taxable income and losses, but you are responsible for reporting and paying your taxes to the IRS. You should consult a tax professional if you have any questions or concerns about your tax situation.

Tips and Resources for Trading on Robinhood

• Educate Yourself: Before you start trading on Robinhood, you should educate yourself on the basics of investing, the different types of assets and strategies, and the risks and rewards involved. You should also familiarize yourself with the platform’s features, tools, and policies. You can use Robinhood Learn, which is a collection of articles and videos that cover various topics related to investing and trading. You can also use Robinhood Snacks, which is a daily newsletter and podcast that delivers the latest market news and insights.
• Set Your Goals: Before you start trading on Robinhood, you should set your goals and expectations. You should know why you are investing, how much you are willing to invest, how long you plan to invest, and what kind of returns you are aiming for. You should also know your risk tolerance, which is how much you can afford to lose without affecting your financial well-being. You should align your goals with your risk tolerance and choose the assets and strategies that suit your profile.
• Diversify Your Portfolio: One of the best ways to reduce your risk and increase your potential returns is to diversify your portfolio. This means that you should invest in a variety of assets across different sectors, industries, markets, and regions. This way, you can reduce the impact of any single asset or event on your portfolio. You can use ETFs, which are bundles of stocks or other assets, to diversify your portfolio easily and efficiently. You can also use fractional shares to invest in more expensive stocks or ETFs that you otherwise could not afford.
• Do Your Research: Before you buy or sell any asset on Robinhood, you should do your research and analysis. You should not rely on hype, rumors, or emotions to make your trading decisions. You should use fundamental analysis, which is the evaluation of an asset’s intrinsic value based on its financial performance, growth potential, competitive advantage, and other factors. You should also use technical analysis, which is the study of an asset’s price movements, patterns, trends, and indicators. You should use both types of analysis to identify the best entry and exit points for your trades.
• Use Caution and Discipline: Trading on Robinhood can be exciting and rewarding, but it can also be risky and challenging. You should use caution and discipline when trading on Robinhood, and avoid some common mistakes, such as:
  • Trading with money you cannot afford to lose
  • Trading without a plan or a strategy
  • Trading too frequently or too impulsively
  • Trading based on emotions or biases
  • Trading without diversifying or managing your risk
  • Trading without doing your research or analysis
  • Trading without learning from your mistakes or successes

You should also be aware of the legal and ethical implications of trading on Robinhood, and follow the rules and regulations of the SEC (Securities and Exchange Commission), FINRA (Financial Industry Regulatory Authority), and IRS (Internal Revenue Service). You should also respect the rights and interests of other traders and investors, and avoid any fraudulent or manipulative activities, such as insider trading, market manipulation, or pump and dump schemes.

Conclusion

Trading on Robinhood can be a great way to start or enhance your investing journey, as it offers a low-cost, user-friendly, and feature-rich platform that allows you to trade a variety of assets. However, trading on Robinhood also comes with some risks and limitations that you should be aware of and prepared for. You should educate yourself, set your goals, diversify your portfolio, do your research, and use caution and discipline when trading on Robinhood. You should also use the tips and resources provided in this article to help you make the most of your experience. Happy trading!

References

¹: Commission-free Stock Trading & Investing App | Robinhood ²: Robinhood Review 2024 – Forbes Advisor ³: Robinhood Review 2023: Should You Invest Here? | U.S. News ⁴: Commission-free Stock Trading & Investing App | Robinhood ⁵: [Robinhood Protection Guarantee] : [Own & control your crypto in a web3 wallet | Robinhood] : [Robinhood outage map | Downdetector] : [Tax Center | Robinhood] : [Learn the Basics | Robinhood] : [How to Set Financial Goals | Robinhood] : [Diversification | Robinhood] : [How to Research Stocks | Robinhood] : [Legal | Robinhood]