Robinhood is the popular mobile trading app that is available on both iOS and Android. Since its launch in 2014, Robinhood has taking a unique approach to bring investing and trading geared towards millennials. In addition, their “commission free” approach to the online brokerage industry has garnered a lot of attention, especially from competitors, who have been forced to slash commission rates over the past few years in an effort to remain competitive. Robinhood users can trade stocks, ETFs, options, cryptocurrency, and soon cash management capabilities. Robinhood also offers premium account options, which opens access to margin use.
Series E Round: $323 Million at Valuation of $7.6 Billion
The mobile brokerage company announces that it raised $323 million during a Series E funding round at a valuation of $7.6 billion. The funding round was led by DST Global and included participation from Sequoia, Thrive Capital, NEA, and Ribbit Capital. Robinhood noted in a blog post that it intends to use the funding to “keep pursuing our mission of democratizing finance for all.”
How Does Robinhood Make Money?
Billed as a brokerage option that is commission fee, many often wonder how Robinhood generates revenue. Many have complained about the startup’s lack of transparency on the issue, but there are at least three main sources:
- Lending Out Uninvested Cash
Much like traditional brokerages, one of Robinhood’s revenue streams comes from lending out uninvested cash held by clients. The loans are used for margin, or are invested into conservative bonds or other interest-generating opportunities.
- Premium Perks
Robinhood’s “freemium” app approach allows the company to benefit from the potential of clients paying for more premium or advanced features. The Robinhood Gold account allows users to trade stocks on margin, pre-market and after-hours trading access, and instant access to deposits for trading activity. The lowest tier costs $6 per month, which allows up to $1,000 worth of margin access.
- Selling Client Orders to Market Makers
Just as traditional online discount brokerages operate, Robinhood generates revenue by essentially selling client orders to market makers. When a client places a trade, the order is sent to a market maker who then in-turn pays the broker a fee for processing the trades. While there is no clear disclosure on the amount generated per trade for Robinhood, The Motley Fool notes that TD Ameritrade and E-Trade earned fees of $2.51 and $2.52, respectively, in revenue per trade in Fall 2018. There is no indication or way to determine if Robinhood is profitable, due to being a private company.