How to Make Money with Robinhood
Posted by Frank Gogol in Financial Apps | Updated on November 15, 2022
Robinhood makes investing in the stock market easier than ever. You can buy any stock you want with just a few taps on your smartphone.
This is fantastic if you want to start making money on the stock market. But the easier it is to invest, the easier it is to lose money, too. It is more important than ever to have a good investment strategy before you begin investing.
If you are interested in investing with Robinhood, read on. We share what the best strategies are for how to make money with Robinhood, the risks you need to watch out for, and more.
Table of Contents
What is Robinhood?
Robinhood is a financial technology company that makes investing friendly, approachable, and understandable for beginners and experts alike.
Robinhood disrupted the financial industry for the better by offering zero commission fees, no account minimums, fractional shares, crypto exposure, and a simple, mobile-friendly sign-up process. It has an easy-to-use and sleek design that feels like social media. The platform also uses user networks to create a large volume of trades.
Robinhood incentivizes its users in different ways. It celebrates your trades with bursts of confetti after each transaction. It also gives you free stock if you refer friends to the platform. Essentially, Robinhood offers gamification of the stock market.
Now that you know what Robinhood is, let’s look at how to make money with Robinhood.
How to Make Money on Robinhood
Making money on Robinhood is the same as making money on any trading platform. Because of Robinhood’s design, there are two main strategies that investors use to make money.
“Buy Low, Sell High” is the cornerstone philosophy of a successful investor. For example, let’s say you love a product you use every day and decide to buy stock in the parent company. Say you pay $10 per share.
Other investors agree with you and choose to buy shares of the parent company, driving up its share price. Some time passes, and the price reaches $25 per share. You decide to sell your share for $25.
This example is known as asset appreciation. You bought low ($10) and sold your share when the price was high ($25) to make a profit (net gain of $15).
Of course, this is easier said than done. You need to predict which shares are going to grow, and when to sell the shares that you have.
If you want to make money with Robinhood you need to do the research and be clear on where you want your money invested. You should also take advantage of the independent analyst ratings provided by Robinhood. You will find lists of the top movers and shakers, as well as the benchmarks they are expected to hit in a specific time frame. Use these to help you to make effective buying decisions.
The second option for how to make money with Robinhood is by collecting dividends. Companies that offer dividends pay out a portion of their profits to shareholders as a reward for owning their stock. Dividends come into play when the company decides to share earnings with shareholders, rather than reinvesting profits back into the business.
For example, if a company offered an annual dividend of $0.10 per share, and you owned 1000 shares, you’d collect $100 in dividend income each year.
Some companies have higher dividend yields than others. Mature companies who are not looking to reinvest profits into the business are good candidates for dividend income.
Robinhood also offers you the option to reinvest your dividend income back into additional shares. Reinvesting your dividends allows you to earn compound interest. You use your dividend income to buy more shares, which means your next dividend payment will be more because you own more shares and so forth.
Patience is the Secret to Making Money on Robinhood
Both asset appreciation and dividend income are strategies that require patience.
The mistake many investors make on Robinhood is to get involved in day trades. Stocks go up and down daily, and if you mistime it, you can lose serious money.
Similarly, margin trading means you are trading on borrowed cash. If your margin trade doesn’t work out, you can lose serious money.
However, the stock market, over time, tends to go up. Increase your investment time horizon. Invest only the money that you have. Be patient and allow your money to compound over time.
Robinhood Special Features
Robinhood also has a few special features that make it unique.
Fractional Share Trading
Robinhood allows investors to buy fractional shares of a company. So, if you are dying to own Tesla but cannot afford its $500 share price, you can buy as little as 1/1000000 of a share, or $0.0005 worth of Elon Musk’s enterprise.
Robinhood Crypto enables users to buy and sell Bitcoin, Ether, Dogecoin, and other alternative coins, 24/7 and commission-free. This service is incredibly unique to Robinhood and is another distinguishing feature.
Trading on the margin means you can trade on borrowed cash, but also lose more money than you invest. Margin trading is risky, and if you aren’t careful you can lose serious money. The Financial Industry Regulatory Authority requires a $2,000 minimum for margin accounts.
Risks With Robinhood
In general, trading on Robinhood is not more risky than trading on any other platform.
However, Robinhood’s margin trading feature is risky for the average investor. Trading with money that is not yours is very risky. If you borrow money and the share goes up, and you sell in time, you can make a big profit.
But if you borrow money and the share goes down, or you don’t sell in time, the loss you make has to be paid out of your already dwindling portfolio.
This big-risk, high-reward way of trading seems very glamorous. But remember for every boastful, leveraged winner, there are thousands of much quieter losers.
Robinhood also makes it very easy for customers to place options trades. This is another risky investment strategy that some liken to gambling.
Nathaniel Popper—a journalist for The New York Times and the author of “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money”—wrote that Robinhood customers had “bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size.”
Popper continued, “This kind of trading, where a few minutes can mean the difference between winning and losing, was particularly hazardous on Robinhood because the firm has experienced an unusual number of technology issues, public records show.”
Before trading on margin or placing options trades, be sure to understand how they work and your potential downside. These strategies are very risky and are not suited for most investors.
How to Mitigate Risk on Robinhood
The least risky way of trading on Robinhood is to not do any margin trading.
If you’re dead set on margin trading, follow the following advice to mitigate your risk:
- Make sure you have enough cash in your account. If you ever have a margin call where Robinhood needs to cover your losses, it will pull from your cash reserves. This way you won’t have to sell any stocks to cover the call.
- Know the stock’s Maintenance Base Requirement. If the margin maintenance requirement is set at 30% and you own $10,000 worth, you must have at least $3,000 in account equity backing the investment.
- You should be extremely confident in the expected value of your investment to even consider margin. The expected return should far outweigh the cost of interest on the loan.
- Pay off the interest incurred on the margin amount you used. Robinhood charges its users 5% yearly interest on the settled margin amount above $1,000.
Investing is unforgiving. Be smart, play the long-term game, and invest in quality assets.
Robinhood makes investing in the stock market easier than ever (even closing your Robinhood account is easy!). With its sleek interface, you can buy any stock you want with just a few taps on your smartphone.
This means it is vitally important to have a good investment strategy before you begin investing. The secret of how to make money with Robinhood is to be patient, play the long-term game, and invest in quality assets.
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