What you MUST KNOW about Robinhood Investing

What's the guys? It's Graham here. Now, normally I would never make two Robin Hood videos like this back-to-back, but I gotta say, this entire event has been extremely mind-boggling. There have been some new events that have just come up over the last day, and I felt like there's a lot more that needed to be said about what's going on because pretty much every major business publication out there has picked up on this story.

Robin Hood still has not addressed the core issue of what's going on, and other people have decided to exploit this loophole even further to new extremes. In fact, before I posted my last video, the Reddit user Moon yacht's was able to use this cheat code to leverage a four thousand dollar deposit into a 1 million dollar position by buying one hundred and twenty thousand shares of foreign stock. After that, the Reddit user called warrior, who had a personal risk tolerance that was much higher than that, turned a three thousand dollar deposit into, wait for it, a 1.7 million dollar leveraged position in AMD.

Meanwhile, Robin Hood's fix was to disable low strike call options, but that still meant you're able to leverage way more than you're supposed to. It's just no longer infinite anymore. So far, at the time of me filming this video, they've only issued a statement saying that we're aware of the isolated situations and communicating directly with customers.

So, let's go over exactly what this means for Robin Hood, how this might affect their future IPO when I think about the entire situation, and also just how they make money in the first place. You know what? Let's just start there. How does Robin Hood actually make their money, especially if they give their users infinite margin?

Now, to start, it's absolutely no doubt that Robin Hood changed the entire investment industry for the better, and their come up has been nothing short of spectacular. They launched in late 2013 with a non-leveraged investment of three million dollars. Their premise was really simple: just offer an easy mobile platform to trade stocks on with zero commissions.

See, they found that actually executing a stock trade did not cost a brokerage that much money, so that meant that brokerages were just upcharging and making a ton of profit every single time he bought and sold the stock. Robin Hood just decided to eat the cost of actually executing the trade, which was not that much money to begin with, and then just run a smaller leaner company that would just balance out the lost revenue.

Their goal was not to make a bunch of money from each user, but instead get a bunch of users and make a small amount of money from each of them. Initially, the app was only launched as a stock tracker without the ability to actually go and buy and sell stocks, and it also offered a way for people to comment and share their thoughts on which stocks they thought would do well.

Within eight months after that, they got regulatory approval to act as a brokerage and offer its users the ability to buy and sell in a limited amount of stocks, all for the low price of zero dollars. Now, that was such a revolutionary and popular concept at the time that they got 10,000 signups within the first 24 hours. Then, by mid-2014, they had over half a million people signed up with 80 percent of those users between the ages of 18 and 29.

By the time they actually launched, they had over 1 million users signed up on their waitlist, which was absolutely staggering considering that this had not been done before, and it wasn't even functional yet. So, this proof that there's enough demand for the concept to go wildly successful, and it did. Within two years after that, Robin Hood received 110 million dollars worth of funding by DST Global, which valued this startup at a whopping 1.3 billion dollars.

Then, in August of 2017, the unthinkable happened. They started offering free stocks as a referral for signing up, which, by the way, is a perfect time for me to plug that if you sign up for Webull using my link in the description, they will give you two free stocks when you deposit $100. One of those stocks is gonna be valued up to $1,000, and they're gonna be giving you a $5 Starbucks gift card. The promotion is ending soon, so if you're interested, use my affiliate link down below in the description to sign up.

But seriously, real talk here, I think we could attribute this whole free stock concept all the way back to Robin Hood. Prior to them, no one was going and giving up free stock referrals like this, and the reasoning for this was pretty legitimate because other companies would offer you a free service as an incentive for signing up. That led you to know what they did; like Uber will give you a free ride, or Airbnb will give you a discount on a stay.

So it made sense that Robin Hood would just offer you a free stock as an incentive for signing up on their platform. You can't argue with results after that because it worked. They currently have over 6 million users and a current valuation of seven point six billion dollars.

But in terms of how they make money, it's a little bit uncertain because they're not a public company yet, and they don't need to disclose whether or not they're profitable or just how much money they're making. But it is estimated that they make money from their six million users in these few ways: One, they make money from the Robin Hood Gold service, which begins at five dollars a month and offers you additional features like unlimited margin trading, sufficient to your own risk tolerance. Just kidding.

Secondly, they charge a five percent interest rate on their sufficiently leveraged margin accounts, which again, 5% adds up. Third, they make money from your uninvested cash on the platform, and banks do the exact same thing. They'll use a portion of customer deposits towards very safe low-yield investments and then profit the difference.

Now fourth, and probably the most controversial, is that Bloomberg says that almost half of Robin Hood's revenue came from a practice of routing order flow. This is the practice in which Robin Hood itself does not execute the stock trades when you place them, but instead, they outsource it to another company who pays for the right to execute those trades. Those types of firms usually make a very, very small amount off the trade. According to Bloomberg, that was zero point zero zero two to four cents per share, but with a hundred and fifty billion dollars worth of stock trading volume, it adds up.

Now, even though this is a very common practice for brokerages, there was some controversy in terms of how this was done. Some say that Robin Hood was selling order flow to high-frequency trading firms that paid more money and didn't get you the best price possible for a stock. Now, I know some people are gonna be up in arms about this, but my opinion is that it's not that big of a deal. We're talking about such a small percentage here.

You should be more worried about picking off a dime off the sidewalk when you see it than worrying about paying a fraction of a cent more for Robin Hood's order flow, but that's again just my opinion. Besides that, I'm sure they're eventually going to be charging some interchange fees from their debit card associated with their cash management account. But I'm also pretty sure they have a few other things that are probably in the works, like maybe hopefully we'll see a retirement account.

I have no clue if they're actually profitable as a company and whether or not they plan to expand into other banking services like checking accounts, loans, credit cards, and stuff like that, which I have a feeling that is going to be whether or not Robin Hood sinks or swims.

So, with that said, I think it's no surprise that their end goal is to result in an IPO. After all, it seems like an inevitable fate of many startups who might have a difficult time getting to profitability, and when investors get antsy to cash out and give their shares to the public, it just seems like the most logical solution.

But in my opinion, a few issues here certainly make it a little bit concerning. One is their fairly large mishap with the SIPC over their proposed checking and savings account. Basically, a year ago, they wanted to create a checking and savings account with fees, no minimums, that also paid you a 3% interest rate. Since they were not technically a bank, they would not be FDIC insured, but they did claim that SIPA insurance would be covered under their brokerage, which covers investment accounts.

Well, it turned out they were wrong, and SIPC never agreed to cover any of their checking or savings accounts. The entire thing was just a massive PR disaster. Robin Hood scrapped the idea, said that they were gonna be revamping it, and then they tried to sweep it under the rug. I get it; mistakes happen. But it was concerning to me that a company as large and valuable as Robin Hood, who spent all of the time to create a checking and savings account, would not first confirm with the SIPC that this was indeed covered before announcing it.

Secondly, how they're handling this margin glitch is to me a little bit concerning. This has been a bug that people have been publicly posting about and abusing for quite some time, so it has to make you think if we're only now just hearing about it, how many other people have been doing this and defaulting on their payments and then just never posting about it? How much action did Robin Hood really take to prevent this from happening in the first place or try to fix it sooner?

Now, I could be wrong here, but I have a feeling this could just be the tip of the iceberg in terms of what people are doing and abusing and then just not posting about it. No, like I said, mistakes happen. No one is perfect; no company is perfect. We all make mistakes at some point, and that's no reason to fault or shame a company.

But I think what does matter is how they handle that situation and the speed at which they address it. Now, in their defense, I have no idea how difficult of a process this would be to fix or how long it would take to address it, and I agree, if they were to make a very large statement about this before the issue is actually fixed, it could draw more eyeballs to the platform and maybe encourage more people to go and abuse it.

But I do think this was such a large issue that should not have happened in the first place, especially with people publicly posting about it for quite some time. You think it would be on their bucket list just to fix this sooner. Not to mention this spread worldwide within about 24 hours of it being posted on Reddit, and the glitch, at the time of me filming this, has not entirely been addressed. Although they have made an effort to curb people who are trying to abuse it, this worries me a little bit about their ability to fix and address other glitches if and when they arise in their entire platform, especially if their end goal is to IPO.

It doesn't exactly instill confidence in terms of where we go from here. Ideally, Robin Hood just fixes the glitch and sweeps it under the rug and then keeps a very close eye out on everyone else just to try to make sure they're not trying to take advantage of any loopholes.

In a weird way, Wall Street bets was probably the best user testing Robin Hood could have ever asked for because only they would find a glitch like that, exploit it, and then bring it to light in such an ostentatious way. But how they handle those issues is going to be an indication of how they will handle future issues as well when they come up, which I think is inevitable, and it's gonna happen to every business out there.

I also think brokerages and any investment app out there should really be monitoring social media sites like Wall Street bets very, very, very closely. The same also applies with YouTube. I think a lot of major brokerages out there are just sleeping on this information and relying on old-school outdated user feedback resources that just really no longer apply.

I was even surprised when I went to a financial networking event a few weeks ago, and several very large companies, which I will not name, had no idea that finance content even existed on YouTube. All they wanted to know about was what my financial blog was. That goes to show you that many of them are years behind where they really should be.

Lastly, I would not be surprised that after this, Robin Hood and many of the other brokerages out there would change the way that margin accounts are handled because, realistically, there's no rational reason why everyone is just given the same access to margin. For the most part, all you need is two thousand dollars, pay for Robin Hood Gold, agree to pay a five percent interest rate, and bam, all of a sudden you can borrow 50 percent of your money to go and invest with? Pretty much in no other industry would you be able to do that, so it doesn't make sense to me why this would be the case for stocks without a more thorough background check.

Finally, let me say this: I have nothing against Robin Hood. I use them myself, and I think they're a great platform. If it wasn't for them, I have a feeling that none of us would be seeing free stock trades like we are today. We almost certainly owe that to them, and they've shaken up the entire investment industry for the better.

They've definitely got some room to improve, customer service being one of them, and the ability to actually call and reach a live person 24/7 would be huge. Maybe they might need a more thorough PR research team to scour the internet, see what people are saying, find flaws, and address them before they get as big as this. Otherwise, you're just gonna have people with nothing to lose and everything to gain by trying to take advantage of these little loopholes and glitches at Robin Hood's expense.

With the potential IPO coming up in the future and competition at all time between them and pretty much every other brokerage, I think it's more important than ever to go on the offense, bring out new features, improve the existing platform, and make sure errors like this are resolved as swiftly as possible.

So, with that said, you guys, thank you so much for watching. I really appreciate it. As always, if you guys enjoy videos like this, make sure to destroy the like button and also destroy the subscribe button and notification bell, so YouTube notifies you anytime I post a video. Also, feel free to add me on Instagram. I post there pretty much daily, so if you want to be a part of it, feel free to add me there. Also, add me on my second channel that is known as the Graham Stephan Show. I post there every single day I'm not posting here, so that means if you want to see a brand new video from me every single day, make sure to add yourself to that.

Thank you so much again for watching, and until next time that sent me, I'll be honest, I was like, "Oh, holy sh**," like they've actually done something in my account now, and now I have an official margin call for over a quarter million dollars. Then that disappeared, and then as they were closing the account positions, my account balance shot up all the way up to 750 [thousand]. You know, so it was all over the place as they were cleaning up the mess of my account.