How to Make Money on Robinhood in 2021: Your Guide to Gains
Robinhood has attracted a legion of fans since its founding, but do these investors know how to make money on Robinhood (HOOD)?
Whether you are learning how to start investing or are an experienced investor, it is easy to invest and make money on Robinhood.
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All investors want to buy low and sell high, but they might not know where to start. Keep reading to find out how to make money on Robinhood, invest safely, and profit from your smart money moves.
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What Is Robinhood?
Robinhood is a financial technology company that makes investing friendly, approachable, and understandable for beginners and experts alike.
Founded by Vladimir Tenev and Baiju Bhatt, they wanted a straightforward and painless way for everyday Americans to access financial markets – not just the wealthy.
Before Robinhood, institutions charged high fees to trade and required minimum account balances to invest. This left young investors on the sidelines. But not anymore.
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.
These minor changes moved mountains and opened the floodgates to average Americans who are eager to tap into the power of compound interest and value investing.
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Why Is Robinhood So Popular?
The firm reported 3 million new accounts in Q1 2020, half being first-time traders and up 200% from new users in Q1 2019. Young investors are flocking towards Robinhood because it speaks their language.
Born in Silicon Valley, Robinhood feels like social media. The ease-of-use and sleek design resonate with both Millennials and Gen Z.
Furthermore, Robinhood executed the network effect perfectly, just like Facebook (FB), Twitter (TWTR), and Snapchat (SNAP) – other social platforms that were built in the valley. You are on Instagram because your friends are on Instagram. It is the same deal with Robinhood.
Robinhood has taken another page from social media’s playbook: Growth Marketing and incentivizing users. Robinhood celebrates your trades with bursts of confetti after each transaction.
Additionally, users can refer friends and receive free stock.
The gamification of the stock market has attracted young, ambitious individuals looking to speculate on assets.
Robinhood’s frictionless sign-up process gets newcomers off the bench and into the game as fast as their fingers can move.
But this still begs the question, how can new investors make money on Robinhood? What investing strategies can they employ?
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How to Make Money on Robinhood
Unfortunately, there is a no “guaranteed gains” button on Robinhood or a “like” button for that matter.
At the end of the day, you make money on Robinhood the same way you make money on any other investing platform. It will just look cooler, and you will have your own fireworks show to prove it.
No matter what financial service you use, there are two ways to make money when investing.
#1. Asset Appreciation
Buy a stock when it’s “low” and sell it when it’s “high,” or at least higher than what you bought the asset for originally. For example, let’s say you love Cash App and decide to buy some Square stock (SQ) at $240.
Other investors agree with you and choose to buy shares of Square, driving up its share price. Some time passes, and the price reaches $251 per share. You decide to sell your one share, net the $11 gain, and pay back your friend from last weekend.
This example is known as asset appreciation. Over time your stock price increased in net value. This simple strategy is how the rich keep getting richer. It’s that easy.
#2. Dividend Income
The second and less sexy way to make money on Robinhood is by collecting dividends. Companies who issue dividends pay out a portion of their profits to shareholders as a reward for owning their stock.
For example, if a company offered an annual dividend of $0.25 per share, and you owned 100 shares, you’d collect $25 in dividend income.
Thus, owning a sizable amount of shares is required to make noticeable gains through dividends, but it adds up over time. Warren Buffet is set to collect $804.1 million from Apple’s (AAPL) dividend payout in 2020 alone.
Keep in mind that companies reserve the right to cut or pause their dividends for several different reasons, such as the sliding health of the company.
The Secret to Making Money on Robinhood
Increase your time horizon. As Anthony Pompliano says, “Anyone can become a millionaire if they have enough time.”
If you’re racing to Robinhood to day trade, a casino will serve the same purpose for you. No investor can know for certain where a stock will go on a given day, but putting time on your side will improve your chances of seeing positive returns.
Stocks go up and down daily, but over time, they tend to go up.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
Fight the urge to check Robinhood every day. Be patient and allow your money to compound over time. We recommend dollar cost averaging. It is a proven strategy that rewards long-term investors year after year.
Special Features
Robinhood offers some features that allow you to make money in different ways. For $5 per month, you can be a Robinhood Gold member and “trade on margin.”
This means that you can trade on borrowed cash, but also lose more money than you invest. Margin trading is risky, and investors can get into hot water quickly if they aren’t careful. The Financial Industry Regulatory Authority requires a $2,000 minimum for margin accounts.
Robinhood allows investors to buy fractional shares of a company. So, if you are dying to own Amazon but cannot afford its $3,000 share price, you can buy as little as 1/1000000 of a share, or $0.003 worth of Jeff Bezos’s enterprise.
Additionally, 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.
Risks of Using Margin Accounts
It is worth explaining the risks of using Robinhood’s margin accounts. As discussed earlier, trading with money that is not yours is a double-edged sword. The best way to understand this is to walk through two examples.
Example 1: Profit
The Federal Reserve allows investors to borrow up to 50% of the value of securities purchased. So, you deposit $5,000 into your margin account and Robinhood loans you an additional $5,000.
You have $5,000 in “portfolio value” and $5,000 in “margin.” You now have $10,000 worth of purchasing power, and decide to buy 1,000 shares of Palantir (PLTR) at $10 per share. Some time passes, and the stock rises to $11 per share.
You sell your entire position and realize a profit of $1,000. You just achieved a 20% gain (your portfolio value was $5,000, and you sold for a gain of $1,000).
If you didn’t accept Robinhood’s loan and your position was $10,000 of your own money, you would have only realized a 10% gain in the same scenario. You had to double your portfolio value ($5,000 to $10,000) just to achieve half the gains (20% to 10%).
Example 2: Loss
You deposit $5,000 into your margin account and Robinhood loans you an additional $5,000. You decide to allocate your $10,000 of purchasing power to 100 shares of Roblox (RBLX) at $100 per share.
Time carries on, and the stock falls to $90. If you sell your shares at this price, your portfolio value has decreased from $5,000 to $4,000, and you must still pay Robinhood the $5,000 loan they gave you. This results in a 20% loss on your original investment.
If RBLX continues to fall, your portfolio value decreases, but you still owe Robinhood $5,000 in margin used.
Robinhood requires investors to have a “minimum equity maintenance base” in their margin account based on the stock they’re trading, which is the relationship between your account value and the margin you were lent.
If your account value falls below their requirements, you may be getting a margin call. This means you’ll have to increase the equity of your account by adding cash or other securities you own to your margin account.
If you don’t comply, Robinhood has the right to sell securities you own to increase the equity in your account.
In an alternate universe, if you didn’t accept Robinhood’s loan and your position was $10,000 of your own money, you would have only experienced a 10% loss in the same scenario. Your $10,000 is now worth $9,000, and no one is knocking at your door.
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How To Lower Your Risk When Trading With Leverage on Robinhood
One of the first and most important steps to financial success is eliminating your debt. Trading with leverage flies in the face of this principle, but if you’re dead set on joining Robinhood Gold, the following paragraphs discuss strategies to mitigate your risk.
#1. Ensure You Have Enough Cash.
Make sure you have enough cash in your account to cover your back if you run into what is known as a “margin call.” This way, if Robinhood needs to cover your losses, it will pull from your cash cushion and not sell any of your beloved stocks.
#2. Know the Stock’s Maintenance Base Requirement.
It is paramount you know the assets maintenance requirement that you plan on buying. Robinhood determines this amount based on the stock’s behavior, such as volatility.
For example, if Robinhood sets Tesla’s (TSLA) margin maintenance requirement at 30% and you own $10,000 worth, you must have at least $3,000 in account equity backing the investment.
And let me be clear, these rules are not set by Robinhood. These are governed by the SEC.
#3. Choose Assets with Significant Upside.
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.
This is when it becomes important to research each individual stock before you make a purchase. Know the company inside and out. How are revenues? Are they releasing any new products? What are analysts saying about the stock?
Wall Street is getting excited about a few stocks in particular, including Moderna (MRNA), Snowflake (SNOW), and Ford (F).
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#4. Pay Off the Interest
This goes without saying. 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.
You will be charged this interest amount at the end of the monthly billing cycle. If you don’t pay it, the amount will be automatically deducted from your account the following month.
#5. Ignore the Hype.
For every boastful, leveraged winner, there are thousands of much quieter losers. Do not treat Robinhood Gold as a get-rich-quick scheme or you might get hurt – or rich off a meme stock.
Investing is unforgiving and certainly does not care about your feelings. Be smart, play the long-term game, and invest in quality assets.
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Limitations
Trading on Robinhood will be in an individual, taxable brokerage account. This means that you will pay taxes on your realized gains.
Robinhood does not offer traditional IRAs, Roth IRAs or other investment vehicles for retirement. A Roth IRA allows your money to grow tax-free since you pay the taxes upfront. Additionally, you will not pay taxes when you take the money out.
Due to the differences in how your earnings are taxed, Roth IRA contributions should be prioritized before funding your brokerage account.
Moreover, the platform has limited securities compared to other brokerage services. You cannot invest in Mutual Funds or bonds with Robinhood. A diversified portfolio will protect you when the market heads south.
Bottom Line: How to Make Money On Robinhood
You can sign up and begin trading in less time than it took you to read this article. Do your own research, play the long game, and enjoy the raging bull market.
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