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There aren’t any.
Just kidding, but it might seem like that at first sight! As a commission-free brokerage, Robinhood does not charge the most obvious fee that traditionally prevented much of middle and lower classes from investing.
In fact, with Robinhood’s current sign-up promotion, they’ll basically PAY YOU to invest. When you sign up for Robinhood today, you’ll get between $5 and $200 of FREE CASH to invest in whatever stocks you choose (from a premade list of 20 stocks). You can buy fractional shares of one or more stocks if you’d like. Then, when you refer friends to Robinhood, you’ll get MORE free investing cash, up to a limit of $1,500 per year!
Robinhood has earned a spot in the hearts of many investors, especially those who are new to investing or have smaller portfolios to work with.
Robinhood democratized the investing world by disrupting the brokerage game with commission-free trading. In the past, big name brokers would charge huge commissions just to buy or sell a stocks. Now, most of the major brokerage firms and online brokers have followed in Robinhood’s footsteps to keep up with the changing world of investing.
But, we all know there’s no such thing as free lunch. So, if you don’t have to pay commissions on Robinhood trades, what do you have to pay? Let’s take a look.
Regulatory Trading Fees
There are some fees that Robinhood has to charge by law. You’ll have to pay these regulatory fees no matter what brokerage you’re doing business with.
Regulatory Transaction Fee
Robinhood is required by law to pay fees to the Securities and Exchange Commission (through FINRA, the Financial Industry Regulatory Authority) when you make a sale. As the customer, you are only required to pay this fee if your sale is greater than $500. As of February 21, 2021, the SEC charges is $5.10 per $1,000,000 of principal. This would be a total of $0.0051 for a sale of $1,000.
Robinhood rounds this fee up to the nearest penny and keeps the difference. Interestingly, in 2020, this fee rate was over four times higher at $22.10 per $1,000,000 of principal, but Robinhood’s round-up policy was still the same. This fee is set by the SEC and can change up to twice per year.
Trading Activity Fee
Robinhood also has to pay a fee directly to FINRA as a sort of management fee. You only pay this fee when you make a sale of more than 50 shares. The fee is $0.000119 per share for equity sales and $0.002 per share when you sell options contracts. This fee is also rounded up to the nearest cent, and can be no more than $5.95.
Tracking so far? Robinhood can’t get out of these fees since they are required by financial regulatory bodies. They could eat the cost themselves, rather than passing them along to customers – but then they would likely go bankrupt. It it is helpful to know they are rounding the fees up to the nearest penny though…hmmm.
Then again, Robinhood is eating the cost for smaller trades, opting not to pass these fees onto under $500 or under 50 share trades. That seems pretty on brand – take from the rich and give to the poor, right? Let’s keep going…
Account Transfer Fees
This fee is one you always have to watch out for, regardless of who your brokerage is. The technical name for this fee, ACATS, stands for Automated Customer Account Transfer Service, and the fee is charged when you decide to transfer your shares from one brokerage to another. If you decide to switch from Robinhood to another brokerage, and don’t want to incur the taxes that will come from realizing gains by selling your stocks, you will be charged a $75 fee (regardless of account size) to transfer those stocks to another brokerage.
According to the Motley Fool, this is pretty much exactly average among other brokerages. Although, as the Fool notes in their article, some brokerages don’t charge anything to transfer your brokerage account. So, if that flexibility is important to you, watch out for this fee.
Robinhood does not charge you a fee to transfer your cash balances to your bank account from your investment account or vice versa.
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Okay, back to Robinhood!
Fund-Specific Management Fees
Management fees are another type of fee you’ll be required to pay on funds you own regardless of what brokerage you are using. Management fees make up part of what is referred to as the MER, or management expense ratio.
These fees can be sneaky; they are not a fee you actually pay directly with your credit card or the funds in your investment account, but fees that are deducted from the total return of the fund and kept by the company that owns the fund. If you invest in passively managed funds like ETFs, these fees will be very small.
For example, VOO, which is one of the most common index funds that tracks the S&P 500, has a MER of 0.03%, or three basis points. Other ETFs that are passively managed but require a bit more work, like sustainability ETFs or sector-specific ETFs, might have a MER closer to 0.15%.
If you choose to invest in actively managed funds like mutual funds, which aim to beat specific benchmarks through frequent buying and selling, it is not uncommon to see MERs upwards of 0.7%, which includes management fees, operational expenses, and even fees incurred when you buy into and sell out of mutual funds. At the moment, Robinhood does not offer mutual funds, so you won’t have to worry about these fees.
These fees can really add up when you put a lot of money into a fund over a longer-term investing horizon, especially when you’re investing in an actively managed fund.
Once again, these fees are not specific to Robinhood and the money goes directly to the fund managers, but Robinhood often does not list these fees on their platform. So just be sure to take a look at the MERs of mutual funds before you buy in!
Trade Execution: Order Flow Routing
This is how Robinhood makes a majority of its money. When you place an order to buy or sell a stock, you are subject to what is called the bid-ask spread of that particular stock. The bid price is the highest price at which a buyer is willing to buy the stock. The ask price is the lowest price at which a seller is willing to sell the stock. The difference between the bid price and the ask price is the bid-ask spread.
Market makers, which are the companies that actually make your trades for you, create the bid price and the ask price and profit off of the spread. Typically, stock brokerages “broker” their clients’ transactions by routing their trades to market makers and taking a commission from the clients. But Robinhood, being commission-free, makes money by routing their clients’ trades to certain market makers and taking a rebate payment from the market makers themselves.
This might sound great since Robinhood is taking money from the “big guys” instead of its clients, but here’s the catch: since the big guys pay Robinhood to send trades to them, they are forced to widen the bid-ask spread for those trades. This means that you, the investor, have to buy your stock at a higher price or sell it at a lower price.
Unfortunately, Robinhood got into some trouble with the Securities and Exchange Commission (SEC) in late 2020 for this practice, which was seen as dishonest and harmful to clients; read the Forbes article about the SEC charges here.
The good news? If you’re only trading a small amount of shares at a time, the difference is only a few cents and you will likely still gain a net benefit given the absence of commission. Also, you can get around the difference in the spread by using limit orders to specify that you want to buy or sell a stock at an exact price or better, not the current market price.
Robinhood also charges fees for certain optional account services, like if you want to receive your monthly statements in paper form rather than electronically or you need to overnight a check.
Robinhood Gold is Robinhood’s premium membership. If you choose to upgrade to Gold, you pay $5 in monthly account fees, which comes with $1000 of margin. If you want to borrow more than $1000, the margin account rate is currently 7%. Gold gives you access to margin trading, larger instant deposits from your bank account, and advanced research and market data. If you SIGN UP FOR ROBINHOOD GOLD NOW, you can get the first month for free!
Or, for more information, read our review: Is Robinhood Gold Worth It?
If you don’t opt for special brokerage services and aren’t planning on making huge trades, your investing experience is literally free. But make sure to keep an eye out for taxes on your short-term and long-term capital gains, dividends, and interest, which you will have to pay regardless of the brokerage you use.
As you can see, you aren’t completely immune from fees on Robinhood.
But the account fees you do pay are very typical for similar brokerages, or normal fund fees you pay when you invest in ETFs or mutual funds.
Some fees are completely optional, like the monthly fee for signing up for Robinhood Gold. Robinhood Gold is not at all required, but is helpful if you want to trade on margin, or you’re looking for bigger instant deposits, more interest on your uninvested cash, or better research and data.
Compared to other online brokers, Robinhood takes the cake when it comes to a fee-free investing experience.
If you want to learn more about Robinhood, you can read about the Robinhood Crypto Wallet or get an answer to the question: how does Robinhood make money?