What Robinhood is and what it is not

Robinhood is a brokerage firm, not a bank and not a financial advisor. It is a company licensed by the Securities and Exchange Commission (SEC) to buy and sell stocks, exchange-traded funds (ETFs), options, and cryptocurrencies on your behalf. You open an account, deposit money, and use Robinhood's app or website to place trades yourself — you make the decisions about what to buy and sell.

Robinhood does not hold your money the way a bank does. When you deposit cash into your Robinhood account, that money sits in a cash management account that Robinhood operates. The cash itself is held at partner banks and is covered by Federal Deposit Insurance Corporation (FDIC) protection up to $250,000 per account holder per bank partner. But Robinhood is not a bank, and your account is not a checking or savings account.

Robinhood also does not give personalized investment information. The app shows research, educational content, and market data, but these are informational tools, not recommendations tailored to your situation. If you want someone to tell you what to buy, you need a financial advisor or robo-advisor, which Robinhood is not.

Key Takeaways

  • Robinhood is a brokerage that lets you trade stocks, ETFs, options, and cryptocurrencies through an app, but you decide what to buy and sell.
  • Cash in your Robinhood account is held at partner banks and covered by FDIC insurance up to $250,000, but Robinhood itself is not a bank.
  • Robinhood does not provide personalized investment information or manage your money for you.
  • Robinhood makes money through payment for order flow (selling information about your trades to market makers), subscription fees for premium features, and interest on cash balances.
  • Your trades on Robinhood are subject to the same tax reporting and capital gains rules as trades at any other brokerage.

How Robinhood makes money

Robinhood charges no commission on stock and ETF trades, which is why it became popular. Instead, it makes money in three main ways. The primary source is payment for order flow — Robinhood sells information about your trades to market makers (large firms that buy and sell securities). This practice is legal but controversial because it creates a conflict of interest: Robinhood profits when you trade, even if trading frequently costs you money.

Robinhood also offers Robinhood Gold, a paid subscription tier that costs $5 per month and gives you access to margin (borrowed money to trade with), extended-hours trading, and research tools. This is optional; you can use Robinhood's basic service for free.

A third revenue stream comes from interest on cash balances. When you hold cash in your Robinhood account, Robinhood earns interest from the partner banks holding that cash and passes some of it to you. The rate varies and is set by Robinhood, not by you.

How Robinhood differs from a traditional brokerage

Traditional brokerages like Fidelity or Charles Schwab also charge no commission on most trades, so the main differences are in features and business model rather than cost. Robinhood's app is designed to be straightforward and mobile-first, with a focus on individual stock trading and a social feed showing what other users are trading. Traditional brokerages offer more research tools, retirement account options, and customer service by phone.

Robinhood does offer retirement accounts — both Traditional and Roth IRAs — but the selection of investment options is narrower than at larger brokerages. You can hold stocks, ETFs, and options in a Robinhood IRA, but not bonds or mutual funds.

Another difference: Robinhood's customer service is primarily through the app and email, not by phone. If you need to speak to someone when ready, this is a limitation compared to brokerages with phone support.

What happens to your money if Robinhood fails

If Robinhood went out of business, your securities (stocks, ETFs, options) would be protected under the Securities Investor Protection Corporation (SIPC) rules. SIPC covers up to $500,000 per account, with a limit of $250,000 for cash. Your securities would be transferred to another brokerage, not liquidated.

Cash held in your Robinhood account is covered by FDIC insurance up to $250,000 per bank partner. Robinhood works with multiple partner banks, so if you have more than $250,000 in cash, it may be spread across partners to increase your coverage. You can see which banks hold your cash in your account settings.

These protections are standard across brokerages and are not unique to Robinhood. The risk of a brokerage failing is low because they are heavily regulated and must maintain certain capital reserves.

Tax reporting and capital gains on Robinhood

Robinhood reports your trades to the Internal Revenue Service (IRS) the same way any brokerage does. At the end of each tax year, Robinhood sends you a Form 1099-B (for securities trades) and a Form 1099-INT (for interest earned). You use these forms to report your capital gains and losses on your tax return.

Capital gains are taxed differently depending on how long you held the investment. If you sold within one year, it is a short-term capital gain and taxed as ordinary income. If you held for more than one year, it is a long-term capital gain and taxed at a lower rate (0%, 15%, or 20%, depending on your income). Robinhood does not calculate your tax liability — you or a tax preparer do that based on the 1099 forms.

Robinhood also tracks your cost basis (the price you paid) and can calculate gains automatically if you ask, but you are responsible for reporting accurately to the IRS. If you trade frequently or hold investments in multiple accounts, keeping your own records is wise.

Robinhood's regulatory status and past violations

Robinhood is registered with the SEC as a broker-dealer and is a member of the Financial Industry Regulatory Authority (FINRA). This means it follows the same rules as other brokerages regarding how it handles your money, what it can charge, and how it must communicate with you.

Robinhood has faced regulatory action. In 2021, the SEC fined Robinhood $70 million for misleading statements about its revenue sources and failing to disclose conflicts of interest related to payment for order flow. In 2023, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $57 million for supervisory failures and failures to maintain accurate books and records. These violations did not affect customer accounts or securities, but they show that Robinhood has had compliance issues.

Robinhood also faced criticism during the 2021 GameStop trading event when it temporarily restricted buying on certain stocks. The company said this was due to clearing house requirements, not a deliberate choice to protect hedge funds, but the incident raised questions about how much control Robinhood has over your ability to trade.

Robinhood versus other brokerages for different goals

If you want to trade individual stocks and ETFs with a straightforward app and no commission, Robinhood works the same as Fidelity, Charles Schwab, or E*TRADE. The choice comes down to features and interface. Robinhood's app is simpler; others offer more research and phone support.

If you want to open a retirement account (IRA), Robinhood offers Traditional and Roth IRAs, but with fewer investment options than larger brokerages. Fidelity and Schwab have broader selections, including mutual funds and bonds.

If you want a robo-advisor (a service that automatically invests your money based on your goals), Robinhood does not offer this. Betterment, Wealthfront, and Vanguard Personal Advisor Services do.

If you want to trade options or use margin (borrowed money), Robinhood allows both, but you must meet account minimums and pass an options approval process. The same is true at other brokerages.

Frequently Asked Questions

Is my money safe on Robinhood?

Your securities are protected by SIPC up to $500,000 per account, and cash is covered by FDIC insurance up to $250,000. These protections are standard across brokerages. Robinhood has faced regulatory violations but has not lost customer funds.

Can I use Robinhood for retirement savings?

Yes, Robinhood offers Traditional and Roth IRAs with the same contribution limits and tax rules as IRAs at other brokerages. However, Robinhood's investment options are limited to stocks, ETFs, and options — you cannot hold bonds or mutual funds in a Robinhood IRA.

Does Robinhood charge fees?

Robinhood charges no commission on stock and ETF trades. It offers a paid subscription (Robinhood Gold) for $5 per month that adds margin and extended-hours trading. Some account types or features may have other fees; check your account settings or contact support for details.

What is payment for order flow and why does it matter?

Payment for order flow means Robinhood sells information about your trades to market makers, who use it to set prices. This creates a conflict of interest because Robinhood profits when you trade. Some argue this slightly worsens your execution price, though the difference is usually small.

Can I transfer my investments out of Robinhood?

Yes, you can transfer securities to another brokerage through an ACAT (Automated Customer Account Transfer) transfer. Robinhood may charge a fee (typically $75 to $100) for outgoing transfers. Cash must be withdrawn separately.