How Robinhood Really Makes Money #Best Education Page #Online Earning

- So in this video today I'm going to be answering

one of the most common questions

that I get every single day,

either here on my YouTube channel

or over on my investing blog.

And that is the question of

how do these free trading apps out there

actually make any money?

And the thought process behind this makes a lot of sense

because a lot of us were taught,

especially when we were younger,

that there is no such thing as a free lunch out there.

I'm sure you've all been at the mall before,

or somewhere in public,

and someone comes up to us

and says hey, I wanna give you a free cruise

or a free vacation,

and you get roped into this long conversation

only to find out that it in fact is not free

and you just surrendered over all of your information.

So are these trading apps legit?

Are they a complete scam?

That's what we're gonna answer today in this video.

So unless you've been living under a rock,

or maybe you just don't know

anything about the stock market,

you've probably seen these ads for different

commission free trading apps out there.

Three of the most popular ones being

Robinhood, M1 Finance,

and most recently an app known as Webull.

These companies are spending millions

of dollars on advertisements

and acquisitions of customers,

but they're not charging anything for trades,

and most of them have a zero dollar minimum account balance.

And not only that, but a number

of these different apps are offering you free stocks

just for signing up.

And that right there is the perfect segway

into a shameless affiliate plug for Webull.

So I of course am affiliated with Webull

and they are offering users up to two free stocks

just for opening up an account with them.

So number one, you do have to open an account

to get a free stock.

And then number two, after you fund that account

with $100 or more,

you're going to get a second free stock.

So if you're looking to get into

investing in the stock market

and you wanna explore the Webull platform,

they're gonna offer you up to two free stocks

just for signing up.

That's going to be the top link

in the description below.

Now you do have to use my link

in order to get those two free stocks,

or someone else's affiliate link

if you just don't like me.

But if you download the Webull app

from the app store you will not get

any of the free stocks.

I'm not just saying that,

that is the God's honest truth.

They are using this as a way to draw new accounts.

And if you've already heard of Webull

and you're downloading them from the app store,

they don't have to spend that money giving you free stocks.

So if you wanna take advantage of that offer,

that is the top link in the description below.

So maybe you're one

of these people that are still very skeptical about this,

your inner scam alert is being triggered,

and you basically wanna understand

how a company that charges zero dollars for trades,

has, in most cases, zero dollar minimum account balance,

and they're literally handing you up to two free stocks,

how is there any money to be made in this business?

And just to circle back here

and give myself a bit of a credibility point here,

I have been writing about these different brokerage accounts

and investing apps over on my personal finance blog,

investingsimple.blog, for the last year.

So I have put hundreds of hours into research

on these specific platforms.

And for this video alone, many hours

of research went into this.

All that I ask in return is that you go ahead

and hit that like button for me.

Don't worry, I will wait.

Okay, thanks for hitting that like button guys,

I really appreciate that.

It helps out with the algorhithim

and just overall shows your support for my channel,

so I do appreciate that.

But that being said, lets get into it

and talk about how these brokerages

made money in the past.

So if we went back in time about 10 years ago or so,

your only options when it came down to trading stocks

were basically one of two options.

Number one, you could go through an online discount broker.

We're all familiar with these.

There's Charles Schwab.

There used to be Scott Trade,

TD Ameritrade, E Trade.

This is what you call an online discount broker.

And these online discount brokers

allowed you to place trades online,

paying a small commission of around five to $10 per trade.

Option number two was a little bit more expensive,

and that was to go through an in-person stockbroker.

And that was somebody you would literally

call up on the phone and say hey,

I'd like to place a buy order

or a sell order of these specific shares.

So in the past that was the only way

that you could trade stocks.

You had to pay commissions on your trades,

and most of these accounts for these online discount brokers

had minimum balances of $500 or more.

And this made it extremely difficult for beginners

to get started with investing in the stock market

because even if you had enough

for the minimum account balance,

you were spending so much money on trading commissions

that even if you turned a small profit

your commissions are gonna wipe that out entirely.

So then in April of 2013

everything about the brokerage industry changed forever

with the introduction of Robinhood.

And Robinhood came on the scene offering

zero dollar commissions, zero dollar minimum account balance

and they even had a referral program

where if your friend referred you to Robinhood

you would both get a free stock

just for signing up for an account with them.

So this was extremely disruptive to this brokerage industry

where pretty much the old way of doing business

was what everyone was doing,

and Robinhood came on the scene

and said nah, we're gonna do it differently.

So obviously a number of companies have now followed suite.

M1 finance originally charged fees to customers,

but they went commission free over a year ago now.

And then most recently we have Webull,

which is a more sophisticated

trading platform than Robinhood,

which is offering commission free,

short telling commission free trading,

and all kinds of additional bells and whistles

above and beyond what you see with Robinhood.

So essentially we can credit Robinhood

for starting up this new industry here

of commission free brokerages

or commission free trading.

And this literally did not exist even just five

or six years ago.

But obviously M1 Finance, Webull,

and Robinhood are not charities.

They have operating costs, they have employees

and they have to have a means to make money.

And so they are in fact making money,

but they made the decision to do dit in a different way

than the old school players were doing.

So in the past this is how you would make money

as a brokerage.

Number one, you would charge commission for trades.

As we said, that's what these

online discount brokers were doing for years.

Or number two, if you built portfolios for your customers,

you would charge an annual asset management fee.

So for example a common management fee was around

half a percent to one percent.

So if you had $100,000 in a portfolio,

that would be $500 to $1000 per year

in fees paid to that financial institution.

Now these free investing platforms

obviously disrupted this business model

and eliminated the commission environment.

And M1 Finance even offers pre-built expert portfolios

with zero percent annual management fee.

Now it's important to understand

that in order for these companies to offer all

of these free perks they had to do

a significant amount of cost cutting.

And there were some major inefficiencies

with how these traditional brokerages

were operating their businesses,

primarily in three different areas.

Number one was customer service.

Phone support is extremely expensive and time consuming

so all of these free investing platforms out there

exclusively handle customer support through either Email

or chat support.

You're not gonna find any phone support

with these free investing apps

because they just can't afford it.

Number two, the second area is paper.

Paper is extremely expensive.

It costs money to mail out statements

so all tax documents and statements

are going to be sent electronically to your Email

or available through the apps.

And then third and finally retail locations.

You can drive to a Charles Schwab

or an E trade office and make a deposit.

And you can call someone up on the phone.

But all of that is going to be costing you money

when it comes down to asset management fees,

as well as commissions.

So there is no such thing as a Robinhood office

or Robinhood branch you can stop into.

And these are the three areas

that these free investing platforms

have really cut back on

in order to offer the perks that they're offering you now.

So that being said, now that we're all caught up here,

understanding the landscape

of these free investing platforms,

lets talk about how they're actually making money.

But before we do that,

I wanna go ahead and do a quick survey for you guys.

So what I want you to do is

scroll down to the comments section below

and drop me a comment of what brokerage

you are currently using.

I'm curious if a lot of people have switched over

to these new investing platforms

or are they still going the route

of the online discount broker

or the in-person broker.

So pause the video now.

I will wait for you.

Drop a comment down below.

Okay so the first way that these apps are able to make money

is through the uninvested cash

held within your brokerage account.

So when you invest money through these platforms

you deposit money from your bank account

into your brokerage account,

and you use that money to buy stocks or bonds

or whatever it is that you wish to buy.

Now not everybody invests all of their cash at once,

which means that there is

idle cash held within your account.

Now this may be as small as $5 to $10,

but when you consider the fact that

there are millions of different accounts

with each of these platforms,

that small amount of uninvested cash

starts to add up.

And they do not pay any interest on that cash,

and as a result they are able to loan that money out

and collect interest on it in the process.

Now before that is a red flag for you guys

I just wanted to let you know that

you are insured through SIPC,

which protects you up to $250,000

for the cash held within a brokerage account.

So if they loaned out all of this cash

and lost that money, you are insured up to a quarter

of a million dollars.

And it's also important to note

that pretty much every financial institution out there

is doing exactly this.

When you put your money in the bank

it doesn't stay in your bank account,

it gets loaned out,

and it's a means for that bank to make money.

Your brokerage accounts are doing the exact same thing.

All right so the second way these companies

are able to make money is through

something called a margin account.

And a margin account is where

they are matching your buying power.

In most cases dollar for dollar,

and essentially giving you a loan to invest with.

So for example if you had $50,000 in your brokerage account

and you opened a margin account,

you would effectively have $100,000 worth of buying power.

$50,000 is your cash, the other $50,000 is a loan

given to you by your brokerage account.

And just like a traditional loan from the bank,

you have to pay interest on that loan every single month.

And this is a way for your brokerage account

to make money and earn interest,

and it's another form of income for them.

Now this is an extremely risky area for investors.

I don't recommend margin trading,

I don't really know anybody who does,

but it is a way that they make money.

One example is Robinhood Gold.

That is a subscription that allows you to have margin

and gives you additional buying power

for a certain dollar amount each month.

And it's important to understand

as well that through a margin account

your stocks are actually serving as collateral.

So if you end up losing money on a bad investment

you will get what is called a margin call,

which is when you are required to deposit

additional cash into that account

or they will be selling your stocks

and keeping that money.

So it's a low risk way for these brokerage accounts

to make money by offering you a loan to purchase stocks.

And if you do in fact make a bad investment

they have the right to sell your stocks

and keep that money.

Now the third way that these brokerages are making money

is by offering some type of paid subscription

or paid membership.

Robinhood Gold is an example of this,

where you're getting access to margin.

Another example of this is Webull

sells subscriptions to global real time market data.

So if you wanted to get real time market data

on different global exchanges,

you can pay a monthly subscription

to get access to that data.

But it's important to remember that all investors

are going to get access to real time US market data

completely free.

If you have the desire to get data on other global markets,

you can pay a monthly fee for that.

And then lastly, M1 Finance does offer M1 Plus

which is a debt and checking account

that offers similar cashback benefits to a credit card.

But you do have to pay an annual fee.

So that is an additional revenue stream

for these free investing apps.

Number four, the fourth way that these companies make money

is by lending shares out to short sellers.

Now this gets a little bit deep in the weeds here,

but I'm going to try to explain this as simply as possible.

Short selling is essentially

betting against a particular stock.

So most people in the stock market make money

when the stock goes up in value.

So you wanna buy at $10 and maybe sell at $15,

making money by buying low and selling high.

Now short sellers on the other hand

are making money in the exact opposite way.

They're betting against a stock

and they want a stock to go from $15 down to $10.

That is when they would make money.

So in order to do that,

this takes place in a margin account.

What they have to do is borrow shares

from a brokerage account,

sell them on the market

and then at a later date repurchase those shares

from the market and return them

to that financial institution.

So brokerages like M1 Finance

and these other free investing platforms

loan out your shares to short sellers

and earn margin interest in the process.

Now don't be too worried about this.

Again, because through that SIPC insurance

you are insured up to $500,000

for the securities held within your account.

So if your brokerage lent out your shares

and then they lost your shares,

you're insured up to a half a million dollars

for those securities held within your account.

And on the M1 Finance website for example,

they publicly stated that they lend out

less than five percent of securities,

meaning that 95% of them stay in the brokerage account.

Only a small percentage are being lent out to short sellers.

Number five, the fifth way these brokerages

are able to make money is through something called

a portfolio line of credit.

Now most of us are familiar with

a home equity line of credit,

and it's honestly quite similar.

A home equity line of credit is a way

for you to get a low interest loan for whatever you need,

maybe it's medical bills, maybe you wanna go buy a car,

whatever it is, it allows you to get a low interest loan,

which lets you use your house as collateral.

So if you don't pay back that debt

they have a lien on your property

and they have a right to ownership of your property.

Or if it's liquidated

they're going to get money back in that liquidation process.

The exact same thing is possible

with some of these brokerages.

One example being M1 Borrow.

So you're allowed to borrow money against your securities

at a very low interest rate

because you have collateral in place.

So if you had an unsecured loan,

that could be 15% to 20% interest,

but a secured loan might be anywhere from

four to six percent interest.

Obviously those are just guesstimations,

those are not real figures.

But it's usually somewhere around there.

So it's an appealing way

for people to get access to a line of credit

without a high interest rate.

And of course if you did in fact default

on your obligations the brokerage has the right

to sell your stocks to recoup that loss.

Now number six, the final way

these companies are making money

is honestly quite controversial,

so I wanted to save it for last.

And it's also the most complicated.

But I'm going to try to explain it

in the simplest way possible.

And that is that these companies are making money

by directing order flow.

Now there's a number of different components at play here,

and we're gonna add on to these one at a time as we go.

Starting off with your brokerage account.

So your brokerage account is

essentially where your stocks live.

In order to have stocks and invest in the stock market,

you hae to do this through a brokerage account.

Now when you buy and sell shares,

this happens on an exchange.

The two most common ones people talk about

are the New York Stock Exchange

and the NASDAQ.

And essentially that is an exchange

that connects buyers with sellers,

and it allows you to transact stocks

and do so in a very short period of time.

And the measurement of how easily assets change hands

is known as liquidity.

So stocks, publicly traded stocks,

have high liquidity because

they can be easily converted into cash.

Meanwhile, something like real estate

has lower liquidity because it's not on the public exchange,

and it's a lot more difficult to turn a piece

of real estate into cash.

So let's start with those components

and begin explaining what we have going on here.

So when you log into your brokerage account

and you go to sell a stock or buy a stock,

it is going to go through an exchange,

most likely the New York Stock Exchange or the NASDAQ.

And on these exchanges you have public quotations

of all of these different assets.

Now within that you have two different things here.

You have the bid price

and then you have the ask price.

And the bid price is essentially

what people are willing to pay for the stock,

and the ask price is what people are looking to sell it for.

And there's always a difference between these two numbers,

known as the spread.

So let me give you guys a quick example here

to make sense of what I just threw at you, all right?

Let's say you have Scribner stock.

If my company traded on a public exchange,

and you had a bid price of $10.50

and an ask price of $10.55.

That means that people are trying to buy my stock

for $10.50 per share.

People are trying to sell my stock for $10.55.

And there is a spread of $0.05.

So if that order was filled at that exact instant

it would be filled somewhere between

$10.50 per share and $10.55.

Now there's another component here

that we have to talk about,

and that is something called a market maker.

And the market maker is

essentially the middle man in this transaction.

And why we have a market maker is so that we can have

that thing called liquidity,

which is the ability to buy and sell our stocks

at a moment's notice.

So, as you can imagine,

people who are buying and selling stocks are doing so

at very different times.

Maybe one day you're seeing a lot

of people trying to buy this particular stock

or sell another one.

And you're not always going to have a perfect buyer

and a perfect seller lined up at the right time.

So let's take Scribner stock again for an example.

Let's say somebody's trying to sell 1,000 shares,

but then someone's only trying to buy 200 shares

at the exact same time.

Well that order wouldn't be filled

because there's an additional 800 shares

that have to be sold.

Essentially what the market maker is doing

is filling that order regardless

of whether or not they have somebody on the other end

to buy it at that exact moment.

So if you are looking to sell 1,000 shares

of Scribner stock, they're gonna fill that order immediately

and then they're gonna sell those shares

whenever orders come up.

And in doing so they're looking

to make a profit on that spread.

So just to use an example here,

lets say they bought shares of Scribner stock,

1,000 shares at $10.50 per share,

and then they sold these off in five different lots

of 200 for $10.55 per share,

they're making $0.05 per share across 1,000 shares.

And so a lot of people think this is a huge scam

having these market makers,

but the truth is they have a very important role

in the way that stocks and publicly traded assets

trade on exchanges by offering you that immediate liquidity.

If we didn't have the market maker,

we would not have the liquidity that we have today.

And if you were looking to buy and sell shares,

there would be no guarantee that you have a buyer

or a seller on the other end at that exact instant.

So the market maker provides a very useful service

of providing us with liquidity,

and in the process they make money on that spread.

So circling back to the brokerage accounts,

you have something called order flow,

or essentially where they're actually sending

these orders to be placed.

So M1 Finance, Robinhood, Webull,

they're all allowed to

prioritize whoever they're sending these order to,

and they earn money in the process

by directing order flow to certain market makers.

So on their website M1 Finance

disclosed how much they are making,

and they said that they direct orders to electronic

market makers that earn them roughly two hundredths

of a cent per share transacted.

And when you multiply that across thousands

or tens of thousands

or millions of shares trading hands each day,

that could be a significant amount of money

and a good revenues stream for these brokerage accounts.

So anyways guys, that is gonna wrap up this video.

That is how these free investing apps

and free trading apps are making money.

They all carry the same SIPC insurance,

as the traditional brokerages do.

And they are just as safe as these other brokerages

that we are all used to.

You always wanna make sure that they have SIPC insurance.

But the three names mentioned in this video

I have vetted all of them,

done massive amounts of research on them,

and I have an immense amount of trust built

for all of these platforms.

So they are not a scam,

they're not stealing or selling your information.

They simply saw inefficiencies

with the old way of doing things

and they figured out new and creative ways to make money.

Now circling back to one more point I wanna make here.

Lets talk about the free stocks

because these companies are often giving out free stocks

or free investing credits for their referral programs.

And as we mentioned earlier, Webull of course is offering

two free stocks if you click the top link

in the description below.

And that is because of something called venture capital.

So because these companies are rapidly gaining market share

there are people who want to invest in these companies

on the ground floor

or during early financing rounds

because they're looking at make money.

And so these companies are backed with millions,

hundreds of millions of dollars

of venture capital and they're spending that money

on ads and customer acquisition.

So just to give you an example of this,

Acorns finished another round of financing in January,

which raised another 105 million dollars,

giving them a valuation of $860 million dollars.

And one of the most well known

Acorn investors from earlier on

is none other than Ashton Kutcher

from That 70's Show.

I just think that's funny.

I've seen him on the ads before.

But Ashton Kutcher is a venture capitalist

who invested in Acorns.

So these companies have hundreds

of millions of dollars to play with in terms of advertising,

as well as affiliate relationships,

and that is why they are able to pay people like me.

Affiliate commissions for referrals

and give the users free stocks, free investing credits,

whatever it is that they're offering.

So essentially you get people like me,

and I write reviews of different brokerage accounts,

I do videos of different brokerage accounts,

and then I have affiliate links

which are in the description below.

And then when people click on those links

and sign up I earn commissions in the process.

And just from these brokerage accounts alone

we're talking probably 10 to $15,000 per month in total

is what I'm earning just from affiliate commissions

by reviewing these apps

and making money in the process

through these affiliate relationships.

So of that hundred of millions of dollars

of venture capital, a small amount

is trickling back to me because

of my affiliate marketing efforts.

So that being said guys,

if you do want to sign up for Webull

and get those two completely free stocks

and see how this whole process works,

that is the top link in the description below.

But if you are like the one percent

of people who see past the smoke and mirrors

and you're curious about my business model

of affiliate marketing,

which allows me to earn 20 to $30,000 per month

across all of my different affiliates,

I have a completely free two hour training

I'm gonna point you guys towards

down in the description below

that goes into a lot more detail

about my business model

and how I make money doing exactly this,

which is making referrals to different online platforms.

But thank you guys so much for watching this video.

It's been a question I've been getting for a very long time.

I hope I did my best to answer it in a very simple way.

If I did, make sure you hit that like button

and subscribe to be notified

of any future uploads.

Thank you so much for watching,

and I will see you in the next video.

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