Last Updated November 6, 2021
Investing is a great way to make money, but do you know how? You may have heard of the app Robinhood that lets you trade stocks for free and wondering how to make money with it. The great thing about this investment platform is that there are many ways to generate income. Find out how to make money from Robinhood with these 5 easy tips (plus 3 more advanced tips).
What Is Robinhood?
Robinhood is a mobile trading platform that allows people to buy and sell stocks for free. You can access Robinhood through a mobile app and also on your computer through their website.
The great thing about Robinhood is there are zero commission fees, no account minimums, and it’s super easy to use. With Robinhood you also don’t need a minimum account balance, so you can get started right away.
Their target audience is millennial investors or new investors who were previously left on the sidelines by traditional brokerage firms. This is because buying and selling stock was so expensive before Robinhood came along.
Robinhood disrupted the financial industry for the better and made investing accessible to everyone regardless of socioeconomic status.
I personally use Robinhood to purchase individual stocks and ETFs. Sign up today and you can get a free stock like Apple or Facebook with new accounts.
How Does Robinhood Work?
With Robinhood, you can buy stocks, ETFs, options, and cryptocurrencies for free. To invest with Robinhood you need to meet the following requirements:
- Be 18 years or older;
- Have a valid Social Security Number (not a Taxpayer Identification Number);
- Have a legal U.S. residential address within the 50 states or Puerto Rico (they may make exceptions for active U.S. military personnel stationed abroad); and
- Be a U.S. citizen, U.S. permanent resident, or have a valid U.S. visa.
The way Robinhood works is you make a deposit into your Robinhood brokerage account by transferring money from your bank account. Keep in mind that it could take up to 5 business days for the transaction to process.
However, Robinhood has an Instant Deposit feature that gives you immediate access to $1,000 after you initiate a deposit. Once you fund your Robinhood brokerage account you can start trading.
Robinhood also offers a premium feature called Robinhood Gold for $5 per month. With Robinhood Gold, you can get access to more features that are not offered for free on the platform. Features such as:
- Bigger Instant Deposits.
- Professional research from Morningstar.
- Level II market data from Nasdaq.
- Access to margin investing (note: not all investors are eligible for margin investing).
Another great feature with Robinhood is you can purchase fractional shares. What that means is you can buy partial shares.
For example, if Apple is trading at $150 per share, you can buy half of an apple stock for $75. Fractional shares on Robinhood can be as small as 1/1000000 of a share.
Is It Safe To Invest With Robinhood?
Yes! Robinhood is a very secure platform and it’s insured by the Securities Investor Protection Corporation (SIPC). SIPC insures your money up to $500,000 (or $250,000 for cash claims).
How To Make Money From Robinhood?
There are many different ways that you can make money on Robinhood. Let’s go over how to make money with Robinhood through a few different strategies.
Strategy #1: Asset Appreciation
The first way to make money from Robinhood is how most people use it —buy and hold investments for long term gains.
Historically the stock market goes up at a rate of about seven percent per year. So in essence if you invest in a good solid company and hold your stock for a long time, that stock should appreciate and go up in value.
However, it’s important to mention that the stock market is not always up. This means there are times where your investments will go lower than what you bought them for and they could stay that way until the price of stocks goes higher again (this can take weeks or even months).
Strategy #2: Use Limit Orders on Robinhood
Limit orders are probably the best way to make money with Robinhood because they will help you get a better price for your stock than just placing an order at market value.
A limit order is an order to buy or sell a stock at a specific price. When you place these types of orders, they are held in the order book until they get filled by another investor who is willing to meet your terms.
One thing to note about limit orders is you’re not guaranteed to get the price for the stock you want.
The process of how it works is simple. If you’re using a buy limit order, you place an order that is not executable unless the price of your stock is at or below a specific price.
If you’re using a sell limit order, you place an order that’s is not executable unless the price of your stock is at or above a specific price.
This saves you the hassle of constantly watching the stock market for price drops or price increases when you want to buy or sell.
Strategy #3: Dividend Income
Another way to make money from Robinhood is by collecting dividends. Dividend income on stocks is the company’s way of giving back some of its profits to investors who own stock in that company.
This can be a good revenue stream and a source of passive income because you’re essentially getting the distribution of profits that the company earned for the quarter.
With Robinhood, when you collect dividends you can automatically reinvest them, use that money to invest in other companies, or transfer your money to your bank account.
Strategy #4: Referrals
You can also make more money from Robinhood by referring friends to the Robinhood app and getting a referral fee for each person that signs up for a Robinhood account using your code. Robinhood usually gives you and your friend a free stock when they sign up. So it’s a win-win for both people.
However, don’t recommend Robinhood to people just because you will get a referral fee. You should actually use Robinhood and only recommend it because you like it.
I personally use Robinhood and recommended it to all my friends and family because, at the time, they were the only platform I knew that allowed you to buy and sell stocks for free.
Now, there are a lot of other platforms that you can buy and sell stocks for free, but I still recommend Robinhood because I continue to use them and like them. And like anything else on my blog, I only recommend products I know, use, and love.
Strategy #5: Robinhood IPO Access
The final way to make money from Robinhood is by taking advantage of its IPO feature. An initial public offering (IPO) is how companies raise capital for funding projects, expansion, marketing campaigns, and other initiatives that will help the company grow.
Robinhood offers its users the chance to buy into these IPOs.
How it works is you request shares at the IPO price before a stock is available to the general public. Once you have access, you can submit a request or “conditional offer to buy” (COB) for IPO shares from select companies from within the app.
When you submit a request for shares with IPO Access, you’ll be creating a COB. Then you can indicate the number of shares you hope to purchase.
A COB is similar to a “buy order,” except the COB remains pending and does not become an active order until the IPO is priced and set for the initial public offering.
People usually want to get shares at the IPO price so they can buy shares before the price goes up. If and when the value of your shares go up, you can then sell it for a profit.
It’s important to note, however, that the value of a stock can drop below the IPO price in the future.
Other (More Risky) Ways To Make Money From Robinhood
There are other ways to make money with Robinhood that I didn’t cover above because they involve more risk than just buying and holding stocks or investing for dividend income.
I don’t recommend trying these methods to make money unless you really know what you’re doing. Otherwise, you can end up losing a lot of money.
Strategy #6: Day Trading
Day trading is the process of buying and selling stocks within the same day. The goal is to make a profit by how much money you can buy and sell your stock for during that time.
Day trading can be a way how to make money from Robinhood but it’s very hard because you have to rely on timing the market (and no one ever knows for sure what the market will do).
If you’re not careful, this method will destroy your wallet fast because it requires knowledge about how the market works and how to read charts correctly.
This is why for a beginner investor, I don’t recommend day trading. You can check out this Investopedia article to learn more about day traders and how they make money.
Strategy #7: Use Robinhood Gold for Margin Investing
Robinhood offers a unique feature with their app called margin investing. Not all investors can use this feature and you have to upgrade to Robinhood Gold to have access. But if you are able to purchase on margin then it is one of the best ways to make money from Robinhood.
The margin investing feature allows you to borrow money from Robinhood to purchase securities. This gives you access to additional money. So if you see an opportunity in the market and want to invest more, you can invest right away without needing to make a deposit from your bank.
Let me give you an example of how margins work. Let’s say you deposit $10,000 in cash and borrow $5,000 on margin to buy 150 shares of a stock for $100 per share—for a total of $15,000.
Since $5,000 of your initial purchase was bought on margin, your portfolio value is $10,000 ($15,000 – $5,000 amount borrowed = $10,000).
If the stock price increases to $125 per share, the stock is now worth $18,750. Since $5,000 of your initial purchase was bought on margin, you now have $13,750 in portfolio value and you owe $5,000 in margin used.
In this scenario, you made a profit of $3,750 as opposed to $2,500 if you didn’t invest on margin and only bought as many shares of stock that you could with your available cash (100 shares for a total of $10,000).
Although this sounds good, margin investing is very risky because you can lose more money than you deposit.
Let’s say, on the other hand, the stock price from our example above drops to $75 per share, the stock is now worth $11,250. Since $5,000 of your initial purchase was bought on margin, you now have $6,250 in your portfolio value and you owe $5,000 in margin used.
In this scenario, there’s a loss of $3,750 as opposed to $2,500 if you didn’t invest on margin and only bought as many shares of stock that you could with your available cash (100 shares for a total of $10,000).
Not only do you have to pay back what you borrowed to Robinhood, but you also need to pay interest on any margin used over $1,000. So in the scenario above, $4,000 of the $5,000 you borrowed is also subject to interest.
Strategy #8: Options Trading
You can use options as another way to make money from Robinhood but it has some serious risks involved especially if this isn’t how you normally invest.
An option is basically the right (or privilege), but not the obligation, that lets you buy or sell an underlying asset at a specific price up until a certain date.
The asset could be anything, but usually, it’s related to stocks in some way. Options can be used to bet on how high or low an asset will go in the future.
Options trading can be a bit complicated, so let’s take a closer look and allow me to break it down into more detail for you…
How To Get Started With Options Trading?
There are different types of trades you can make with options trading. Let’s go over a few of the most common strategies so that you learn how to make money from Robinhood with options trading.
The two most common types of options are “call” and “put” options.
What are Call and Put Options?
A call is usually used when people think a stock price might go up and they want to bet on it going higher than what it already is.
The general reason for buying call options is if the price of that stock does go up (above the amount you bought the call option for), you’ll be able to make a profit by buying the stock at a lower price than the market value.
If the price doesn’t go up, you lose what you paid for the options contract.
For example, if Apple was selling at $150 per share today, you may buy a call option because you think the price would go up to $160 in the future.
So when you buy a call option, it means you’re buying the right to purchase Apple’s stock for $150 per share instead of the $160 you think they’ll be worth by the time your contract expires.
The price you are agreeing to pay for the shares is called the strike price. So in our Apple example, the strike price is $150.
However, because you’re only buying an option to buy shares later, you aren’t obligated to actually buy those shares if the stock price didn’t go up like you thought it would.
Think of a call option as a down payment for the option of a future purchase.
Let me give you another example because this was difficult for me to understand as a beginner.
Think of your favorite coffee shop. Imagine your favorite cup of coffee costs $2 today. However, this coffee shop is very popular and you think the cost of a cup of coffee is going to go up to $3.50 soon.
So you purchase a coupon for 25 cents that allows you to buy your favorite cup of coffee for $2 in the future (because you think the price of that cup of coffee is going to go up to $3.50 per cup). That’s an example of a call, or option to buy something at a later date for $2 (in this case, coffee).
The cost of the option contract is known as the premium. So in our coffee shop example, the 25 cents you paid for your coupon is the premium.
But because you paid a premium for the call option, if you don’t exercise your right to buy those shares (or that cup of coffee), you will have lost the money that you paid for the premium.
So going back to our coffee shop example, let’s say your coupon to buy your favorite cup of coffee expires in 3 months. Assume the price of coffee did not go up and it stayed at $2 per cup within those 3 months.
Since the price of your favorite cup of coffee stayed the same, you didn’t get the chance to use your coupon (since there was no point in using it). In this case, you lose the 25 cents you paid for your coupon because your option expired.
Put options can be used when people think a price might drop and want to make money off of that happening. In other words, put options are basically the opposite of call options.
Unlike a call option, a put option is essentially a bet that the price of an underlying security (like a stock) will go down in the future. So you are buying the option to sell shares at a higher price than their market value.
The price at which you agree to sell the shares is called the strike price, while the amount you pay for the actual option contract is called the premium.
An example might be if Amazon was selling for $3,500 per share today, you might buy a put option giving you the right to sell Amazon stock at $3,500 because you think the price will drop in the future.
Assume you were right, and Amazon stock falls to $3,000 per share. When you buy a put option, it means you’re buying the right to sell Amazon’s stock for $3,500 per share instead of the $3,000 per share market price.
So you would’ve made $500 per share by being able to sell your Amazon stock at $3,500 even though it is only worth $3,000 now.
I want to note that you don’t have to own the underlying stock to buy or sell a put.
Again, to purchase the put option you will have to pay the premium. And if the Amazon stock doesn’t drop during that period of your option, you will lose the premium spent.
What Are The Benefits Of Options Trading?
Investors are typically drawn to options trading because the initial investment for options is usually much smaller than buying stocks outright.
Options trading has so many benefits such as:
1) Risk Management
Options can allow you to reduce the risk that is associated with your investment. Just as you insure your house or car, put options can be used to insure your investments against a downturn.
For example, let’s say you purchase an Apple stock at $150. If the price goes down to $100, you lose $50 on your initial purchase.
However, if you had purchased a put option for this same stock at $125, you can sell your Apple shares at the higher strike price of $125 instead of the lower market price of $100. Therefore, you would only lose $25 (plus the cost of the premium) instead of losing $50 on this stock.
Options trading also gives you the ability to benefit from an increase in price for a specific asset without actually owning it.
So for example, if you believe that Apple’s stock will increase in value in 3 months, but don’t want to purchase the shares, you could purchase a call option with an expiration date in 3 months.
Let’s look at the Apple stock example to compare the outcomes for someone who owns the stock directly and someone who owns a call option.
Let’s say Apple stock trades at $100 per share today. You buy a call option with a $100 strike price for a $5 premium that expires in six months. Usually, each options contract represents 100 shares, so 1 call contract costs $500.
Assuming you have $500 in cash, this would allow you to either purchase 1 call contract or 5 shares of Apple stock.
Imagine 3 months later Apple stock is now trading at $150 per share.
If you decide to purchase 5 shares of Apple stock, your $500 would now be worth $750—earning you $250 ($150 market price – $100 purchase price = $50 gain per share x 5 shares = $250 in total profit).
However, if you purchased 1 call contract your gains would’ve skyrocketed to $4,500 ($150 market price – $100 purchase price = $50 gain per share x 100 shares = $5000 profit – $500 premium= $4,500 in total profit).
The biggest benefit of options trading is that it gives investors leverage over their investments. The price of buying an option is a lot less than the cost of purchasing shares.
For example, a call option may only cost a few dollars or even cents per share compared to the full price of a $100 stock.
So in our Apple stock example above, the same $500 investment netted a total profit of $4,500 if you bought a call option vs. $250 profit if you purchased the stock.
Another benefit of options trading is that it offers you a lot of flexibility. Before your option expires you’re flexible to do several things. Such as:
- Buy the shares of a stock and hold them.
- Buy the shares of a stock and sell all or some of them.
- Sell your options contract to another investor.
- Lock in the stock price at a certain dollar amount (the strike price) without actually buying it for a specific period of time. Think of it like putting stocks “on layaway.” Depending on the type of option used, it guarantees that investors will be able to buy or sell the stock at the strike price any time before the option contract expires.
What Are The Risks Of Options Trading?
You might be wondering what the catch is with options trading. Well, there are a few risks you need to know about before getting started with options trading, such as:
1) There Are Additional Costs
The first risk you need to learn about is that trading options cost money. When you buy a call or put option, for example, it has an associated cost called “premium”. You have to pay this premium no matter what.
On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; therefore, you must multiply the contract premium by 100 to get the total amount you’ll have to spend to buy the put or call.
This is unlike buying a stock that you could buy completely for free on Robinhood.
2) Your Timing Has To Be Perfect
One other risk you should learn about is that options have an expiration date. When an option expires, it becomes void meaning you can no longer sell or buy anything with it.
Making money from options trading gets a little tricky because your timing has to be right. Needless to say, if the underlying stock doesn’t fall (or rise) the way you hoped your options contract can expire without you making any money.
3) You Could Lose Money
The biggest risk you need to learn about options trading is you can lose money. If you purchased an option, the most obvious danger is that the underlying asset doesn’t move the way you hoped, forcing your contract to expire.
If that happens, you would’ve paid the premium for nothing. Have this happen often enough can add up and you could lose money over time.
If this is your first time trading options, I recommend getting some guidance from someone experienced in the area before trying anything on your own.
How Does Robinhood Make Money?
Now that you know all the ways you can make money from Robinhood, you might be wondering how Robinhood makes money from you since they offer commission-free trading. Well, Robinhood makes money in several ways:
1) Every Time You Buy And Sell Stock
When you buy or sell stocks, ETFs, and options through your brokerage account, your orders are sent to market makers for execution. Market makers basically give Robinhood a small payment as compensation for directing orders to them.
The payment is usually only fractions of a penny per share but can be a significant source of revenue for companies dealing with a large number of orders.
2) Robinhood Gold
Robinhood also makes money from membership fees for Robinhood Gold. As stated earlier, Robinhood Gold is Robinhood’s premium feature that costs $5 per month.
3) Interest From Loans
You can use Robinhood Gold for margin trading. When you invest on margin, you’re borrowing funds from Robinhood Securities.
If you use more than $1,000 of margin, you’ll pay an interest rate of 2.5% yearly interest on the amount you use above $1,000.
4) Interest From Cash
Robinhood makes money off of uninvested cash in Robinhood users’ brokerage accounts. They make money primarily by depositing Robinhood users’ cash in interest-bearing savings accounts.
I hope this article has provided some insight into how you can make money from Robinhood. This free app allows you to make money in a variety of ways. The best part of this platform is the commission-free trades. I think Robinhood is one of the best online brokerages.
If you want to get started, sign up with my link today. You can get a free stock like Facebook or Apple!