How to Make Money from Robinhood

Robinhood is one of the first most innovative investment tools that caught on recently over the last 5 years. Thanks to its easy access to investing in stock within the palms of our fingertips, it has led to many other investment brokerages jumping in on this idea.

Now more than ever, we have many investment platforms such as Tiger Broker, MooMoo, TD Ameritrade, and WeBull that allow us to invest our money. And if stock picking is not the thing for you, Robo-investing such as Stashaway, Syfe, and Endowus are great platforms for users to invest automatically. That said, unlike the other investing platform, Robinhood does have more to offer such as investing in crypto or gold; which is currently a unique feature that the platform has.

Now, more than ever, it is way easier to start investing to reach financial freedom. So do read this article to find out how to make money from Robinhood.

How to Get Started on Robinhood to Invest

Potential benefits and risks of using Robinhood for investing

While Robinhood has gained a lot of popularity in recent years, there are both benefits and risks associated with using the platform for investing.

Benefits:

1. Commission-free trading: One of the biggest benefits of using Robinhood is that it charges no commissions or fees for trading. This can help investors save money on transaction costs and make it easier to buy and sell assets.
2. Easy to use: It’s a user-friendly interface that is easy to navigate. Honestly, it has made investors almost idiot-proof. They would often prompt users for confirmation, making it a good choice for beginner investors who are just starting out.
3. No account minimums: Unlike some traditional brokerages, Robinhood has no account minimums. So any beginner investors just looking to try out the app can start trading with as little as $1.
4. Fractional shares: Allows investors to buy fractional shares. This means they can invest in companies like Amazon or Google for as little as a dollar. This is great for low-cost investors would don’t have enough to own shares of the company but still want exposure.
5. Free research and analysis: Provide free research and analysis tools to help investors make informed decisions about which stocks to buy and sell. They often link up news information on their website in order to provide more information to investors about investing in the stock.

Risks:

1. Limited investment options: Robinhood offers a range of assets to trade. Including stocks, options, and cryptocurrencies, it does not provide access to other types of investments like mutual funds or bonds.
2. Lack of investor education: Robinhood does not offer much in the way of investor education or guidance, which can make it difficult for new investors to make informed decisions.
3. Trading addiction: The ease and accessibility of Robinhood’s trading platform can make it easy for investors to become addicted to trading, which can lead to poor decision-making and financial losses.
4. Technical issues: Robinhood has experienced several technical issues in the past, including outages that prevented users from trading, which can be frustrating and potentially costly for investors.
5. Risky investment strategies: Some investors on Robinhood engage in risky investment strategies, such as day trading or investing in volatile stocks, which can lead to significant losses.

Investing Strategies

Now to make money investing in Robinhood, here are some learning points you can learn.

Long-term investing

Long-term investing means holding onto investments like stocks and bonds for several years or more. It’s a way to build wealth over time by taking advantage of the power of compound interest and the potential for market growth.

To be a successful long-term investor, it’s important to remember a few key things:

1. Diversification, spread your investments across different types of assets to reduce the risk of losses in any one investment.
2. Be patient and don’t get discouraged by short-term fluctuations in the market.
3. Invest consistently over time to take advantage of dollar-cost averaging.
4. Review and adjust your portfolio periodically to make sure it’s still aligned with your goals.
5. Focus on companies or assets with strong fundamentals and a competitive advantage in their industry.

By following these principles, long-term investors can potentially build wealth over time and achieve their investment goals. Most investors that don’t like the idea of having to look at the stock market every day would invest in the US S&P500 total stock market under the ticker symbol VOO. This ETF(exchange-traded fund) allows investors to automatically diversify and have their stock portfolio grow at 10% per annum(according to 50 years of historical growth).

Pick stocks with the potential for growth

Unlike long-term investment where most investors simply DCA(dollar cost average) their way into the stock market. Stock picking can be rather complicated but have high upside potential for huge gains. Most often, stock pickers would research heavily into the stock they are interested in and wait for the best time to buy the dip whenever it happens.

However, statistically, picking stocks is a losing game. By picking individual stocks, you have a higher probability of underperforming a risk-free asset than you do of beating the market. This is why ultimately investors stick with investing in the S&P500 to invest long term.

Reinvesting dividends

Dividend investing is such a popular investment strategy that even Warren Buffet; the founder of Berkshire Hathaway, bought Coca-Cola stock in 1988 and has never sold a single stock. In 2022, Coca-Cola paid $704 million in dividends to Berkshire. Its large snowball growth amounted to a yearly return of 54% on a $1.3 billion initial investment!

Here are some of the key reasons why dividend investing is important:

1. Income: Dividend-paying stocks can provide a steady stream of income to investors, making them a popular choice for retirees or anyone looking for regular income.
2. Long-term returns: Historically, dividend-paying stocks have delivered strong long-term returns. According to some studies, dividend-paying stocks have outperformed non-dividend-paying stocks over the long term.
3. Stability: Dividend-paying companies are often well-established, financially stable companies with a history of consistent earnings growth. This stability can provide a degree of safety for investors, particularly during times of market volatility.
4. Discipline: Investing in dividend-paying stocks can provide discipline to investors. It encourages them to focus on companies with solid fundamentals and a history of consistent dividend payments.
5. Tax advantages: Dividends are taxed at a lower rate than other forms of investment income, such as interest or capital gains. This can be an advantage for investors seeking to maximize their after-tax returns.

Once the payout is processed and paid into the investor’s Robinhood account. The investor can then reinvest the uninvested cash automatically.

Short-term trading

Short-term trading is a type of trading strategy in which traders hold positions for a short period of time, typically from a few seconds to a few weeks. The most famous trader Takashi Kotegawa grew his small account from roughly $13,600 to $153 million in about eight years. Sometimes making millions per trade.

The goal of short-term trading is to profit from small price movements in the financial markets, using various technical analysis tools and indicators to identify opportunities for buying and selling. Short-term trading can be highly profitable, but it also involves a high degree of risk, as the markets can be volatile and unpredictable. Successful short-term traders typically have a strong understanding of technical analysis and risk management, and they often use stop-loss orders to limit their potential losses.

Day trading and swing trading

Short-term traders are often focused on trading highly liquid markets such as currencies, commodities, and equities. They use a variety of trading techniques, including scalping, swing trading, and day trading. Scalping involves making small profits on small price movements, while swing trading involves holding positions for a few days to take advantage of price swings. Day trading involves buying and selling within a single day, often closing all positions by the end of the day.

technical analysis to make trading decisions

Technical analysis is a way to study financial markets by looking at the price and volume data of assets. This helps traders make decisions about when to buy or sell based on patterns and trends in the data. Technical analysts believe that historical price movements can help predict future prices, so they use various tools and techniques to analyze the data and find these patterns. By doing this, they can identify trends and make informed trading decisions. For example, they might decide to buy an asset if they see a bullish trend or sell if they see a bearish trend.

Options Trading (Specifically selling)

There are buy and sell options strategies in order to make money in investing. However, statically selling options is generally a safer approach and is most widely used by large institutions. Selling options is one of the most successful investing strategies but hardly anyone ever talks about it. It’s a powerful investing strategy that is able to earn investor return on either side of the market whether it goes up or down. Options traders just love to invest in uncertain markets.

The reason is option selling is deemed “not sexy” and will not provide a high return. These days, the word 2x or 3x gains from options trading is so common that many beginner investors only listen to those sales speeches. However, chances are this investor will realize so enough that they are losing money and will quit in the near term.

Overview of options trading

80% of all options held through expiration will indeed expire worthless. Furthermore, experts estimate that only 10% or less of all options will ever be exercised. Most traders and investors, especially in the commodities arena, have been taught from their trading lesson that to turn a profit, a series of small losses must be accepted to make that one big gain. From my experience, most beginner investors start trading options by buying. Buying options are relatively a lot cheaper than selling because selling options require collateral. It is the potential for this one big gain that keeps traders and gamblers alike coming back time after time and losing money time after time.

That is why is it so sad to see many beginner investors jumping the gun, losing their hard-earned money, and badmouthing options trading as one of the worst and most dangerous ways of making an income. If you would like to know more about options trading, here is an in-depth how-to blog on trading options guide for you to check out first.

Benefits and risks of options trading

Here are some pros and cons of option trading

PRO: Most Expire Worthless

Futures magazine published a study in 2003 (Summa, 2003) regarding percentages of options expiring worthless. The study tracked options in five major futures contracts: the S&P500, the Nasdaq 100, Eurodollars, Japanese yen, and live cattle. It was conducted over three years from 1997 to 1999. The research came to major conclusions:

1. On average, three of every four options held to expiration expire worthlessly (the exact percentage was 76.5%).
2. The shares of puts and calls that expired worthless are influenced by the primary trend of the underlying market.
3. Option sellers still come out ahead even when they go against the trend.

So think about it this way. If you have ever lost money buying options, imagine that you had made a premium for every option you held that expired worthless. Would you be ahead right now? Of course, you can also lose money selling options. There is no free lunch. But in option selling, there are multiple ways you can make money but only one way you can lose it.

PRO: Taking Profits Becomes Simple

“cut your losses short, and let your profits run”. Every trader is drilled to memorize this quote. True to a certain degree, however, applying it in real-life trading accounts is extremely difficult, if not impossible. Cutting losses and letting profits run sounds good on paper, but the psychology of it goes against human nature. Emotions are a critical enemy of traders, and of all emotions, there is no damage to a portfolio as the feeling of hope.

When one sells an option, as opposed to trading the outright futures contract, the decision of when to take profits generally becomes one that you no longer have to make. The market makes it for you. As long as your option is not in the money, the value of your option will eventually deteriorate to zero at expiration.

Pro: Better Risk-Adjusted

Unlike a buyer of an option, the risk of option selling is the amount of collateral owned. Regardless of the label of unlimited risk in selling short options, option selling risk can be just as definable and controlled as any other type of futures or stock trading risk. And there are multiple ways to manage risk, depending on the investor’s risk tolerance. This is mentioned here as an advantage only so you will know that you can control option selling risks and have several methods available to you.

Pro: Time is on your side

Unlike buyers of an option. An option seller has time on their side. In simple terms, as long as the stock remains above (puts) or below (calls) the strike price, the option seller is rewarded with the premium. So most option sellers put a strike price far out of the money of the stock.

I love the analogy put up by James Cordier & Micheal Gross in the book ‘The complete guide to option selling’ where he compares selling options to being a football team that plays on defense for an entire game. The scenario is your team have scored a few goals and the best strategy right now is to defend the goal post at all time. As every minute passes by, the opposing team has lesser time to score a goal to beat you. The opponent can’t step out of bound or call time out to stop the clock. The best part is, that if you begin to feel uncomfortable at any point in the game, you can simply quit.

As an option seller, the passage of time is your greatest ally.

Con: Unlimited Risk

Let’s get the elephant out of the room. Options selling has its risk, a lot of risks. If you purchased Apple stock sell options at a strike price of 180 and Apple falls to over 150, you are still obliged to buy the stock once the option expires. However, this risk compared to buying options can be calculated and measured.

Selling options is like watching a boxing match between a bull and a bear. As they fight, money will flow everywhere out of the ring. An option seller’s job is to not be involved in the fight and view it as a spectator. As long as you are not directly involved in the fight and the match ends, you get money from the fight.

The idea of how option seller makes money using that analogy is whatever happens in the stock market. As long as the options seller is not in the money, they will be able to make a premium.

Con: Limited Profit

Sad to say, no matter how much the stock goes up or down. An options seller can only make a profit based on the amount of premium it provides. It is for this reason that traders chasing the “big score” and trading the market for the adrenaline rush generally are not attracted to the concept of option writing. To use a baseball analogy, an option writer is an investor who is willing to give up his chance of hitting a home run in favor of consistently hitting singles over and over again.

Con: Higher Capital

The seller of options requires collateral enough to be able to purchase 100 shares of XYZ company. That means if you would like to sell an option put the position of Apple with a strike price of $180. You would be required to have $18,000 minus the premium of collateral to purchase the option.

When trading option selling correctly, the investor can only make upwards of 2 to 4% of the collateral amount monthly. That is why for many beginner investors, selling options may not want they can afford to do so. Not only that, to their small portfolio, earning 2 to 4% per month is not enough gains to them.

Strategies for making money with options

The end goal of trading options to make an income is to eventually make it as passive as possible. So the common question people would usually ask is ‘how can I make options trading passive?’

LEAPS

The answer to that question is “Sell LEAPs”. LEAPs are long-term equity anticipation securities, which are options contracts with expiration dates that are longer than one year, and typically up to three years from issue. They are functionally identical to most other listed options, except with longer times until expiration. With this longer expiration, the premium of a LEAP is generally a lot higher.

For example, selling a put with an expiration of 1 month for TSLA would provide a premium of $30.21 ($3,021 since it is 100 shares). While selling LEAPs with an expiration of 2 years would provide $87.51 ($8,751 since it is 100 shares). Generally, investors purchase LEAPs of a company that has good future potential and already good business earnings. This is to ensure that the chances of the investor forcing to purchase the options will be slimmer.

Depending on how much premium you are aiming to achieve, an investor can purchase LEAPs far out the money to have a higher probability of it expiring worthless. LEAPs are generally safer (if you know what you are doing!) as 80% of all options contracts expire worthless. Hence, most seasonal investors believe that the most passive way of investing option is selling LEAPs.

Cryptocurrency Trading

Robinhood offers a feature that allows users to trade cryptocurrencies on its platform. Do note that this feature is available to Robinhood users who reside in states where cryptocurrency trading is legal.

Overview of cryptocurrency trading

To trade cryptocurrencies on Robinhood, users need to follow these steps:

1. Download the Robinhood app and sign up for an account.
2. Verify your identity and add funds to your account.
3. Navigate to the cryptocurrency section of the app and select the cryptocurrency you want to trade.
4. Choose whether you want to buy or sell the cryptocurrency and enter the amount you want to trade.
5. Review the transaction details and confirm the trade.

Robinhood currently supports trading in a limited number of cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Dogecoin, and Ethereum Classic.

One of the unique features of Robinhood’s cryptocurrency trading is that it allows users to trade cryptocurrencies commission-free, which means users can buy and sell cryptocurrencies without paying any trading fees or commissions. This feature can be especially attractive to traders who are looking to minimize their trading costs.

Risks and potential rewards of investing in cryptocurrency

Investing in cryptocurrency on Robinhood can potentially provide high rewards, but it also comes with a number of risks. Here are some of the risks and potential rewards to consider:

Risks:

1. Volatility: Cryptocurrency prices are known to be highly volatile. This means that their value can rise and fall rapidly and unpredictably. This makes investing in cryptocurrencies riskier than traditional investments.
2. Hacking and Security Risks: Cryptocurrencies are often stored in digital wallets, which are vulnerable to hacking and theft. If a user’s digital wallet is hacked or compromised, they can lose all of their cryptocurrencies.
3. Regulatory Risks: Cryptocurrencies are not yet fully regulated by governments, which makes investing in them riskier than traditional investments. The FED (federal reserve board) has been closely monitoring the movement in the crypto markets and has been actively giving out fines and charges for illegal activities.
4. Lack of Liquidity: Cryptocurrencies are not yet widely accepted as a form of payment. This makes it harder to sell them in the market and can result in lower liquidity.
5. Limited Number of Cryptocurrencies: Robinhood offers only a limited number of cryptocurrencies for trading, which may limit investment opportunities for users.

Potential Rewards:

1. High Returns: Investing in cryptocurrencies can potentially provide high returns due to their volatile nature. If a user is able to buy a cryptocurrency at a low price and sell it at a high price, they can potentially earn significant returns.
2. Diversification: Cryptocurrencies can provide diversification in a user’s investment portfolio, as they are not directly correlated with traditional investments like stocks and bonds.
3. Commission-free trading: Robinhood offers commission-free trading for cryptocurrencies, which can reduce the costs of investing.
4. Accessibility: Robinhood is a user-friendly platform that is accessible to a wide range of users, which makes investing in cryptocurrencies more accessible to the general public.
5. Early Stage: Crypto adoption over the years has been increasing. As of 2023, the estimated global crypto ownership rates are at an average of 4.2%, with over 420 million crypto users worldwide.

It’s important for users to consider both the risks and potential rewards before investing in cryptocurrencies on Robinhood or any other platform. It’s also important for users to do their research and stay informed about the latest news and developments in the cryptocurrency market.

Strategies for investing in cryptocurrency

Investing in cryptocurrency can be a high-risk, high-reward endeavor. Here are some strategies to consider before investing, note that some of these strategies are similar to investing in stock because investing in anything requires the same mindset:

Do your research

Before investing, take the time to understand the cryptocurrency market, how it works, and the potential risks involved. Read up on the specific cryptocurrencies you are interested in and their historical performance.

Diversify your portfolio

Just like with any other investment, it’s important to diversify your portfolio to spread out the risk. Consider investing in a variety of cryptocurrencies, as well as traditional investments like stocks and bonds. To lower volatility in the crypto market, investing in Bitcoin and Ethereum is widely considered to be a smart approach to crypto investment.

Start small

If you’re new to cryptocurrency investing, start with a small amount of money and gradually increase your investment as you gain more experience and confidence.

Keep a long-term perspective

Cryptocurrency prices can be volatile, so it’s important to keep a long-term perspective and not panic if the market experiences a downturn. Many successful cryptocurrency investors recommend holding on to your investments for at least a few years to allow for potential growth.

Stay up-to-date

Unlike investing in a blue-chip company, the crypto market can change overnight due to regulatory issues. That’s why keeping up with the latest news and developments in the cryptocurrency market is crucial. This can help you make informed decisions about when to buy or sell your investments.

Consider dollar-cost averaging

Dollar-cost averaging is a strategy where you invest a fixed amount of money at regular intervals, regardless of the market price. With crypto being such a volatile market, this can help investors avoid the temptation to buy or sell based on short-term fluctuations in the market.

Robinhood Gold🪙

To advance your investing, Robinhood Gold is a collection of strong tools, information, and features. Access to four premium features is available with Gold: Your brokerage cash that isn’t invested will earn 4.15% interest with cash sweep (1.5% without Gold).

Benefits of using Robinhood Gold:

1. Increased buying power: Robinhood Gold provides users with access to margin trading, which allows investors to borrow money to invest in stocks. This means that you can potentially increase your buying power and make larger trades than you would be able to with your own funds.
2. After-hours trading: Robinhood Gold allows users to trade before the markets open and after they close, providing more opportunities to make trades and react to the news.
3. Research tools: The service provides access to Morningstar research reports and level II market data, which can help users make more informed investment decisions.
4. Instant deposits: Robinhood Gold allows for larger instant deposits, which can provide users with more immediate access to funds.
5. Reduced fees: Robinhood Gold offers reduced fees on margin trading and extended-hours trading compared to other brokers.

Risks of using Robinhood Gold:

1. Margin trading risks: Margin trading can amplify gains, but it can also increase losses. If the market moves against you, you could end up owing more money than you invested.
2. Higher fees: While Robinhood Gold offers reduced fees on some features, it comes with a monthly subscription fee that can add up over time.
3. Limited investment options: Robinhood Gold is primarily focused on stocks, which means that users may not have access to other types of investments like bonds or mutual funds.
4. Market volatility: Extended hours of trading can expose users to additional market volatility and potentially increase their risk.
5. Lack of investor protection: Robinhood is not a member of the Securities Investor Protection Corporation (SIPC), which means that users may not have the same level of protection as they would with other brokers in the event of a failure or bankruptcy.

Conclusion

While there are many ways for investors to start making money through Robinhood. It’s always best that beginner investors take a slower approach to investing by researching and understanding their investments better. Investing is a long-term game where it will take many years in order for compound interest to fully take over. So there is no rush to make a few quick bucks by simply buying and selling.

reminding of potential risks and the importance of investing

While investing may be considered risky as compared to leaving money in the bank or buying bonds. Investing in stock is the only sure way to compete against our sticky high inflation. With our current inflation at 6%(as of March 2023), investing your money to combat inflation from eroding the value of your dollar becomes increasingly important.

Think about your money, which is riskier? To invest or not to invest?

Final thoughts and recommendations for Robinhood users

While there may be quite a number of backlash about the Robinhood platform most notably the Gamestop short squeeze. Robinhood is still one of the better more stable investment platforms to invest in to grow your wealth. If anything goes wrong with the company, know that your investments are protected up to $500,000 for securities and $250,000 for cash claims because they are a member of the SIPC (Securities Investor Protection Corporation).