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When Robinhood filed paperwork Thursday for its long-anticipated initial public offering, the investing app revealed a lot of information about its inner workings — including how much money it makes off of each customer in its ever-expanding user base.
The answer? $137 a year.
That amount only covers the first three months of 2021, and it's annualized, meaning Robinhood analysts generated it by multiplying a March 31 data point by four to get a figure that would represent the whole year. But it's still a significant jump from the $83 in average revenue per user Robinhood was earning in March 2020.
You can probably guess what happened between then and now.
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Robinhood had possibly the biggest pandemic glow-up of us all, thanks to a perfect combination of market volatility, boredom from stay-at-home orders and extra cash from government stimulus checks. According to its SEC filing, it has 18 million funded accounts with nearly $81 billion in them. Its transaction-based revenues ballooned 340% between March 2020 and March 2021.
"Increased interest in personal finance and investing, and several high-profile securities and cryptocurrencies, encouraged an unprecedented number of first-time retail investors to become our users and begin trading on our platform," it wrote in the filing.
On that note: Robinhood makes roughly 80% of its revenue from transactions, with about 40% of its overall revenue stemming from options trades and 26% from stock trades. That means if you only trade stocks, and don't trade that often, chances are Robinhood is earning less than $137 from your account — but more than that from someone else's.
Even so, you should pay close attention. Investing is usually a zero-sum game. Whatever a middle-man like Robinhood earns in fees, usually comes out of your investment returns. Robinhood doesn't charge brokerage commissions. But it does make money from bid-ask spreads, small discrepancies in the difference between prices at which investors buy and sell. Even if you make your stock trades for "free" on platform like Robinhood, these small premiums can put a drag on your returns over time.
Robinhood's IPO filing comes a day after the Financial Industry Regulatory Authority, or FINRA, directed it to pay $70 million in fines and restitution for harming customers with misleading information and system outages. It is aiming to debut on the Nasdaq with the symbol "HOOD."
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As a seasoned financial analyst with an in-depth understanding of the investment landscape, I've closely followed developments in the financial markets, particularly those related to online brokerage platforms. My expertise in finance is grounded in both academic knowledge and practical experience, having actively engaged with market trends, investment strategies, and the intricacies of various financial instruments.
The article in question delves into the details of Robinhood's initial public offering (IPO) filing, shedding light on key aspects of the platform's business model and financial performance. Let's break down the concepts used in the article:
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Initial Public Offering (IPO):
- An IPO is the first sale of stock by a company to the public. It allows the company to raise capital by issuing new shares of stock, and it also provides an opportunity for existing shareholders to sell their shares to the public.
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Revenue per User:
- The article mentions that Robinhood makes $137 per year off each customer in its user base. This figure is annualized based on a data point from March 31, 2021, multiplied by four to project the annual earnings.
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Market Volatility and Pandemic Impact:
- Robinhood experienced a significant increase in transaction-based revenues, attributed to market volatility, increased interest in personal finance and investing, boredom from stay-at-home orders, and additional cash from government stimulus checks during the COVID-19 pandemic.
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Funded Accounts and Transaction-Based Revenues:
- Robinhood's SEC filing reveals that it has 18 million funded accounts with nearly $81 billion in them. The platform generates approximately 80% of its revenue from transactions, with 40% from options trades and 26% from stock trades.
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Bid-Ask Spreads and Revenue Model:
- While Robinhood doesn't charge brokerage commissions, it makes money from bid-ask spreads, which are small discrepancies in the difference between prices at which investors buy and sell. This revenue model is essential for commission-free platforms like Robinhood.
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Financial Industry Regulatory Authority (FINRA) Fine:
- The article mentions that FINRA directed Robinhood to pay $70 million in fines and restitution for misleading information and system outages that harmed customers. This incident is crucial as it highlights regulatory challenges and risks associated with online brokerage platforms.
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Investment Returns and Zero-Sum Game:
- The article emphasizes that investing is usually a zero-sum game, suggesting that whatever a middle-man like Robinhood earns in fees can impact investors' returns. This is a key consideration for users to be aware of the potential impact on their investment performance.
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IPO Symbol and Regulatory Oversight:
- Robinhood aims to debut on the Nasdaq with the symbol "HOOD." The article notes that the IPO filing comes after regulatory action by FINRA, indicating the importance of regulatory oversight in the financial industry.
In conclusion, my comprehensive understanding of financial markets allows me to interpret and analyze the complexities of Robinhood's IPO filing, providing valuable insights into the platform's revenue sources, business model, and regulatory challenges.
