Skip to content
How To Make Money On Robinhood - 3 Simple Steps

How To Make Money On Robinhood – 3 Simple Steps

Robinhood is a modern innovative broker that offers commission-free stock trading. Their mobile app and free trade feature attract a lot of young investors and millennials, so today, I wanted to take a look at how to best use Robinhood and how NOT to use it. I have used Robinhood in the past and asked myself: what’s the best way to make money on Robinhood?

How To Make Money On Robinhood. The best way to make money on Robinhood – and through any other broker for that matter – is to buy and hold exchange-traded funds (ETFs). I would recommend a simple three-fund portfolio consisting of Vanguard’s Total Stock Market Fund (VTI), Total International Stock Market Fund (VXUS) and Total Bond Market Fund (BND).

Before we dive further into today’s topic, let’s first have a look at why it is so easy to lose money on Robinhood.

TIP: Keep track of all your investments with Personal Capital. I use this amazing tool to aggregate all investments in one place and make sure I'm on track to financial freedom. Oh, and did I mention it's free? Try it out here (link to Personal Capital).

How NOT to make money on Robinhood

It’s a bummer I know, but Robinhood was not really build to help you – as a retail investor – make the most money.

5 Ways to Make money on YouTube
5 Ways to Make money on YouTube

Their main business is selling trading data to institutional high-frequency traders which is why they are able to offer commission-free trades.

If you keep this in mind, it becomes quite obvious why Robinhood’s platform and app are set up to encourage investors to trade multiple times a day. When you place a trade, it rains confetti. This is called operant conditioning. You may have heard of it.

Should you still insist on using Robinhood as you broker, here are some things the prudent investor should keep in mind:

Trading

When you confuse trading with investing, you lose. Trading stocks, as opposed to investing in companies, is the practice of buying and selling stocks based on “technical indicators” or price action.

Although it can be profitable in the short term and you may have a lucky streak for even a few months, there are very, very, very few traders who have managed to remain profitable over the long-term.

In addition to this, trading is horribly time-intensive and will drive you slightly insane.

Speculating

Speculating and trading are similar concepts. Usually, trading refers to speculation as applied to shorter time frames. “Investing” in gold, for instance, is a form of speculation – though be it a sophisticated one.

Thus, the main difference between speculating and investing is the fact that you base your decision not solely on the price you think someone else is going to pay you in the future.

Sure, when you buy stocks you’d like them to go up in value. But in the meantime, you will also collect dividend payments.

Back in the day, Benjamin Graham came up with a definition of investing which goes something like this:

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.

Thinking you can beat the market

Both of the above fallacies have their root cause in the fact that you think you can beat the market. If not, why would you be day-trading like a degenerate gambler?

The truth is 99.9999999999% of investors don’t beat the market. So there is no reason to think that you will.

With all this out of the way, let’s focus on how to really make money on Robinhood.

FYI: The best way I've found to invest in ETFs is through M1 Finance. It's free and you even get an instant line of credit! Have a look here (link to M1 Finance).

How to make money on Robinhood

Yes, you can make money through investing in the stock market. People have done for over 100 years. In the following section I’ll outline a simple 3-step-process that can be repeated again and again to make money on Robinhood:

Step #1: Buy an ETF

The very first step is to buy an ETF, ideally, one that tracks a total market index such as Vanguard’s Total Stock Market Fund (VTI).

ETFs are an easy way to get exposure to the entire stock market without buying individual shares. This mitigates risks by diversifying your funds among hundreds or even thousands of different companies.

Additionally, they are highly liquid and tax-efficient as shares are traded among investors allowing the fund to maintain a relative consistent portfolio of securities.

Step #2: Don’t sell the ETF

Now for the hard part: don’t sell.

I know, it’s crazy right? Even if the market takes a nose-dive? Yes, even then.

There are several reasons why you should simply hold on to your funds for the long-term. On average, the stock market has yielded around 7.5% per year. It is simply more efficient to leave your capital in the market than to try and time the market.

You can’t time the market.

Even when prices rise and it is tempting to withdraw some of your profits, it is wise to leave your money where it is unless you absolutely need it. Every time you sell a stock and make a profit you will be subject to capital gains tax.

You can avoid this and mitigate your tax burden simply by holding funds for a long time and thus declaring your dividend earnings as qualified dividends.

Step #3: Collect dividends

And now for the fund part: earning dividends. One of the easiest ways to make money on Robinhood is to hold ETFs and have their dividends distributed to your Robinhood account once every quarter.

When you scroll down a bit on the page for each fund you’ll find the current dividend yield:

For VTI this yield is around 2% as of June 2020. This means you’ll receive $200 of dividends paid out straight to your Robinhood account every year for every $10,000 you own of VTI. Or $50 per quarter!

If you prefer some higher paying dividend funds Vanguard’s Dividend Appreciation Fund (VIG) or the High Dividend Yield Fund (VYM) may be right for you.

NOTE: The easiest way to add diversification to your portfolio is to invest in real estate through Fundrise. You can become private real estate investor without the burden of property management! Check it out here (link to Fundrise).

How long does it take to make money on Robinhood?

As we have seen, with the above method it will take you about 3 months to make some money on Robinhood in the form of dividends. You may also receive your first dividend payment even sooner depending on when in the current quarter you buy the fund.

Dividends are paid out to investors who hold the given security on the ex-dividend date. For most companies and ETFs these dates are set roughly one month before the dividend payout date.

FYI: Another great way to get exposure to the real estate sector is by investing in real estate debt. Groundfloor offers fantastic short-term, high-yield bonds that can add diversification to your portfolio!

Can Robinhood make you rich?

Yes, eventually Robinhood can make you rich.

However, this is not because of Robinhood or their sleek mobile app. Whether or not you will become rich through Robinhood solely depends on your own investment decisions.

Trading and speculating will very likely not make you rich. Investing in broad market funds, holding them for a long time and collecting their dividends will eventually make you rich.

ALSO: Small-cap equities can add a lot of upside to a portfolio while mitigating risks. Recently, I've discovered Mainvest's investment platform which makes it easy to invest in small and local businesses with returns of 10-25%. Take a look here (link to Mainvest).

Conclusion

Robinhood is some magical app that deposits money in your bank account. But it has potential. As outlined above, the biggest problem I see with Robinhood is that it incentivizes bad investing habits.

If you are drawn to the modern platform and commission-free trades but at the same time prefer a long-term approach to investing and wealth building, take a look at M1 Finance.

Smarter Investing: M1Finance.com

I personally use them as my trusted broker on my path to financial independence.

Lastly, I just want to highlight the general importance of conducting your own research. In most cases, the quick and easy route is not the one that will offer the greatest rewards.

Put in effort, be patient. The rewards will come.


Current recommendations:

Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:

P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!

1)Personal Capital is simply the best tool out there to track your net worth and plan for financial freedom. Just their retirement planner alone has become an invaluable tool to keep myself on track financially. Try it out, it's free!

2) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!

3) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).

4) Groundfloor is another great way to get exposure to the real estate sector by investing in short-term, high-yield real estate debt. Current returns are >10% and you can get started with just $10.

5) If you are interested in startup investing, check out Mainvest. I've started allocating a small amount of assets to invest in and support small businesses. Return targets are between 10-25% and you can start with just $100!

To see all of my most up-to-date recommendations, check out the Recommended Tools section.

Leave a Reply

Your email address will not be published.