Robinhood Fees: The Hidden Costs of Selling Your Stocks

The stock market closed, and Sarah checked her portfolio. The cash amount from the sale was slightly lower than she had anticipated. She started to dig deeper into what might have caused this discrepancy. Was Robinhood really as “free” as it claimed to be? This question led Sarah down a rabbit hole of discovery about the hidden fees and costs associated with selling stocks on Robinhood—a rabbit hole that most casual investors overlook.

The Illusion of Zero-Commission Trading

Robinhood revolutionized the brokerage industry by eliminating commission fees on trades, a move that attracted millions of new users. For years, traditional brokerages charged anywhere from $5 to $10 per trade, and Robinhood’s model seemed to disrupt that norm. But as Sarah would soon learn, just because there’s no commission fee doesn’t mean that selling stocks on Robinhood is completely free.

Payment for Order Flow (PFOF): The Invisible Fee

Sarah learned that Robinhood makes a significant portion of its revenue through a controversial practice known as Payment for Order Flow (PFOF). When she sold her Tesla shares, Robinhood didn’t directly execute her order. Instead, it routed her order through a market maker—a third-party entity that executes the trade and compensates Robinhood for the order flow. The problem? These market makers might not always give the best price for the trade. The difference, often just a fraction of a cent per share, can add up to significant hidden costs over time.

For instance, if Sarah had sold 100 shares of Tesla, even a price difference of $0.01 per share could result in a $1 cost that she never sees itemized. It’s not much, but over dozens or hundreds of trades, these small discrepancies can accumulate into meaningful sums. While this practice is legal and widely used, it creates a situation where the broker's incentives might not always align with the investor’s best interest.

The Spread: Another Hidden Cost

The spread is another cost Sarah discovered. The spread refers to the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept). On a platform like Robinhood, where you might not have the most competitive market access, this spread can sometimes be wider than on other platforms.

For example, if Sarah was selling her Tesla shares at an ask price of $800, but the highest bid in the market was only $799.95, she’d have to sell at a slightly lower price, effectively losing out on the difference. In highly volatile or less liquid stocks, this spread can widen, meaning Sarah could lose more money than anticipated on the sale.

Regulatory Fees: The Small Print

Though Robinhood doesn’t charge commission fees, Sarah was surprised to learn that there are still regulatory fees involved in selling stocks. The Securities and Exchange Commission (SEC) imposes a transaction fee on all stock sales, and while this fee is usually quite small—currently $0.00051 per share—it's a cost nonetheless. On top of that, there is also a FINRA (Financial Industry Regulatory Authority) Trading Activity Fee (TAF), which is typically $0.000145 per share, with a maximum of $7.27 per trade.

These fees are minuscule on their own, but for large transactions, they can add up. For instance, if Sarah sold 1,000 shares, her SEC fee would be $0.51, and her TAF fee would be $0.145, totaling $0.655. While these are minor amounts, they are still costs that eat into the total proceeds from a sale.

Opportunity Costs: The Real Cost of Free Trades

One of the most significant yet often overlooked costs is the opportunity cost of not receiving the best possible execution on a trade. For a long-term investor like Sarah, these tiny differences might not seem significant, but for day traders or those who frequently trade, the cumulative effect can be substantial.

If Sarah had used a traditional brokerage that offered direct market access and better execution speed, she might have gotten a better price for her Tesla shares. Over time, this could mean the difference between thousands of dollars in her investment account.

The Hidden Cost of Cash Sweeps

After Sarah sold her Tesla shares, the cash from the sale sat in her Robinhood account, waiting for her next move. What she didn’t realize is that this cash is swept into a low-interest account managed by Robinhood, where it earns a paltry interest rate compared to what she might get in a high-yield savings account. This is another way that Robinhood makes money off its users without them realizing it—by earning a spread on the interest from cash balances.

The Price of Convenience

Robinhood’s easy-to-use interface and gamified approach to investing make it simple for users like Sarah to execute trades without thinking too much about the consequences. This convenience can come at a cost. The platform encourages frequent trading, which can lead to higher tax liabilities, more opportunities for poor market timing, and, ultimately, lower returns.

Taxes: The Unseen Consequence of Frequent Trading

While not a fee imposed by Robinhood, Sarah had to consider the tax implications of selling her stocks. Every time she sold a stock, she incurred a taxable event. If she held the stock for less than a year, she’d pay short-term capital gains tax, which is taxed at her ordinary income rate. For longer-term investments, she’d pay long-term capital gains tax, which is typically lower. However, the frequent trading that Robinhood’s platform often encourages can lead to a higher overall tax bill—a cost that many users overlook.

The Bigger Picture: Are You Really Saving Money?

As Sarah reflected on her experience, she began to wonder whether the convenience and “free” trades offered by Robinhood were worth the hidden costs she had uncovered. While the platform is undoubtedly a good fit for some investors, particularly those making infrequent trades or those just starting out, it’s essential to understand that “free” doesn’t always mean no cost. The hidden fees, less-than-optimal execution prices, and other factors can erode your investment returns over time.

For serious investors, it might be worth considering alternatives that offer more transparency, better execution, and perhaps even lower overall costs when factoring in all the hidden fees and opportunity costs.

In conclusion, Robinhood’s zero-commission model is a game-changer in many ways, but it’s not without its costs. Understanding these hidden fees and the true cost of using the platform is crucial for making informed investment decisions. As Sarah learned, sometimes the price you pay isn’t immediately visible—but it’s there, quietly chipping away at your returns.