The Robinhood free stock catch (and an easy workaround)

I don’t think you should invest in individual stocks, but gambling is, famously, fun, and when I want to gamble on individual stocks I use the Robinhood iPhone app, which offers commission-free trades for stocks and ETF’s listed on US exchanges. If you were so inclined, you could even use it as your primary taxable brokerage account, although I don’t believe you can link it to services like Mint or to roboadvisors that would help you periodically rebalance your portfolio.

A little while ago they launched a referral program which gives new users and the existing user who referred them a free share of one of a few stocks. The exact stock you receive is determined randomly among the stocks they offer, which seem to currently include Facebook, Apple, or Microsoft (expensive) and Ford, Sprint, or Freeport-McMoRan (cheap). Apparently the stocks available change periodically based on share price and market capitalization.

If you aren’t a user, feel free to use my referral link: http://share.robinhood.com/stephes23.

Free stocks “lock up” your account’s withdrawable cash

According to the terms and conditions of the free stock referral offer, “[t]he cash value of the stock bonus may not be withdrawn for 30 days after the bonus is claimed.”

That seems reasonable enough, since the point of the referral bonus is to get you onto the platform and trading. They want you to leave the value of your free stock on the platform for 30 days, whether you hold onto the stock or sell it and buy something else.

However, they’ve implemented this restriction in a particularly sneaky way. As the terms and conditions go on to say:

“You have to keep the cash value of the stock in your account for at least 30 days before withdrawing it. After the 30-day window, there are no restrictions on the money.

• “If we add 1 share worth $10 to your account, you cannot withdraw the $10 you receive by selling the stock for 30 days.
• “If we add 1 share worth $10 to your account and you deposit $100 dollars into your account, you can only withdraw $90 until you sell the stock bonus. After you sell the share, you will be able to withdraw an additional $10″ [emphasis mine].

Read that second bullet carefully: it says that as long as you hold your free stock, up to 30 days, you can’t withdraw money added to the platform from your own bank account.

I’ve referred a couple of people to Robinhood, and just ran into this exact situation. I received one share each of SPLS (Staples) and VER, a real estate investment trust. I had previously made a few profitable bets on China, which I was ready to sell. To my surprise, when the trade settled, my withdrawable cash was $8.96 lower than the proceeds from the sale. I couldn’t for the life of me figure out what had happened, until I started scrolling back through the “history” tab and spotted precisely that figure: it was the value of a share of Staples on the day I claimed my free share (I had received my VER share more than 30 days ago).

The amounts involved in my case are very small, but you can imagine if you lucked into a share of Apple or Facebook that having a few hundred dollars of your own money tied up could be a real nuisance if you were counting on withdrawing it as soon as a trade settled and the cash became available.

I don’t like this restriction but it’s easy to work around

I had been holding on to my two free shares as a kind of laugh, since they didn’t cost me anything, so I was disappointed to see that I had been punished for doing so. To withdraw the $8.96 of my own money, I would have to sell my share of Staples (now worth $8.84). Then I could reinvest the $8.84 or wait a few more weeks to withdraw it. That’s a weird hassle for a platform that I’ve praised in the past for its simplicity and ease of use.

The workaround is simple: if you plan on using Robinhood to actually gamble or invest, simply sell your free shares as soon as possible, two days after receiving them. That will tie up your own cash deposits for the shortest possible time.