It's probably fitting that Robinhood Markets (NASDAQ:HOOD) has traded more like a meme stock in its first month on the public markets than like a stodgy brokerage. It is, of course, the online investing app that's most connected with the stock trading frenzy that swept the stock market earlier this year.

Yet Robinhood is not so different from E*Trade, TD Ameritrade, and Charles Schwab. While its claim to fame came from democratizing investing through commission-free trading with no account minimums, it still must follow all the same rules of the SEC, the stock exchanges, and stock clearinghouses.

That raises the question: If it's pretty much the same as other brokerages, can investors hope to become millionaires investing in Robinhood? Let's take a closer look to find out. 

Stockbrokers on phone on a trading floor.

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A shooting star

Robinhood went public at the end of July and quickly blew past its $38 per share offer price. After more than doubling in value within days, topping out at $85 per share, it subsequently collapsed to around $40 a stub, where it trades today.

But a stock's price is a poor way to judge whether it's a company you want to invest in. You need to look at its business, and there Robinhood offers some hope.

At the end of the second quarter, the six-year-old brokerage reported it had 22.5 million funded accounts, 130% more than it did the year before. In comparison, Schwab, which was founded in 1971, reported it had 32.3 million active brokerage accounts at the end of the quarter, which is the combined total between its namesake brokerage and the TD Ameritrade accounts that it acquired last October.

So while discount brokerages have existed for decades, it is Robinhood that is bringing first-time investors into the market. The online trading app says more than half of its funded accounts are from people opening their first brokerage account. Cumulatively, it has $102 billion in assets under management, or triple the amount from a year ago.

Person looking at a stock chart on mobile device.

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Leaving a bad taste

Robinhood had been popular with investors for a while, but it really shot to fame when stock traders on the WallStreetBets subreddit began rallying around highly shorted stocks such as AMC Entertainment and GameStop in a bid to drive their prices high and cause a short squeeze.

Traders, though, quickly got doused with a bucket of cold water when Robinhood abruptly shut down trading in the most volatile but popular stocks, first only allowing traders to sell their shares, then limiting purchases to just one or two shares.

The move was seen immediately seen as collusion between hedge funds and the brokerage. Market maker Citadel Securities, Robinhood's biggest client, is owned by the same financial services firm that owns the hedge fund Citadel Capital that was helping to bail out Melvin Capital, which had bet big against GameStop's stock.

Despite there being regulatory barriers between the hedge fund and its securities business -- just as there are between Robinhood's trading platform and its securities side -- many believed that with billions of dollars at stake, those firewalls could be easily scaled.

The brokerage explained its securities business had to make deposits with clearinghouses to cover the trades, but the extreme activity was pushing the limits of its available capital. Many felt its reputation was tarnished by the episode.

Many traders soured on the brokerage -- whose unofficial motto was "Let them trade!" -- though it seems not to be an impediment to Robinhood's business.

Person looking at charts on computer monitor.

Image source: Getty Images.

Risks abound

While the kerfuffle showed there are limits even to Robinhood's platform, a greater risk is that the SEC might ban the way the brokerage makes most of its money. 

Since Robinhood doesn't charge investors for making trades, it makes money by directing transactions to market makers like Citadel in return for receiving a bit of the profits made on each trade. SEC Chairman Gary Gensler recently told Barron's that prohibiting payment for order flow is "on the table" because the arrangement presents a conflict of interest.

Robinhood also has to contend with an influx of competitors beyond the discount brokers. Square, for example, was a beneficiary of the dustup over limiting stock trades during the height of the meme stock frenzy (although it, too, had to limit trades), and Paypal is planning on entering the stock brokerage business, as well.

Robinhood posted GAAP losses of $504 million, though adjusted EBITDA was positive $90 million, up from $63 million a year ago. That suggests Robinhood can still grow, but it may take a long time before investors become millionaires by buying its stock. That's still a better bet than the latest meme stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.