Is Robinhood safe for investors?
Robinhood is an online brokerage firm that’s attracted quite a bit of attention by offering commission-free trading alongside fractional shares, no account minimums, instant deposits, and competitive trading fees.
Whether you’re trading stocks, exchange-traded funds (ETFs), options, or cryptocurrencies like Bitcoin, chances are you’ve heard of Robinhood. You may have also heard horror stories about a GameStop scandal and outages on the Robinhood platform that have you wondering whether it’s safe to use.
Read on to learn whether Robinhood is safe for investors and what risks you accept when you use this popular brokerage platform.
Is Robinhood Safe for Investors?
In short, Robinhood is among the safest online brokers around today. The company is a regulated broker, meaning it must follow specific rules that keep investors safe. It also employs a wide range of safety features on its platform to ensure your personal information isn’t compromised.
Ways Robinhood Is Safe
Robinhood takes several measures to make sure you’re safe when using its platform. Those measures include:
All securities traded in the United States, including shares of publicly traded companies, are regulated by the U.S. Securities and Exchange Commission (SEC). The regulatory body has strict reporting requirements, ensuring that investors have all the data they need to make informed investment decisions at their fingertips. Robinhood only allows users to trade stocks and ETFs that trade on public exchanges and are thus governed by SEC regulations.
Cryptocurrencies are the only assets you can trade on the Robinhood platform that don’t fall under the purview of the SEC. Keep in mind that when you trade crypto assets like Bitcoin and Ethereum, you’re trading in unregulated markets where the risk is substantially higher.
Robinhood is also a member of the Financial Industry Regulatory Authority (FINRA). FINRA was launched in 2007 to ensure brokers act in the best interests of their clients. Securities brokers like Robinhood must register with FINRA in order to legally provide services in the United States.
FINRA sets rules designed to weed out unethical activities. These rules outline who can sell securities and how they can be sold. The authority periodically checks in on member brokers to ensure compliance with its rules. If a broker is found to be in violation of the rules, they will be assessed fines.
As a FINRA member, Robinhood must be transparent about its fees and security processes, adding to the level of safety when you work with the broker.
Checking and savings accounts have FDIC insurance that protects customers should the banks fall on hard times. Although FDIC insurance doesn’t cover investments, Robinhood and other brokerages are insured through the Securities Investor Protection Corporation (SIPC).
SIPC insurance covers investors when member brokerages fail. The platform provides up to $250,000 in insurance for members with cash accounts and $500,000 in insurance to cover securities investments.
This coverage means that even if Robinhood were to completely go out of business, your investments with them are insured.
Robinhood takes other security measures to ensure the safety of its clients’ accounts. Its platform takes measures to ensure information like your bank account number, debit card information, and Social Security number are safe in their hands.
- Password Storage. All passwords on the platform are stored using the BCrypt hashtag algorithm rather than storing them in plain text. If someone were to somehow access Robinhood’s stored passwords, they wouldn’t be able to read them without also cracking the BCrypt hashtag algorithm’s code.
- Data Encryption. Data is moved using Transport Layer Security (TLS) encryption. Encryption mixes letters, numbers, and symbols to make it unreadable and nearly impossible to decrypt without the correct key.
- Two-Factor Authentication. Users can enable two-factor authentication. This security feature sends you a text message or email with a unique code in order to log into the Robinhood app.
Risks of Using Robinhood
Although Robinhood is safe to use, there are always risks involved in investing. Some of those risks are related to the broker you choose to work with.
Some risks to consider before signing up for a Robinhood account include:
Payment for Order Flow Model (GameStop Controversy)
In early 2021, heavily shorted meme stocks like GameStop spiked during the so-called Big Short Squeeze. Robinhood halted trading of many of these volatile stocks on its platform. The broker cited market volatility as their reason for halting certain trades, claiming it was done in the best interest of investors.
Users were outraged, and some claimed that the inability to buy and trade the stocks prevented them from realizing tens or even hundreds of thousands of dollars worth of gains from the trades.
Some investors blamed Robinhood’s payment for order flow activities, through which market makers pay the platform to route orders through them. Many of these market makers are the very hedge funds that were being hurt by the Big Short Squeeze. Users suggested the hedge funds that pay Robinhood had a hand in the brokerage stopping trades on these heavily shorted stocks. Of course, those allegations were never verified.
Considering this event, some investors believe that if another battle is waged between the hedge fund Goliaths and the retail-investing Davids, Robinhood is likely to stand on the side of the Goliaths.
In mid-2021, FINRA slapped Robinhood with $70 million in fines surrounding outages on its platform. According to the San Diego Union Tribune, the fine was the largest of its kind ever imposed by the regulatory body.
FINRA said the fine was the result of misleading and false information coupled with harm suffered by investors as a result of system outages from 2018 through 2020. The misleading information had to do with how Robinhood displayed customer account balances and buying power and whether customers could place trades on margin. The system outages FINRA cited locked customers out of their accounts during times when large swings were taking place in the market.
Because customers were locked out of their accounts when the market was on a downswing, they took significant losses as a result of the inability to sell, and when the market was on an upswing, they didn’t have the opportunity to tap into the trend.
Overly Simplified Interface
Robinhood was built to be one of the most intuitive platforms available. The platform isn’t convoluted with tons of tools. Instead it offers only what most investors, especially beginners, need right where they need it.
The problem is that the simplicity of the trading platform makes stock trading seem easy — an insinuation that couldn’t be farther from the truth.
Making trades so easy may encourage new investors to make uninformed decisions. Much of the detailed stock information available on other platforms is simply nonexistent in Robinhood’s interface.
Although the platform is a great option for long-term, fundamental research-oriented investors, its simplicity can easily lead beginners down the path toward short-term speculation and uninformed trading decisions.
As mentioned above, Robinhood is an easy-to-use, simple platform. Although that has its perks, there’s also a bit of a downside. It can be difficult for investors to manage a well-diversified portfolio with multiple positions on such a simple platform because it lacks the technical and fundamental analysis tools to monitor such a portfolio efficiently.
The Robinhood app also doesn’t feature integration with popular cash management apps like Mint and Quicken. This can make it difficult to get a complete picture of your financial situation.
Verdict: Should You Open a Robinhood Account?
There are no one-size-fits-all solutions in the world of finance and investing. With that said, Robinhood is the perfect low-cost investing app for the right investor. You should consider opening a Robinhood account if:
- You’re a New Investor. New investors shouldn’t focus on day trading and other high-risk investment concepts. Instead, they should focus on the basics, which is exactly what the Robinhood platform seems to be designed for. Its low cost structure and intuitive interface make it easy to create an account and get started even if you don’t have much money to invest yet.
- You’re In It for the Long Term. Robinhood doesn’t provide the technical tools that most active short-term traders would need to be successful. However, it’s a great place for investors who focus on long-term investment opportunities. If you research the fundamentals of your investments beforehand and can resist the urge to hop in and out of trades, Robinhood will work well for you.
Although Robinhood is a do-it-yourself-style platform, you don’t have to go at it alone. There’s no shame in seeking the help of a financial advisor when you need a professional’s help or guidance.
Alternatives to the Robinhood Investing App
Robinhood is a great option for some investors but isn’t the best option for everyone. If you feel the platform doesn’t fit what you’re looking for in a discount online broker, there are plenty of other options to choose from. Some of the most popular Robinhood alternatives include:
- E*Trade. Founded in 1982, E*Trade has been at the forefront of technological innovation in online investing and trading. The platform offers all the tools active traders need to be successful while featuring similar benefits to Robinhood, like free stock trading and no account minimums.
- TD Ameritrade. TD Ameritrade is a longstanding financial service provider with decades of experience. The company offers the thinkorswim trading platform, which was built by traders for traders and comes with all the technical analysis tools you could ever want. It also provides similar benefits to Robinhood, like free stock trading and no account minimums.
- Charles Schwab. Charles Schwab is another online broker that offers access to free stock trading and no account minimums. Research is where the company shines, meaning you’ll have more information when making investment decisions if you use this platform.
The stock market is all about balancing risk and reward, including the risks of investing and risks created by the broker you choose to invest with. Although Robinhood does have a few blemishes on its record, the company has also become one of the most popular discount brokers online today.
That kind of popularity wouldn’t exist if the company didn’t take active steps to keep its customers safe.