Robinhood’s stated goal was to bring investing to the masses.
When I started investing back in the late 1990’s, brokerage commissions were exorbitantly high. (I had a few bucks in a Roth IRA, which made the commissions even more brutal) In the years since, they’ve slowly come down as discount brokers entered the market and stole market share from the giants.
Robinhood fipped the whole model on its head when they offered commission-free trades. Wow. It was a game changer.
But since it was born in the era of social media and gamification within apps, it relied on many of those same models to help it grow. The app itself wasn’t a stodgy brokerage app – it was fun to use with confetti and scratch off tickets and other aspects that gave you the brokerage experience but wrapped in a candy-coated shell.
Personally, as someone who has been investing for quite some time and with a fully developed prefrontal cortex, the experience didn’t affect me.
But as we’ve learned from numerous news stories, sometimes those little features do have an impact.
Today, I’m going to look into whether Robinhood is safe for investors. We’ll go through the basics, such as regulation, SIPC, and financial safety, but we’ll also delve into the softer side. We’ll look at the various gamification aspects and the absence of guardrails and what you may want to keep an eye out for.
But before we get into the details (and the details matter!) – Robinhood is safe. It’s regulated and complies with all security and investing standards. You do not have to worry they are a fly-by-night company or will otherwise disappear anytime soon. They’re legitimate.
But critics feel it makes it too easy for beginners to make investing mistakes.
Table of Contents
- Is Robinhood Safe?
- Robinhood is Regulated
- Up to $1.75 Million in SIPC Insurance
- FDIC-Insured Cash Management Account
- Two-Factor Authentication
- Pattern Day Trading Limits
- Robinhood Gold
- Multiple Order Types
- Where Is Robinhood Not Safe?
- Very Easy to Make Trades
- No Portfolio Analysis
- Easy Margin Trading
- Easy Options Trading
- No Research Tools
- No Retirement Accounts
- Limited Customer Service
- Platform Outages
- How Does Robinhood Make Money?
- Is Robinhood Good for Beginners?
- Alternatives to Robinhood
Is Robinhood Safe?
Robinhood is a legit investing app for investing in stocks, ETFs, and options. Here are some of the protocols in place to protect investor’s money and privacy.
Robinhood is Regulated
The platform is regulated by these two organizations:
- Securities and Exchange Commission (SEC#:8-69188)
- Financial Industry Regulatory Authority (FINRA) (BrokerCheck# 165998)
Being monitored by either body doesn’t prevent fraud or financial failure but each registration provides peace of mind to investors.
Any legit broker open to US investors is also a member of these two organizations. Some examples include Fidelity, Vanguard, Schwab, and micro-investing apps like M1 Finance and Acorns.
Up to $1.75 Million in SIPC Insurance
The platform is a member of the Securities Investor Protection Corporation (SIPC) and registered as Robinhood Financial LLC from Menlo Park, CA and Robinhood Securities LLC out of Lake Mary, FL.
This protection is similar to FDIC insurance for a bank account if the bank fails. If Robinhood closes, investors can recoup their cash and stock balances.
SIPC insurance doesn’t protect against normal investment losses – like declining stock prices.
Investors that only have a brokerage account can get up to $500,000 in SIPC coverage, including up to $250,000 in cash reserves.
Robinhood states they have purchased additional coverage through Lloyds of London. Members can have a combined return of up to $10.5 million, including up to $1.75 million in cash deposits.
FDIC-Insured Cash Management Account
Robinhood also offers a cash management account that functions like a checking account but can also earn a higher interest rate. This account has up to $1.25 million in FDIC insurance, up to $250,000 per partner bank.
Users can enable two-factor authentication (2FA) to protect their account from unauthorized logins. In addition to entering your password, the service sends a one-time passcode via text message or an authentication app.
Three of the supported authentication apps include:
- Duo Mobile
- Google Authenticator
This extra security feature is optional but Robinhood strongly recommends that users enable it. Many financial platforms use 2FA to protect accounts.
Pattern Day Trading Limits
As Robinhood is a member of the FINRA self-regulatory body, the platform enforces the same pattern day trading rules as other brokerages.
A “day trade” is buying and selling the same stock or option on the same trading day. Users can only make up to three day trades within a rolling five business days, if the number of day trades is more than 6% of the total number of trades for the same period.
If Robinhood (or another broker) labels users as a pattern day trader, they cannot buy any new stock, ETF or crypto position on Robinhood for the next 90 days.
This restriction doesn’t apply to brokerage account portfolio balances higher than $25,000, excluding cryptocurrency holdings.
Investors have the opportunity to increase their brokerage account balance up to $25,000 in the same market day as making the fourth pattern day trade.
Robinhood Cash Accounts are Exempt
The pattern day trading restrictions don’t apply to the Robinhood Cash brokerage accounts. But these accounts don’t offer instant deposits and withdrawals. For example, if deposit new cash or sell stock shares, you can’t access the funds for several business days when the funds settle.
However, a Robinhood Cash account isn’t the default option and users must request an account downgrade. Since 2016, a Robinhood Instant account is the standard account type that lets users instantly invest cash deposits even if the funds are still in the bank account.
Instant accounts also let users immediately reinvest the sale proceeds into a new stock or ETF.
Premium “Robinhood Gold” accounts are also subject to the pattern trading rules.
Like other brokerages, investors can open a margin trading account that charges interest to short stocks or sell options.
Margin trading requires a paid Robinhood Gold subscription starting at $5 per month. The fee increases for larger account balances.
Federal law requires a minimum $2,000 account balance to open a margin account as well.
Investors can turn off margin trading to avoid accidentally making leveraged trades.
A Gold subscription also offers these features:
- Morningstar research reports
- Level II quote data
- Larger instant deposits
Multiple Order Types
Like traditional online brokerages, Robinhood supports multiple order types:
- Stop loss
- Stop limit
The standard order type is a “market order” that buys or sells shares at the current market price. Using one of the advanced order types can help buyers and sellers trade shares at a specific price to potentially avoid investment losses.
Market timers may also appreciate Robinhood as you can trade during normal market hours instead of being restricted to a single daily trading window. This window may not offer the best share price for technical traders.
Where Is Robinhood Not Safe?
It’s possible to trade the same stocks and ETFs on Robinhood as other brokers, but there are a few areas where users need to be aware:
Many of the areas I’m listing below fall under the category of “investor beware.” Robinhood makes these features and tools available to investors but it’s incumbent on the investor to educate themselves. We live in a free market society where personal responsibility is priority one – just because Robinhood makes something available doesn’t necessarily mean they are at fault if its used irresponsibly. Personally, I don’t think there’s anything negative about these aspects but if you are a new investor, or you are friends or responsible for someone who is on the platform, be aware of the power of the platform.
The biggest knock against Robinhood is that it’s “fun” to use. There are so many aspects of the platform that make it seem like you’re playing a game rather than investing real money. The design and the interface are so well designed it looks exciting and fun rather than what people expect out of a brokerage – which is a boring dull interface.
Is it an unfair knock? Yes. Completely unfair. But when it can lead to risky behavior, it’s worth noting.
New investors may forget they are committing real money into risk-based assets that can lose value. The visual aspects of the platform don’t look “boring” like a typical brokerage – which might keep you out of the proper frame of mind. The platform can give investors the adrenaline rush that stocks only go up in value long-term and that finding winning investments is easy.
For example, the service displays green-colored share prices for stock with rising share prices and red tones for declining prices. Investors may buy stocks with positive price performance thinking it’s a good investment because its share price is currently a green color.
Also, being able to invest as little as $1 into stocks is convenient and can help investors build a diversified portfolio but may encourage excessive risk-taking.
Investors may buy volatile stocks that may have been avoided if they had to buy whole shares or pay a trading commission.
The company is taking steps to reduce gamification by removing its iconic confetti feature. This dynamic graphic activates when users make their initial deposit, buy their first stock, and other key milestones. I’m not going to lie, the confetti was kind of fun, but I understand why they wanted to make it less entertaining.
Very Easy to Make Trades
Robinhood excels at making the investment process easy as investors. They only have to choose the stock and dollar amount they want to invest. The platform offers fractional investing with a $1 minimum investment into any stock or ETF available on the platform so you don’t even have the calculate the number of shares.
Its trade ticket, which you use to buy or sell shares, can be easier to complete than other brokers that also offer commission-free trading and fractional investing. This reduces the friction for each trade.
No Portfolio Analysis
Robinhood doesn’t offer a portfolio analyzer like a traditional online brokerage. This tool can help investors break down their investments by industry sector and asset class to quickly see if a portfolio is properly diversified.
In fairness, other barebones micro-investing apps don’t offer in-depth portfolio management tools either. Stick with traditional brokerages like Fidelity, Schwab and Vanguard to access portfolio tools.
It can also be harder to track unrealized investment performance on Robinhood. Most apps show the lifetime performance of active holding to quickly see if an investment will be a net profit or loss if you sell today.
Robinhood only lets investors see the performance of one holding at a time.
Easy Margin Trading
Investing with a margin account on Robinhood can be cheaper than other brokers. Its margin loan interest rate is currently 2.5% (April 5, 2021) plus the $5 monthly service fee for Robinhood Gold.
Despite the monthly fee, the 2.5% margin rate is lower than most competitors. While Interactive Brokers has a slightly higher rate for small margin balances, most brokers above 7% for account balances below $500,000.
It can be easy for investors to think they can afford the interest of a Robinhood margin loan but not another broker.
The initial paperwork to open a margin account is similar to other brokers with the usual risk disclosures and account explanation. But as most Robinhood users are primarily new and inexperienced investors, the membership base pursuing margin trading may have less investment experience than other brokerages.
Easy Options Trading
Robinhood’s options trading platform made negative headlines during the summer of 2020 with the premature death of a young investor.
The service has added additional protocols to prevent a future occurrence, including basic how-to articles that provide options trading examples with how each strategy can profit or fail.
Also, the platform states they use the investor’s experience level, goals and financial situation to determine which options trading level they qualify for. Qualifying for basic options trading is still relatively easy.
Most investors can qualify for the Level 2 basic options strategies:
- Long call and long puts (buy or sell options)
- Covered calls
- Cash-covered puts
Investors must opt-in to options trading, but the onboarding process is relatively simple – similar to other brokerages. Any investor can buy call or put options but must have a margin account to sell options. Selling options requires using leverage.
Experienced traders can qualify for the Level 3 advanced strategies. Some examples include the Iron Condor, Iron Butterfly and credit spread trades.
For any options trade, Robinhood shows the upfront investment cost per 100 contracts. When comparing options chains, the platform does a better job of listing the strike prices, the necessary share price change to earn a profit and the trading probability of success.
Admittedly, the Robinhood options platform can be easier to compare chains than other brokerages. But the systemic issue returns to how Robinhood’s core user is more likely a beginner investor. More likely one that hasn’t invested through an entire market cycle and may be too aggressive.
No Research Tools
Another ongoing drawback for Robinhood is its lack of investment research tools. Back when Robinhood was one of the only free investing apps, investors would research potential investments on a discount brokerage but trade on Robinhood to avoid the $5 trade commission.
Now that nearly every online brokerage is fee-free, the lack of in-depth research tools is a leading reason to avoid Robinhood.
The platform only offers a basic price chart, recent market headlines and the percentage of buy or sell ratings.
The Robinhood Gold platform offers Nasdaq Level II quotes and Morningstar research reports. However, other free brokerages can offer more third-party reports and also offer interactive charts for technical analysis.
No Retirement Accounts
Robinhood only offers taxable brokerage accounts. This account type can be a good first step for new investors but isn’t the best place to park retirement investments unless you like paying capital gains taxes.
Most brokers offer traditional IRA and Roth IRA retirement accounts plus taxable brokerage accounts. Robinhood isn’t the best long-term brokerage option because they don’t offer retirement accounts.
Limited Customer Service
Robinhood’s customer service is extremely limited compared to traditional online brokers. Other apps may offer 24/7 phone and chat customer support. However, response times are slower during the pandemic for most outlets.
Investors will first need to browse the online knowledge library for frequently asked questions.
If the digital Help Center is insufficient, users will need to email Robinhood—and possibly wait days for a response.
There isn’t live chat support and only minimal real-time phone support.
It’s possible to call Robinhood customer support at 650-940-2700. Calling for account security and options trading can be the best way to reach a live phone agent.
The company is pledging to hire more phone support personnel in 2021, according to CBS News.
Do you remember the early days of the pandemic in March 2020 when the stock market saw record price declines? Robinhood traders want to exit their positions or “buy the dip” but were unable to due to multi-hour platform outages that prevented investors from accessing their accounts.
The traditional brokerages had their bandwidth tested too but had fewer outages than this app.
We’ll have to see whether this happens in the future.
How Does Robinhood Make Money?
Robinhood makes money in several different ways:
- Robinhood Gold subscriptions
- Margin loan interest payments
- Stock loans
- Income from uninvested cash
- Cash management accounts
- Payment for order flow
While Robinhood is a free investing app and investors don’t pay upfront trading fees for stocks and ETFs, the platform still has bills to pay. Robinhood sells trade requests to “market maker” firms instead of sending the buy and sell requests directly to the stock exchange. It’s up to you to decide if this is a conflict of interest or if you’re willing to accept this in return for free trades.
Most trades execute in seconds but the entire investment may not buy stock. The market maker may charge a small premium that’s higher than the ask price other brokerages charge.
When selling stock, the services may keep a tiny slice of the proceeds meaning you sell for less than the bid price.
The hidden fees are minimal but can turn into a small fortune over a multi-year period. For this reason, investors may choose to use a broker that specifically states they don’t sell order flows or receive rebates from market makers and trading venues.
Tip: Public Investing is one free investing app that no longer sells order flow. You can make monthly donations to help them receive income and cover operating expenses.
Brokers receiving payment for order flows is legal and several online brokers use the practice as well. However, Robinhood didn’t transparently disclose this practice for several years and agreed to a $65 million cash settlement in December 2020.
The platform lists the total investment amount, share purchase price and quantity of shares purchases (or sold). But investors will need to use another platform to calculate what the hidden order flow fees are.
Is Robinhood Good for Beginners?
If you want to dabble in stock picking and are able to do so responsibly, yes. If you want to invest in mutual funds or ETFs for the long term and aren’t interested in picking stocks, there are better options (usually the company that offers the mutual fund or ETF, since you’ll be able to buy and sell those for free).
The best reason to use Robinhood is for its $1 minimum investment for stocks and ETFs. This is one of the platform’s few competitive advantages and can make it easy for new investors to start investors with a small amount of money.
But the platform isn’t a good all-in option as it doesn’t offer retirement accounts or in-depth research tools. These features may not seem important to new investors that may only be looking to choose a brokerage with the lowest investment minimum or best free stock offers.
Alternatives to Robinhood
Several Robinhood alternatives are a better fit by offering more research and portfolio management tools without charging fees. You can get the same results and more amenities.
Other online brokerages are more likely to offer these features:
- In-depth fundamental data
- Interactive charts with technical indicators
- Third-party research reports
- Stock analyst ratings
- Portfolio analysis
- Educational articles and videos
- Fractional investing starting at $5
These other platforms may also offer index mutual funds that may have a higher initial investment than similar index ETFs yet have lower recurring investments as low as $1.
The account security and brokerage insurance coverage will be similar to Robinhood.
Webull offers taxable and retirement accounts with stock and ETF investment options. It also has powerful charting tools and a trading simulator.
It’s possible to get free stock shares when you join and make a minimum $100 deposit. Unlike Robinhood, investors can only buy whole shares of stocks and ETFs.
Read our Webull review to learn more.
E*Trade offers commission-free trades on U.S. Stocks, EFTs, and options. Their platform is good for active traders and they also a lot of free investing materials to help beginners get started.
With an easy to use interface, their dashboard allows you to keep closely monitor your investments – including creating watch lists.
Ally Invest also offers free trades on U.S. exchange-listed stock, ETF, and options trades. In addition to serving active traders, Ally Invest has fully managed accounts. So they will meet your needs for both your long term investing and your active trading.
Fidelity provides taxable and retirement accounts. It also offers fractional investing with a $1 minimum investment for stocks and ETFs when you use the mobile app. You can only buy whole shares on the web platform.
The brokerage also offers Fidelity ZERO index mutual funds. This option has a $1 minimum investment and doesn’t charge fund expenses.
New investors may also appreciate the free Fidelity Spire app that offers $1 fractional share investing along with short-term and long-term financial goal planning.
Vanguard is another excellent long-term brokerage option with taxable and retirement accounts. This platform is widely known for its index mutual funds which start at a $1,000 minimum investment but low subsequent investments.
Learn about the best Vanguard funds you might add to your portfolio.
Robinhood is safe but other brokerages can offer more tools for investors to properly research investments and monitor their portfolio performance and asset allocation. While Robinhood was a trendsetter a few years ago, it struggles to match the competition and has indirectly become a victim of its own success in reducing investment fees.
If you are a seasoned investor who won’t be pulled into the bells and whistles of the platform and don’t have another brokerage offering commission free trades, Robinhood is a great option.