- Robinhood, the app that lets users invest in stocks without paying fees, has earned both popularity and controversy.
- Two financial advisors told Insider that while Robinhood is safe to use, the app’s language and design can be misleading to users.
- Always consult a personal financial advisor before investing to avoid unexpected financial risks or crises.
- Visit Insider’s Tech Reference section for more stories.
Theplatform Robinhood launched nearly a decade ago but has gained popularity more recently. The app and web interface allow users to buy, sell, trade, and invest in stocks and other investments (like cryptocurrency) without paying commission fees.
According to Douglas Boneparth, certified financial planner and president of investment advising company Bone Fide Wealth, Robinhood is “geared toward the next generation of investors.”
But that forward focus has led to the company being investigated for “gamifying” investing. The company is currently facing 50 active lawsuits and increased regulatory scrutiny, in part because it restricted trading during the GameStop stock saga in January.
Robinhood’s rise has been rocky, leading many to wonder whether it’s safe to use.
The short answer? “Trade at your own risk,” Boneparth said.
Is Robinhood safe? Mostly
When setting up an account with Robinhood, users give their personal information, like their age, net worth, income, and social security number. According to Nickolas Sanchez, a certified financial planner at Financial Architects, this is an entirely normal process to trade stocks under SEC guidelines.
“This isn’t a Robinhood-specific requirement,” he said. “If you want to invest, even at the most reputable firms, you are going to have to give underlying personal information.”
The Securities and Exchange Commission requires these details to avoid fraud and especially risky investments. And just like any other brokerage firm, Robinhood must abide by the fair practice regulations set by the SEC, including providing proof of fair dealings. Otherwise, they face being hit with fines or civil lawsuits.
Additionally, Robinhood is a member of the Securities Investor Protection Corporation, which offers financial protection if a brokerage firm were to fail. The SIPC can replace up to $500,000 for both securities and cash, including a $250,000 limit for cash only, in missing customer property.
So if Robinhood went bankrupt, as an investor on that brokerage platform, your funds could be transferred to another brokerage firm or refunded to you. However, investments in cryptocurrency are not protected by either the SIPC or Robinhood.
Finally, Robinhood ensures its users that their passwords and “sensitive details” are encrypted. Once you verify your banking information, Robinhood states it will “never access them again.” The app also offers two-factor authentication via SMS text message and third-party authentication apps for additional security protection.
But of course, you should always take your data security into your own hands by using a strong password that you change regularly.
The risks of using Robinhood to buy, sell, and trade stocks
Anyone can sign up and create a trading account with Robinhood within minutes, without any real training on the stock market or educational resources on how investing works. That, according to Boneparth, may be a disservice to its users.
The financial expert pointed to the case of 20-year-old Alexander Kearns, who died by suicide after thinking he lost $730,000 on Robinhood.
“Sure, Robinhood will tell you if you go to their website they have blogs and articles about investing, but that’s no different than any other brokerage,” Boneparth said. “At the end of the day, Robinhood is a business. They don’t have a fiduciary obligation to their clients. They facilitate a service.”
He added that there are no risks specifically inherent to Robinhood’s platform, but advises his clients to bounce investment ideas off their personal investment advisor.
Sanchez agrees, telling Insider that the minimalistic design of the app, coupled with the commission-free trading feature, may “incentivize a lot of activity,” which could pose a potential risk to one’s portfolio.
“One school of thought is that the best approach to investing — and there’s really no right answer — is to buy and hold stocks in quality companies that you believe in, that you trust, and that you use.”
In short, don’t get caught up by the allure of free trading. Treat Robinhood like any other broker, and be careful with how you spend your money.