Robinhood safe? Experts weigh
- Robinhood, the app that allows users to invest in stocks without paying a fee, has gained both popularity and controversy.
- Two financial advisers told Insider that while Robinhood is safe to use, the language and design of the app can be misleading for users.
- Always consult a personal financial advisor before investing to avoid unexpected risks or financial crises.
- Visit the Insider Technical Reference section for more stories.
The Robinhood platform was launched almost 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 a commission.
According to Douglas Boneparth, chartered financial planner and chairman of the investment advisory firm Bone Fide Wealth, Robinhood is “geared towards the next generation of investors”.
Yet this forward-looking focus led the company to be investigated for “gamifying” investing. The company is facing 50 active prosecutions and increased regulatory control, in part because it restricted trading during the GameStop market saga in January.
Robinhood’s rise has been difficult, which has led many to question whether it is safe to use.
The short answer? “Trade at your own risk,” Bonparth said.
Is Robinhood safe? Most
When creating an account with Robinhood, users provide their personal information, such as age, net worth, income, and social security number. According to Nickolas Sanchez, a certified financial planner at Financial Architects, this is a completely normal process for trading stocks in accordance with SEC guidelines.
“This is not a requirement specific to Robinhood,” he said. “If you want to invest, even in the most reputable companies, you will need to provide underlying personal information.”
The Securities and Exchange Commission requires these details to avoid fraud and particularly risky investments. And like any other brokerage firm, Robinhood must adhere to the rules of fair practice set by the SEC, including providing proof of fair use. Otherwise, they risk fines or civil lawsuits.
In addition, Robinhood is a member of the Securities Investor Protection Corporation, which provides financial protection in the event of a brokerage firm’s bankruptcy. the SIPC can replace up to $ 500,000 for securities and cash, including a limit of $ 250,000 for cash only, in customer’s missing property.
So if Robinhood goes bankrupt, as an investor on this brokerage platform, your funds could be transferred to another brokerage firm or be refunded to you. But cryptocurrency investments are neither protected by SIPC nor Robinhood.
Finally, Robinhood assures its users that their passwords and “sensitive information” are encrypted. Once you verify your bank details, Robinhood says he will “never access it again”. The app also offers two-factor authentication via SMS and third-party authentication apps for additional security protection.
Of course, you should always take the security of your data 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 register and create a trading account with Robinhood in minutes, with no actual stock market education or educational resources on how investing works. This, according to Bonparth, can be a disservice to its users.
The financial expert brought up the case of Alexander Kearns, 20, who committed suicide after thinking he lost $ 730,000 on Robinhood.
“Of course Robinhood will tell you that if you visit their website they have blogs and articles on investing, but that’s no different from any other brokerage,” Boneparth said. “At the end of the day, Robinhood is a business. They have no fiduciary duty to their customers. They facilitate a service.”
He added that there are no risks specifically inherent in Robinhood’s platform, but advises his clients to bounce their investment ideas off their personal investment advisor.
Sanchez agrees, telling Insider that the app’s minimalist design, coupled with the commission-free trading feature, can “spur a lot of activity,” which could pose a risk to his portfolio.
“One school of thought is that the best approach to investing – and there really is no right answer – is to buy and hold stocks in quality companies that you believe in, trust, and that you use. “
In short, don’t get carried away by the allure of free trade. Treat Robinhood like any other broker and be careful about how you spend your money.