• Jul. 28, 2021, 3:10 PM

Robinhood Robinhood offers commission-free trading on stocks. Rafael Henrique/SOPA Images/LightRocket via Getty Images

Summary List Placement

Robinhood is an app and web interface that allows users to buy, sell, trade, and invest in stocks and other investments (like cryptocurrency) without paying commission fees.

According to Douglas Boneparth, a certified financial planner and the president of the investment advising company Bone Fide Wealth, Robinhood is geared toward the next generation of investors.

Yet that forward focus has led to the company being investigated for gamifying investing. The company is facing 50 active lawsuits and increased regulatory scrutiny, in part because it restricted trading during the GameStop stock saga in January.

Robinhoods rise has been rocky, leading many to wonder whether its safe to use.

The short answer? Trade at your own risk, Boneparth says.

In the news: Despite regulatory risks, Robinhood is targeting a valuation of $35 billion in an IPO, with shares slated to start trading on July 29. 

Is Robinhood safe? Mostly

When setting up an account with Robinhood, users give their personal information — such as 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 isnt a Robinhood-specific requirement, he says. 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.

Note: The SEC doesnt offer protection to individual investors, nor the investments they make.

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. But 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 says 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.

Quick tip: Of course, you should always take 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 thats no different than any other brokerage, Boneparth says. At the end of the day, Robinhood is a business. They dont have a fiduciary obligation to their clients. They facilitate a service.

He adds that there are no risks specifically inherent to Robinhoods platform, yet 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 risk to ones portfolio.

One school of thought is that the best approach to investing — and theres really no right answer — is to buy and hold stocks in quality companies that you believe in, that you trust, and that you use, Sanchez says. 

The financial takeaway 

In short, Robinhood is safe to use, but dont get caught up by the allure of free trading. Treat Robinhood like any other broker, and be careful with how you spend your money.

Robinhood review: Avoid trading commissions and purchase specialty investments like cryptocurrencies A comprehensive guide to investing in stocks for beginners Robinhood CEO says the company is all-in on crypto and that users can expect new crypto features at some point Robinhood promises to fix the issues that outraged customers when it restricted trading in meme stocks

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