Is Robinhood Safe to Use? What Are the Pros and Cons?
What Is Robinhood? And is it Safe?
Robinhood is a 100% commission-free stock trading app. It was launched in 2013 by Baiju Bhatt and Vladimir Tenev, two friends who wanted to build a product that would make trading in the financial markets accessible to everyone, not just the rich.
Essentially, Robinhood is a no-barrier to entry online brokerage that provides both desktop and mobile app compatibility. Users can invest, commission-free, in publicly traded companies and exchange-traded funds.
Robinhood is headquartered in Menlo Park, California, and serves over 10 million users worldwide.
Since launching in 2013, Robinhood has made some significant operational hiccups that have put them in the critic’s spotlight. Major financial news networks, financial forums, and social media users have spoken out about these incidents, questioning whether or not Robinhood was safe for investors.
This article reviews how Robinhood protects its users and goes over noteworthy pros and cons of the app from a user’s perspective.
How Does Robinhood Protect Its Users?
Those questioning Robinhood’s safety as an online brokerage should keep in mind that, like traditional brokerages, Robinhood is regulated by the SEC. As well, Robinhood is a member of SIPC and FINRA (CRD #165998), a government-authorized not-for-profit organization that oversees U.S. broker-dealers. That said, Robinhood can be considered a safe place for investors to put their money.
Like traditional brokerages, Robinhood is regulated by the SEC (U.S. Securities and Exchange Commission), an independent federal government agency. The SEC is responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.
In layman’s terms, the SEC oversees, regulates, and implements fairness. They also have the power to enforce investigations that can be brought to court.
Member of SIPC and FINRA
As well, Robinhood is a member of SIPC (Securities Investor Protection Corporation), a non-profit corporation that protects clients of brokerage firms that are forced into bankruptcy. So, if Robinhood gets forced into bankruptcy, the SIPC covers each Robinhood user up to $500,000 for securities and cash (including a $250,000 limit for cash only).
This means the value of the stocks in an investor’s portfolio would be covered up to $500,000, and cash up to $250,000.
Robinhood is also a member of FINRA (Financial Industry Regulatory Authority), the largest government-authorized not-for-profit organization that oversees U.S. broker-dealers. You can see Robinhood’s FINRA profile here.
It’s FINA’s job to protect investors and safeguard market integrity “in a manner that facilitates vibrant capital markets.”
What FINRA regulates and requires
- Every investor receives the basic protections they deserve
- Anyone who sells a securities product has been tested, qualified, and licensed
- Every securities product advertisement used is truthful, and not misleading
- Any securities product sold to an investor is suitable for that investor’s needs
- Investors receive complete disclosure about the investment product before purchase
If FINRA finds something out of line, they have the power to fine or ban brokers and brokerage firms that violate its rules.
Why Robinhood Is Great for New Investors (The Pros)
Like any other platform, Robinhood has some good things going for it and some not-so-good things going for it. In this section, I’ll share my take on why Robinhood is great for new investors.
100% Commission-Free Trading (Forever)
Robinhood prides itself as being a pioneer of commission-free investing. They even have it showcased on their homepage and make it even clearer in the Trading Fees section in their Help Center:
Investing with Robinhood is commission-free, now and forever. We don’t charge you fees to open your account, maintain your account, or transfer funds to your account.
That alone was quite the hook to capture the attention of both new and seasoned investors.
As the company continued to flourish, traditional brokerages began to take notice. For those brokerages to keep up with the new competition, many followed suit by offering commission-free stock trading.
Huge props to Robinhood for disrupting the industry and leveling the playing field for everyone who wants to start investing.
Easy to Set up and Start Trading
Another big upside to joining Robinhood is that setup is super easy. My circle of friends and family who use the app were able to register in less than 5 minutes.
Four Things Robinhood needs to verify to get an account
- Be 18 years or older
- Have a valid Social Security Number (not to be confused with a Taxpayer Identification Number)
- Have a legal U.S. residential address within the 50 states or Puerto Rico (They may make exceptions for active U.S. military personnel stationed abroad)
- Be a U.S. citizen, U.S. permanent resident, or have a valid U.S. visa*
After you’re all set up, Robinhood also makes it easy for users to start trading.
Upon account activation, users automatically qualify for a $1,000 Instant Deposit limit, no questions asked.
Instant Deposit is a feature that allows users to have a certain amount of money available instantly upon transferring funds from their bank to Robinhood. Folks who sign up for Robinhood Gold have bigger Instant Deposits.
Here’s an example of the Instant Deposit feature that applies to all regular, non-Gold members who have a $1,000 Instant Deposit limit:
Say you make a $3,000 deposit from your bank, $1,000 of the new funds will be available instantly. So, you can purchase any stock valued at or below $1,000 if you wish. The remaining $2,000 will become available in five business days.
Users who sign up for Robinhood Gold are eligible for Instant Deposit limit increases as the value of their account increases.
- $50k instant deposit limit if your portfolio value is over $50k
- $25k if your portfolio value is over $25k
- $10k if your portfolio value is over $10k
- $5k for every other Gold user
Now, I’m not a Robinhood Gold member, but I can see how useful that particular benefit would be. Especially in this coronavirus climate where things are just so cheap.
Still, as a new, non-Gold member investor, I’ve used the Instant Deposit feature to make a few trades.
Actually, I used it to pick up a share of DocuSign (NYSE: DOCU) and have made some good gains 😃.
I bought some others too, all of which I didn’t have enough money in my Robinhood account to pay for. So, when I transferred money from my bank to Robinhood, the Instant Deposit feature gave me money upfront to buy what I wanted. It’s super handy.
Intuitive User-Friendly Design
Another positive that keeps Robinhood members happy and brings new members onboard is their app’s user interface aka design and functionality. The way they layout information, from their click and drag charts to their Stock and Watchlist sections, is minimalistic. beautiful, and intuitive.
Round of applause for their design and engineering team, seriously.
Helpful bits of information are also sprinkled in the app. For example, if you click the Market Order dropdown menu, Robinhood will give you a list of the various order types available and some information on how each option executes an order.
Robinhood’s user interface is designed in such a way that even the most technologically inept can’t get lost.
Problems With the Robinhood App (The Cons)
Ruh-roh. Now, onto the not-so-good bits of Robinhood. The cons.
Customer Service (Email support)
If there’s one thing I’d want out of a business that’s handling my money, it’s top-notch customer service. Unfortunately, for Robinhood, their email support team needs some improvement.
Speaking from my own experience, I’ve only had to reach out to them for one small issue. I referred a friend who signed up using my referral link, but I didn’t get my free stock. For those of you that don’t know, Robinhood gives you a link that lets you refer friends/family/peeps. If they sign up, you both get a free stock.
Anyway, not receiving the free stock wasn’t that big of a deal. A quick Google search told me that others experienced this issue with Robinhood, too. The advice I read was to contact their customer support so they can verify the referral and drop a free stock into your account.
So, that’s what I did.
My Personal Experience
It took me nearly a week of reaching out to the three separate times to resolve this issue. The first time I reached out, I received a response to which I replied and heard nothing back. The second time I reached out, the same thing happened.
Then, the third time I reached out, finally someone was able to resolve the issue. They even gave me a free bonus stock on top of the referral stock because of the delay, which definitely made up for it.
Now, I admit, my issue was minor (thankfully), but can you imagine having that same degree of customer support if something big happened?
In the unfortunate event that something bigger happens, I’d probably give them a call. Well, not probably, I’d definitely give them a call. The thing is, you can only call and speak to a real human person during market hours 9:30 am – 4:00 pm EST. Compared to brokers like Fidelity who have 24/7 support, Robinhood is a mark behind.
The last thing, I haven’t had any experience with their phone support staff so I can’t give an opinion on the quality of their service in that regard. However, should you need to contact them via phone, their number is (650) 940-2700.
History of App Crashing
Robinhood has a history of their app crashing, the most recent one being early this month (March 2nd, 2020) where the stock market gained nearly $1.1 trillion. The following morning, Robinhood experienced another crash for a brief period of time.
This particular outage caused lots of pain and rage among its users. There’s even a Twitter account, currently at 8,000+ followers, “actively building a case against Robinhood for their negligence and late open on March 2, 2020”.
However, I question how far this movement will get. Under section number 17, Robinhood’s Customer Agreement document (the document you agree to upon sign up) states:
Although considerable effort is expended to make the Website, App, and other operational and communications channels available around the clock, Robinhood does not warrant that these channels will be available and error-free every minute of the day. I agree that Robinhood will not be responsible for temporary interruptions in service due to maintenance, Website or App changes, or failures, nor shall Robinhood be liable for extended interruptions due to failures beyond our control, including but not limited to the failure of interconnecting and operating systems, computer viruses, forces of nature, labor disputes and armed conflicts.
So, since every user agreed to these terms, it seems to me that the people gathering for the class action lawsuit are SOL.
At best, this massive screw-up on Robinhood’s part has encouraged them to be even more vigilant. On March 3rd, 2020, the founders released a statement addressing the issue.
In their statement, it seems that they’ve identified the issue and are working to make sure it never happens again. Fingers crossed.
Lengthy Withdrawal Period
Here, I’ll talk a little about the third con I see as a Robinhood user: the lengthy withdrawal period.
If you want to withdraw money from Robinhood to your bank account, you’ll have to be patient. The withdrawal process can take up to five trading days to move funds from Robinhood to your bank account.
Now, this honestly isn’t that big of a deal, to me at least. It’s just a con that I think is worth noting to those prospective users who didn’t already know.
Frankly, the way I see it is, if you know you’re going to need money from your account, say to pay for a bill or whatever, then plan and have those funds set aside. And in the unfortunate event that you need money from Robinhood now well, maybe you shouldn’t have invested all your liquid cash there in the first place 🤷🏻. In fact, if this sounds like something that might happen to you, you should probably read Dave Ramsey’s Total Money Makeover book before signing up with Robinhood.
Referral Stock Waiting Period
I mentioned above that Robinhood gives every user the ability to refer a friend via a unique referral link. If you get someone to sign up, they would get a free stock and you would get a free stock. A win-win situation. Great.
The thing about referral stocks is they also have a waiting period attached to them. To withdraw the cash value of a referral stock, it would need to be in Robinhood account for at least 30 calendar days before it becomes eligible for withdrawal. In other words, if you sell your gifted referral stock before the 30 days, you won’t be able to access those funds in your withdrawable cash.
Again, not the biggest con, but still something that I’d like to make aware to any prospective Robinhood users.
So, is Robinhood Safe? Yes.
At the end of the day, my opinion is that Robinhood is safe to use. They’re backed by the same industry standards as “the other guys” so I know my money is safe should anything happen.
And for me, their pros, like their ridiculously beautiful user interface, are what keep me using Robinhood. At the same time, I do think their customer service and app stability can and will get better.
Overall, Robinhood has been a great tool for me to get my feet wet in investing in stocks. The time I’ve spent on the app and investing has been a smooth process where everything worked as it was supposed to. Well, aside from that one referral stock that didn’t come through. But that wasn’t a biggie, and they gave me a bonus stock, so we’re good.
That said, as long as Robinhood remains commission-free and they resolve any issues I may encounter, I’ll be an investor with them for life.
Shameless plug: If you want to get started in investing with Robinhood, do us a solid and use my referral link, https://join.robinhood.com/connoro357.
Thanks! Hope we get a good one 🤓.
Related: Read about my best performing stock on Robinhood: Shopify (NYSE: SHOP).