Is Robinhood Safe for Investors? (2024)

Robinhood is considered safe for investors. It's a member for the Securities Investor Protection Corp. (SIPC), is regulated by the SEC, and has additional financial protection per customer up to certain amounts for cash and securities. Learn more about why Robinhood is considered safe and then decide if it's the right investment app for you.

Key Takeaways

  • Founded in 2014, Robinhood charges no commissions or account minimums, making it a user-friendly application for a new generation of investors.
  • Despite the simple user interface that demystified trading for many, some investors questioned if the platform was too good to be true.
  • Robinhood is regulated by the U.S. Securities and Exchange Commission (SEC) and maintains membership in the Financial Industry Regulatory Authority (FINRA).
  • Investment accounts with Robinhood are covered beyond just standard Securities Investor Protection Corp. (SIPC) coverage.
  • Robinhood offers additional SIPC coverage of up to $1.5 million for cash and $10 million for securities per brokerage customer after SIPC coverage is exhausted.

Is Robinhood Safe?

Robinhood (HOOD) is a popular financial services company with 10.3 million monthly active users (MAU) as of November 2023. It’s considered a safe option for investors’ securities and cash for various reasons:

  • Robinhood is a member of the Securities Investor Protection Corp. (SIPC). This means that any loss of an investor’s securities (e.g., stocks and bonds) and cash held by Robinhood is protected up to $500,000 in the event the firm fails or goes out of business. This includes up to $250,000 protection for cash holdings. SIPC insurance does not protect investments from losses caused by market fluctuations.
  • Robinhood is also regulated by the U.S. Securities and Exchange Commission (SEC) because it’s a registered broker-dealer.
  • Finally, Robinhood offers added financial protection per customer account of up to $1.9 million for cash and $50 million for securities.

Keep reading to learn more about Robinhood, its safeguards for investors’ securities and cash, and the challenges it has faced in the past.

How Does Robinhood Work?

Robinhood is a financial services company that facilitates individuals to trade cryptocurrencies, exchange-traded funds (ETFs), individual stocks, and options. It offers commission-free trades and services similar to any other brokerage company. For a monthly fee, it can also invest your uninvested funds in a brokerage cash sweep fund offering interest on the funds.

Robinhood disrupted the financial technology industry by charging commission-free trades. It launched in December 2014 with a waiting list of more than 500,000. Company founders Vladimir Tenev and Baiju Bhatt, both Stanford physics graduates, believed that Robinhood would motivate a new generation of would-be investors with their mobile platform. Its mission was to make the financial markets more accessible, primarily by offering zero-fee trades, no account minimums, and an easy-to-use mobile app—even if some were skeptical. Robinhood now offers its platform on iOS, Android, and most web browsers.

In 2016, it launched a premium trading platform called Robinhood Gold. This service offers investors premium features for a $75 annual fee and allows them to trade on margin up to $1,000, bigger instant deposits, and access to professional research and Level II market data. Investors interested in premium features can sign up for a 30-day free trial.

There’s no doubt that Robinhood has won a loyal following, and the company is backed by major players such as Google Ventures, Index Ventures, and Andreessen Horowitz. But is it safe? Here’s what you should know.

Robinhood’s Protections

As noted in Investopedia’s review of the platform, Robinhood was an exciting platform that attracted new, mostly retail investors who wanted to trade in small quantities. Despite the simple user interface that demystified trading for many, some investors questioned if the platform was too good to be true.

Luckily, Robinhood, like all brokerage firms that handle securities, is regulated by the Securities and Exchange Commission (SEC). The SEC’s primary compliance mechanism is prosecuting civil cases against individuals and companies that commit fraud, disseminate false information, or engage in insider trading. The SEC doesn’t offer individual investors any protection, and it doesn’t insure against loss or otherwise protect investments from actions that brokerage firms may take.

Robinhood also maintains membership in the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) in which most brokerage firms voluntarily participate. SROs are overseen by the SEC but are not part of the government. Brokerages that are FINRA members submit to the organization’s rules and regulations, which cover testing and licensure of agents and brokers, and a transparent disclosure framework that protects investors.

$1 billion+

What Robinhood claims to have saved their users in commissions and fees.

Other Protections

Investment accounts with Robinhood are covered by the Securities Investor Protection Corp. (SIPC), a nonprofit membership corporation that protects money invested in a brokerage that files for bankruptcy or encounters other financial difficulties.

See Also
Trade sizing

The SIPC was created by Congress in 1970 under the Securities Investor Protection Act (SIPA). The SIPC has no authority to investigate or regulate its members—it exists only to restore investor funds (up to $500,000 for securities and cash or $250,000 for cash only per account) held by financially troubled brokerages.

In addition to SIPC coverage, Robinhood has what it calls “excess of SIPC” coverage. Through its partnerships with certain underwriters at Lloyd’s of London, Robinhood provides up to $1.9 million more for cash and $50 million more for securities protection per customer, which is triggered when SIPC coverage is exhausted.

Robinhood’s Safety and Protections
MembershipSECFINRASIPC
RobinhoodYesYesYes

Risks Associated With Trading on Robinhood

For most investors, the potential risks involved with using Robinhood aren’t associated with the regulatory framework covering their accounts. For instance, Robinhood is a very sleek and minimal application, and investor tools are rudimentary compared with those of other major brokerages like Charles Schwaband E*Trade. This can lead to hasty and uninformed decision-making, especially for novice investors.

The Robinhood app makes it difficult to manage a diversified portfolio. Most reviewers suggest that tracking more than three or four positions isn’t practical with Robinhood, which leads to overweighing your portfolio with one or two equities—never a good practice. The Robinhood platform permits stock, ETF, cryptocurrency, and options trades.

As a matter of convenience, Robinhood doesn’t integrate with other financial management tools like Mint or Quicken, so there’s no convenient way to track your holdings as a part of your overall financial picture outside the Robinhood app. In December 2022, Robinhood introduced Robinhood Retirement, which is an individual retirement account (IRA) option. They offer a 1% match for every dollar contributed. The benefits of tax savings and long-term benefits of retirement savings plans are thereby extended to their users.

Robinhood’s Ongoing Challenges

There are challenges that are inherent with brokerage firms like Robinhood. For instance, one of the main sources of Robinhood’s revenue comes from payment for order flow (PFOF), which the SEC is reviewing. In this practice, brokerage firms receive payments for any client trades directed to market makers. The payments are generally fractions of a penny per share. So while it may not seem as much, it does add up when multiple trades are redirected. If banned, companies like Robinhood would lose a significant revenue stream.

Robinhood has also experienced service interruptions and outages during large influxes of orders made by multiple users at the same time, which was commonly found with trades of highly volatile names. This not only led to customer complaints but also meant that Robinhood had to pay a $70 million settlement—the largest such FINRA penalty—in June 2021 to cover losses experienced due to these outages. FINRA had fined Robinhood a much less severe $1.25 million in 2019 for best execution violations.

The Bottom Line

For a certain class of investors, Robinhood may be the right tool at the right time. However, for long-term investors, a mainstream broker may be a better alternative. In many cases, you can open a no-minimum account and get commission-free trades on many, if not most, ETFs while still having access to all the data, charts, tools, and educational resources you need to make informed decisions.

Is My Money Safe With Robinhood?

Investment accounts with Robinhood are covered by more than just the Securities Investor Protection Corp. (SIPC), which protects up to $500,000 for securities and cash or $250,000 for cash only per account. In fact, Robinhood also provides its brokerage customers with excess SIPC coverage, which provides an aggregate of $1 billion of coverage—up to $1.9 million for cash and $50 million for securities per customer, should the SIPC coverage become exhausted.

What Is the Catch With Robinhood?

Robinhood was primarily designed for new investors with a simple user interface and commission-free trades. However, more advanced investors will find that trades on the platform can be limiting: Trades tend to be routed based on payment for order flow (PFOF), there is limited research or resources available, and there are no customization options.

Is It Safe To Enter My Social Security Number in Robinhood?

Robinhood’s security team encrypts sensitive details such as Social Security numbers, ensuring that they will be safe from hackers.

Is Robinhood Really Free?

Robinhood offers commission-free trades in stocks, exchange-traded funds (ETFs), options, and cryptocurrencies. A more in-depth fee schedule is listed on its website—for example, regarding regulatory trading fees.

Is Robinhood Safe for Investors? (2024)

FAQs

Is Robinhood Safe for Investors? ›

Robinhood is a member of the Securities Investor Protection Corp. (SIPC). This means that any loss of an investor's securities (e.g., stocks and bonds) and cash held by Robinhood is protected up to $500,000 in the event the firm fails or goes out of business. This includes up to $250,000 protection for cash holdings.

Is Robinhood safe with my social security? ›

Robinhood has a good track record of protecting users' Social Security numbers, though, so providing yours is as safe as giving it to most reputable financial apps. Unfortunately, U.S. FinCEN requires you to provide your Social Security number to your stock brokerage for identity-verification purposes.

What is the disadvantage of using Robinhood? ›

Robinhood's range of offerings is extremely limited in that it only offers stocks, ETFs, options, and cryptocurrency trading. Robinhood doesn't support mutual funds or fixed-income products, and you can't trade commodities, forex, or futures.

Is Robinhood uninvested cash safe? ›

With the brokerage cash sweep program, the eligible uninvested cash in your individual investment account (cash intended for investing but that you have not yet invested or spent) is swept to program banks, where it becomes eligible for FDIC insurance up to $2.25 million or $250,000 per program bank, inclusive of any ...

Is Robinhood FDIC insured? ›

Cash in your Robinhood spending account is eligible for FDIC insurance coverage of up to a total maximum of $250,000.

Do I have to give Robinhood my Social Security number? ›

To apply for a Robinhood account, you'll need to have a device that meets our Technology requirements, and meet all of the following individual requirements: Be 18 years or older. Have a valid Social Security Number (not a Taxpayer Identification Number)

Why is Robinhood asking for SSN? ›

Robinhood requests personal information, including financial and tax identification information, in order to comply with U.S. government laws and FINRA rules. We'll request personal information from both new customers and long-standing customers.

Why is Robinhood shady? ›

Robinhood claims it is 'free' however, it makes money by payment for order flow. This means they send orders to be executed by trading firms in return for cash payments. These activities are not typical for broker-dealers and raise 'red flags' about the integrity of the business model.

What is the best alternative to Robinhood? ›

  1. E*TRADE. E*TRADE, a stalwart in the online trading sphere, stands out as a dynamic and versatile platform, making it one of the best Robinhood alternatives. ...
  2. TD Ameritrade. ...
  3. TradeStation. ...
  4. Interactive Brokers. ...
  5. Tradier. ...
  6. Webull. ...
  7. M1 Finance. ...
  8. Public.com.

Why is Fidelity better than Robinhood? ›

Fidelity's fee structure is somewhat different, as this platform offers significantly more products and services than Robinhood. Fidelity doesn't charge trading fees or commissions on stocks and ETFs. However, unlike Robinhood, it does charge $0.65 per contract to trade most options.

Why not use Robinhood? ›

No mutual funds or bonds: The lack of mutual funds and bonds may make it difficult to build a truly diversified portfolio. Customers can only access bonds via bond ETFs. Limited customer support: Robinhood has made noticeable improvements to its customer service, but it's still not on par with other brokerages.

Do people still use Robinhood? ›

Over 10 million people use Robinhood as their primary trading platform.

Why can't I withdraw money from Robinhood after selling? ›

Before you can withdraw money from Robinhood, your funds need to be settled. The settlement period for stocks, +1(747) 205-0398 ETFs, and options is typically T+2 (trade date plus two trading days). For cryptocurrency, the settlement is instantaneous.

What happens if Robinhood goes out of business? ›

Robinhood is a member of the Securities Investor Protection Corp. (SIPC). This means that any loss of an investor's securities (e.g., stocks and bonds) and cash held by Robinhood is protected up to $500,000 in the event the firm fails or goes out of business. This includes up to $250,000 protection for cash holdings.

Should I use Charles Schwab or Robinhood? ›

Charles Schwab is better-suited for people who want a full suite of investments and services, including fixed-income securities, robo-advisor portfolios, and mutual funds. However, if you want to trade cryptocurrencies or trade options commission-free, Robinhood may be the better fit.

Should I use Robinhood as a savings account? ›

Though the new 5.00% APY rate is competitive, the best high-yield savings accounts in the country pay even better—from 5.25% to 5.40% APY, with no subscription required. Robinhood customers without Gold membership will earn just 1.50% APY on uninvested cash. Have savings you won't need for a while?

Can I trust stash with my SSN? ›

Q. Why does Stash need my Social Security Number? Stash takes safeguarding your personal information very seriously—we use it only for identification purposes, and we never perform credit checks.

Do I need to pay taxes on Robinhood? ›

Do you have to report stocks on taxes? If you sell any stock using Robinhood, you must report this and pay taxes on the gains. Sometimes Robinhood gives away free stocks for referring a friend or creating an account. If the value of the stock exceeds $600, you'll need to report this to the IRS.

Why do stocks need my Social Security number? ›

The SEC, via the 2001 USA PATRIOT Act, requires all financial institutions to verify and record your Social Security number in order to verify your identity. This helps identify and prevent potential terrorists and money launderers from gaining access to the stock markets.

Why do investing apps ask for SSN? ›

Brokers are required to ask for ID to verify your identity and act in accordance with various regulations, including anti-money laundering and terrorism laws and know your customer policies.

Top Articles
Latest Posts
Article information

Author: Prof. Nancy Dach

Last Updated:

Views: 5889

Rating: 4.7 / 5 (57 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Prof. Nancy Dach

Birthday: 1993-08-23

Address: 569 Waelchi Ports, South Blainebury, LA 11589

Phone: +9958996486049

Job: Sales Manager

Hobby: Web surfing, Scuba diving, Mountaineering, Writing, Sailing, Dance, Blacksmithing

Introduction: My name is Prof. Nancy Dach, I am a lively, joyous, courageous, lovely, tender, charming, open person who loves writing and wants to share my knowledge and understanding with you.