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, you 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
  • Allows members to trade on margin up to $1,000
  • Grants bigger instant deposits
  • Provides 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.

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 considered one of the largest and legitimate fintech platforms, with funds protected up to $500,000 for securities and $250,000 for cash claims, thanks to membership in the Securities Investor Protection Corporation (SIPC).

Is Robinhood completely safe? ›

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.

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.

How safe is Robinhood Cash Sweep? ›

Cash deposited into these banks is eligible for Federal Deposit Insurance Corporation (FDIC) insurance up to a total maximum of $2.25 million (as of October 1, 2023), inclusive of deposits you may already hold at banks in the same ownership capacity.

Is Robinhood protected by the FDIC? ›

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

Can I trust my money in Robinhood? ›

Your securities and cash are protected by SIPC

Robinhood Financial LLC and Robinhood Securities, LLC are both members of SIPC, which protects securities for customers of its members up to $500,000 (including $250,000 for claims for cash) for each investing account, including IRAs.

Is Robinhood safe with your bank account? ›

Insurance – Robinhood sweeps cash balances into F.D.I.C. insured banks each day. This means that cash balances at Robinhood are insured up to $250,000 per user.

Why investors don t like Robinhood? ›

Robinhood employs a risky business strategy to make money

Options can be difficult for new investors to understand, and in some cases, they present the unlimited risk of financial loss.

What is the best platform for investing? ›

  • Fidelity Investments. Best brokerage account overall. ...
  • Merrill Edge. Best for Bank of America customers. ...
  • Charles Schwab. Best for low fees and access to physical locations. ...
  • Vanguard. Best for direct access to industry-leading, low-cost index funds and ETFs. ...
  • E*TRADE. ...
  • Interactive Brokers. ...
  • Webull. ...
  • SoFi.
4 days ago

What happens if Robinhood gets hacked? ›

Robinhood notified users directly if their data was affected by the breach. Users concerned about their data security can check platforms like HaveIBeenPwned, or review their account activity and communications from Robinhood for any indications of unauthorized access or use.

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.

What bank does Robinhood use? ›

RHY currently partners with JP Morgan Chase Bank, N.A. to hold funds in your spending account, and Sutton Bank holds funds associated with your Cash Card. Review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement for more information.

Does Robinhood pay interest every month? ›

Each day, you earn interest on your balance, and that earned interest itself also earns interest. Over time, your uninvested brokerage cash multiplies and grows on its own. Compound interest is a powerful tool to help build and accumulate wealth over time. Interest is paid on a monthly basis.

How trustworthy is Robinhood? ›

I have had a Robinhood account since 2014 and I have made hundreds of trades, so I can assure you that Robinhood is definitely both legit and has the necessary policies (with federal regulations) to be a safe brokerage. I have never had a problem executing a trade.

Should I give Robinhood my SSN? ›

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)

Does Robinhood affect credit score? ›

No. This process will not affect your credit score.

Does Robinhood refund money? ›

Robinhood Support can't reverse or refund payments for you.

Is Robinhood stock lending safe? ›

There is a risk that Robinhood Securities could default on its obligations to you under the Stock Lending program and fail to return the securities it has borrowed. If Robinhood Securities defaults and is unable to return loaned securities, you won't be able to trade such securities as usual.

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