Are Your Investments Safe with Robinhood?

Robinhood is an online trading platform that offers investors the opportunity to trade securities and financial instruments including individual stocks, exchange-traded funds (ETFs), cryptocurrencies, gold, and more. Robinhood makes money from fees it charges for transactions, including payments for order flow they might receive from other brokers.

Having a Robinhood account gives you access to their online trading platform as well as their mobile trading app. New investors who join the platform stand a chance of winning a free stock and benefit from the platform’s commission-free trading and zero account minimums.

But is Robinhood safe? Here is a view of the safety measures Robinhood has in place so you could determine how comfortable you might be using this platform.

A bit about Robinhood’s history

Robinhood Financial LLC was founded in 2013 by Vladimir Tenev and Baiju Bhatt who were classmates at Stanford, and the company has grown over the years.

According to the company’s press release announcing its earnings for the fourth quarter and the full 2021 year, the company added over 10 million net-funded accounts in 2021. Robinhood indicated that it has nearly doubled the number of users on the platform from the previous year.

However, the company’s earnings showed a net loss for 2021 of $3.69 billion compared with a net profit of $7 million for 2020. Total net revenue for 2021 increased to $1.82 billion from $959 million in 2020.

Investors could use the trading platform to invest in the stock market, the commodity market, and more, often commission-free. In addition to free trades, the platform also offers fractional shares, which allow you to buy a part of a share or a stock.

Robinhood offers more options for investing money, including cryptocurrency trading. However, mutual funds cannot be purchased on the stock trading app, and neither can individual bonds. 

There might be a number of reasons an investor might question whether the Robinhood mobile app and web platform are safe. There have been some issues with the platform that might concern potential investors.

In June 2021, the Financial Industry Regulatory Authority (FINRA) fined Robinhood $70 million for what the regulator deemed to be “systematic failures that included system outages, providing false or misleading information and weak options trading controls.” FINRA said that these factors combined may harm millions of the platform’s users.

The company also came under investigation by various federal and state regulators for several years prior to its settlement with FINRA. It is suspected that the company agreed to the settlement to pave the way for it to go public on July 29, 2021. Robinhood stock went public at a price of $38 per share. As of October 7, 2024, HOOD is worth $23.32 per share.

Robinhood’s safety

The measures of safety that Robinhood provides come in the shape of efforts from the company itself as well as protection that regulators have in place. It should be noted that none of these measures is “foolproof” in terms of investor safety.

Regulatory protections

Like all online brokerages, Robinhood’s activities are regulated by the Securities and Exchange Commission (SEC). The SEC oversees U.S. securities markets to ensure transparency and to ensure a level playing field for all investors.

As a publicly-traded company, Robinhood is subject to regulation from the SEC and must submit various reports to the agency every year. The SEC has the power to fine the company and to take other types of enforcement actions for violations Robinhood might do as a broker or as a public company.

Robinhood is also a member of the Financial Industry Regulatory Authority (FINRA). FINRA has regulatory powers over brokerage platforms and companies that conduct securities transactions. Additionally, individuals who advise clients on securities transactions are also subject to FINRA’s authority.

Robinhood is also a member of the Securities Investor Protection Corporation (SIPC). The SIPC steps in to protect investors when a brokerage fails or when securities are missing from an account. The SIPC insurance provides coverage of up to $500,000.

Uninvested money is not directly insured through Robinhood. But investors who opt in for Robinhood’s cash card could have their uninvested money moved into a network of banks. Investors would then receive coverage through the Federal Deposit Insurance Corporation (FDIC). This FDIC insurance covers money losses up to $1.25 million in total and up to $250,000 per bank.

It’s important to note that none of these agencies protect investors against losses from their investing activities based on the ups and downs of the financial markets.

Additionally, if you use Robinhood Crypto, the company’s platform for trading bitcoin and other cryptocurrencies, you may have less regulatory protection. Robinhood has a disclaimer indicating that assets in Robinhood Crypto are not covered by the SIPC insurance protection. This crypto trading platform is not a part of FINRA either.

Internal protections

In addition to regulatory protections, Robinhood cites some internal protective measures that are used on its platform.

The company takes measures to protect user passwords via the use of the BCrypt hashtag algorithm, which scrambles passwords and makes them difficult for hackers to access.

The company also uses data encryption to secure your personal data such as your Social Security number. It uses up-to-date security protocols for the communication of data between mobile and web applications and the Robinhood servers.

Robinhood also indicates that it never accesses your bank account information once it is verified. Instead, Robinhood uses a third-party integration to access your banking information if needed in the future.

The platform also uses two-factor authentication to verify your identity when logging into your account. This requires two forms of verification when logging in and when a device is changed or updated.

The risks of trading on Robinhood

Some of the risks related to trading on Robinhood might be related to the operation of the platform and its capabilities. For example, FINRA has indicated in 2021 that the company failed to properly supervise its technology.

This resulted in a series of outages and critical systems failures that included a major outage in March 2020 during the outset of the pandemic turmoil. This outage may have caused some Robinhood customers to lose money.

Another risk is inherent in the trading restrictions that Robinhood placed on many investors in early 2021. The platform limited trades of so-called meme stocks after a number of smaller investors banded together via social media to push up the price of GameStop, AMC, and several other stocks. Robinhood responded by placing trading restrictions on many of these meme stocks citing a large volume of margin calls by its clearing company, National Securities Clearing Corp.

Lawsuits against Robinhood following these meme stock trading restrictions have largely been dismissed. However, the potential of sudden trading restrictions may not appeal to investors and potential users of Robinhood.

Lastly, while Robinhood uses several data security measures, it still faced a data breach in November 2021. According to the company, a fraudster “socially engineered a customer support employee by phone and obtained access to certain customer support systems.” This included obtaining lists and email addresses of millions of customers.

Is Robinhood right for you?

Robinhood has several advantages that may appeal to you. These include:

• Low or no commissions on many types of assets, including free trading of cryptocurrencies.
• Low investment minimums.
• Easy access and user-friendly interfaces via the Robinhood app and the web-based platform.
• A cash card that is linked to an FDIC-insured spending account.

The platform also has some disadvantages that may not appeal to you:

• There is no trading of mutual funds.
• The app has a history of outages and other technical issues.

If you're looking for features like dynamic rebalancing and automatic investment schedules and prefer to take a more hands-off approach to portfolio management, Robinhood might not fit your needs.

On the other hand, Robinhood might be an option for an investor who is looking for a low-cost platform for stock, ETF, or cryptocurrency trades. The platform could also be suitable for investors who wish to get started with small amounts of money. Its user-friendly platform could be a good place to start for someone who doesn’t have a lot of investing experience.

FAQs

Bottom line

Robinhood has gained popularity as an investing app. It offers some advantages, such as low or no commission trades on stocks and cryptocurrencies. However, it has previously faced operations and data security issues. Additionally, trading certain types of investment assets, such as mutual funds, is not supported.

A data breach in November 2021 and outage issues cited by regulators might give some investors a pause when considering its safety. However, Robinhood claims that it has beefed up its efforts to remedy such issues.

Robinhood might be a choice for an investor looking for a low-cost trading platform. It might not be the most fitting choice for any investor wanting a platform for their entire portfolio, including mutual fund investments.

If you’d like to learn more, check out our Robinhood review. If Robinhood doesn’t sound like the right choice for you, check out our picks for the best investment apps you could use.