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Contributing Writer
Jackie Lam has 8 years of experiencing writing in the personal finance space for both fintech startups…
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Robinhood, founded in 2013, is a fee-free platform that makes trading in the stock market easy — too easy, according to some experts and regulators. And it doesn’t offer the tax-advantaged investment accounts that are key to building long-term wealth.
The app has 21 million customers and over $102 billion in assets and aims to be “easy, friendly, and approachable” to its customers. The average age of its users is 31, and about 50% of those are first-time investors, according to a spokesperson for Robinhood.
Although its low fees and usability are sure to hook users, investors should be wary of Robinhood.
In recent years, Robinhood has faced regulatory fines, public scrutiny, and lawsuits. In 2020, Robinhood was hit with a $65 million fine by the Securities and Exchange Commission (SEC) for misleading customers. (A representative at the time said the settlement “relates to historical practices that do not reflect Robinhood today.”) In June 2021, Robinhood was fined $70 million by the Financial Industry Regulatory Authority (FINRA) for outages and misleading its customers. (In response, Robinhood said it had “invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams.”)
Earlier in 2021, Robinhood settled a wrongful death lawsuit over the death of a 20-year-old user who committed suicide after seeing an incorrect negative balance of $730,000 on the app. (A Robinhood spokesperson said: “We were devastated by Alex Kearns’ death. Since June, we’ve made improvements to our options offering … We remain committed to making Robinhood a place to learn and invest responsibly.”)
For a list of cheap and accessible alternatives to Robinhood, see NextAdvisor’s best online brokers of 2022. Or read on to see some more pros and cons of the Robinhood app.
Thousands of fractional shares are available on the Robinhood platform.
You can read more about Robinhood’s pricing on its fee schedule.
So is Robinhood good? Well, it can be appealing to newer investors without a lot of cash with which to invest. With no trading or commission fees, no account minimums or account maintenance fees, it’s a low-cost way to get one’s feet wet with the stock market.
However, the app’s gamified approach to investing makes it too easy to trade quickly and frequently. Robinhood users trade nine times more often than users of other low-cost brokerages such as E*Trade, according to a November 2020 study by behavioral finance experts. Other studies have shown passive investing — also known as buying and holding — is proven to build more wealth over the long term than making active trading decisions. So Robinhood’s ease of trading may actually work against you.
Another reason to look elsewhere? Robinhood does not offer Roth IRAs or traditional IRAs. Financial experts love these accounts because they help shield you from taxes while you build wealth. Other discount brokerages allow you to make all the same investments you might make with Robinhood, except within a tax-advantaged retirement account.
Robinhood might be a decent option for people who would like to invest in cryptocurrency, though it lacks some of the more advanced features you’ll get with cryptocurrency exchanges. Financial experts advise investors to limit their crypto holdings to about 5% of their overall portfolio, and to achieve other financial goals first, such as eliminating high-interest debt, building an emergency fund, and investing in a traditional retirement account.
While some discount brokerages offer in-depth reports and detailed research, online workshops and virtual trading to help newer investors learn the basics of investing, Robinhood’s educational resources are limited to a Learn section on its app. While it’s a robust library of content, newbie investors could benefit from having free access to more learning tools.
Finally, those who wish to get AI-powered guidance through a robo advisor, or have their portfolios managed by a professional, will also need to look elsewhere.
1. Research discount brokerage platforms and apps. If you’re looking for a low-cost way to get started trading, start by doing your homework and looking at different discount brokerage platforms. What kinds of services, products, and investments do they offer?
2. Compare fees. Look beyond commission trading fees and see if there are any account maintenance fees, minimums to open an account, or other costs. Consider the expense ratio of any stock or fund in which you plan to invest.
3. Submit an application through the Robinhood app. You’ll be required to provide personal information such as your tax ID and financial details. Within a few days you’ll receive an email either approving your application or requesting more information. Should Robinhood need to verify your identity, the process could take an additional five to seven days.
During the application process, you have the option of pre-loading your initial deposit. That way when your application gets approved, the money will be ready to go.
Robinhood has no monthly fee, no account maintenance fee, and no trading or commission fees for stocks, ETFs, and cryptocurrency. You can see a full list of Robinhood’s pricing here on its fee schedule.
Robinhood makes it easy for new investors to get started. There are no minimums to open an account, nor commission fees. But younger investors stand to benefit most from tax-advantaged investment accounts like the Roth IRA, which is not available on Robinhood, and a buy-and-hold strategy to maximize compound interest, which goes against Robinhood’s incentives to trade often.
The limits on taking money out of your Robinhood account is as follows:
When you deposit funds, it can take up to five business days for the transaction to go through. Once the transaction is completed, you’ll be able to take the money out.
After a sale, there’s a settlement period of the trade date, plus two trading days before you can make a withdrawal.
Robinhood is a registered broker deal and member of the SIPC, which means that as an account holder your assets are protected should the brokerage become insolvent. It also protects if there’s unauthorized trading or in the case of theft. In these instances, assets in your Robinhood account are covered up to $500,000 per customer. This includes $250,000 in cash.
There are also standard security measures, such as two-factor authentication on the app or SMS, and encryption of sensitive information.
There are always risks involved with investing, and there is no protection against the ups and downs of the market.
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