Is Robinhood Safe for Investors?

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.

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.

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.

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 Schwab and 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.