Is Robinhood safe? Is handling a lit torch around a pile of cash safe?
Well, probably not. I know I wouldn’t recommend it to anyone.
Remember trading is a fucken battlefield, so many snowflakes the unethical promoters & Robinhood just use & throws out because they weren’t prepared for the harsh realities of financial warfare. I’m NOT here to be your friend, I teach to ensure your survival/to help you succeed!
— Timothy Sykes (@timothysykes) October 14, 2020
You probably got here because you searched “why Robinhood is bad” or something like that. If you follow me on Profit.ly, you already know what I think…
But I’m glad you made it here. Trading is a battlefield, and there are rules key to survival.
I’m a teacher. I love to show people what I’ve learned along the way from turning $12,000 into almost $6 million.*
So I get angry when an app like Robinhood markets itself as a ticket to financial freedom. I’ve seen their commercials where they’ve marketed the promise of ‘getting rich quick,’ appealing to the worst instincts in a trader.
I’ve often said this isn’t the way to succeed in trading. It’s the way to become a casualty, like most traders who lose money.
I can tell you what you need … an education.
My free penny stock guide is a good place for newbies to start.
And once you’re ready, my 30-Day Bootcamp can help you build a solid trading foundation.
Consider this article a warning. There are ways to win at trading…
And there are 10 times as many ways to lose. The most reliable one is to not be prepared.
(*Here’s my disclaimer about how hard work and experience are critical to your trading. Listen, it’s easy to dazzle you — there’s a lot of money out there! But the fact is most traders lose money. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose.)
Table of Contents
- 1 What Is Robinhood?
- 2 History of Robinhood
- 3 Understanding How Robinhood Works
- 4 List of Features
- 5 Crypto on Robinhood
- 6 Robinhood Gold
- 7 What’s the Difference Between Robinhood and Other Platforms?
- 8 Is Robinhood Safe?
- 9 Free Stocks on Robinhood: What’s the Catch?
- 10 How Does Robinhood Make Money?
- 11 Should You Use Robinhood to Trade?
- 12 Most Frequently Asked Questions (After the “Is Robinhood Safe” One)
- 13 Conclusion: Is Robinhood Safe?
What Is Robinhood?
Robinhood is an online-only brokerage. Its big claim to fame is commission-free trading. And of course, those very ads that imply that money will gush out of the app.
It launched in 2014 with a waitlist of 500,000. Now it has more monthly trades than E-Trade and Charles Schwab combined.
It’s been positioned as a way to make trading accessible to more people. An egalitarian assault on Wall Street.
But here’s the thing … I want to teach newbies how to think for themselves in the market. I don’t want to make it easier for them to lose money.
So to me, it seems like Robinhood is a massive funnel for pulling new traders into the market. It gives them a sleek interface. It gives them default access to margin accounts. But from what I’ve heard, it doesn’t provide the best executions or customer service.
In my opinion, it’s a recipe for inexperienced traders to blow up their accounts.
History of Robinhood
In 2013 two college buddies, Vladimir Tenev and Baiju Bhatt, decided to create their own brokerage.
After designing trading software for a few New York hedge funds, they’d made some observations…
- Most brokerages had minimum fees to set up an account.
- They also charged fees upwards of $10 per trade — while they themselves were charged very tiny amounts.
By changing these things, these guys figured they could make trading more accessible.
According to their mission statement, they wanted to “provide everyone with access to the financial markets, not just the wealthy.”
That got people’s attention. In 2014, Robinhood officially launched to great hype.
It quickly gained a reputation as a ‘millennial’ platform — with good reason. In 2015, nearly 80% of its customers were in that demographic, with an average age of 26.
Despite its popularity with younger traders, Robinhood has actually had an impact on traders of all ages and experience levels.
In October of 2019, a wave of brokerages — including E-Trade and Charles Schwab — went commission-free. Robinhood’s largely viewed as the catalyst for that massive change.
Let’s look at some important numbers and events from Robinhood’s history that demonstrate its growth:
- 2017: Robinhood’s valued at $1.3 billion and reported to have 200,000 daily active users.
- 2018: Robinhood’s valued at $5.6 billion and reported to have 664,775 daily active users.
- 2020: Robinhood’s valued at $8.3 billion. By the summer of 2020, Robinhood reportedly had 13 million total users. Three million of those accounts were added in the first quarter of 2020 alone.
- Currently, Robinhood’s value is $11.7 billion. There’s talk of the company going public.
That kind of reads kind of like ‘Robinhood, to the moon!’ … In reality, not quite. Keep reading to learn what I think…
Understanding How Robinhood Works
At its core, Robinhood is a trading app and website. You can buy and sell a lot of stocks on Robinhood. Unless you’re talking about the OTC stocks that I love — those penny stock markets are off limits.
To all those using #Robinhood and #webull missing out on the absolutely amazing runups on $ALYI $AABB $BBRW $BRTXQ $IGEN $AXXA $SITS $ZICX $WKSP wake the hell up & realize you’re missing out on the plays that can truly grow your account EXPONENTIALLY! Read https://t.co/Ens8xBEzdW
— Timothy Sykes (@timothysykes) August 31, 2020
You can also buy other investment vehicles. They added crypto some time ago. One study found that Robinhood traders options trade at 88 times the rate of Schwab traders.
It’s one of many trading apps out there — I even have a Robinhood app review here. I prefer to do my trading from a more powerful platform though.
The best of these platforms can make trading easier and more intuitive than it used to be. My go-to is StocksToTrade. It features awesome charting capabilities. It’s equipped with a highly customizable stock screener. It directly links to news on stocks and social media buzz.
A platform like this is key to my success as a trader. I used to go back and forth between 20 different browser windows to do all the work I can buy now on one platform.
Robinhood can’t do any of this stuff. StocksToTrade isn’t free like Robinhood is … but you can try it for just $7 for 14 days. I think you’ll see that’s money well spent.
(Full disclaimer: I’m an investor in StocksToTrade, and I proudly helped develop it.)
I only use trading apps as fallbacks when I’m on the move. Trading requires concentration and the right equipment. Why would I want to put myself at a disadvantage?
List of Features
When Robinhood started, it was primarily a platform for trading stocks and funds. They’ve expanded over the years. Here’s a current list of features for Robinhood..
Stocks and Funds
Commission-free trading for stocks and funds was the original Robinhood product. It remains one of its primary offerings.
In 2016, it introduced instant deposits. This feature lets customers use up to $1,000 right after it’s deposited versus waiting a few days for the ACH transfer to process.
Robinhood’s stocks and funds product also allows customers to buy fractional shares (portions of higher-priced stocks) and offers an option for automatic dividend reinvestment.
In 2017, Robinhood began offering zero-commission options trading. Currently, traders go through a process before they ‘unlock’ portions of the options trading platform.
I’d say that’s a good thing, but the reason they put those locks in effect is troubling. In 2020, a young trader committed suicide. In a note he left, he wrote about $730,000 in losses trading options on Robinhood. Adding to the senselessness of the tragedy, it later turned out he hadn’t actually experienced the massive loss he thought.
I’m not an options trader. However, I can say with certainty that it’s well worth pursuing an education in any type of trading before you’re lured in by the promise of commission-free trades.
In 2018, Robinhood announced it would offer checking/savings accounts and debit cards.
Initially, it claimed that the accounts would have a 3% annual interest rate — significantly higher than most other banks. They also said it would be insured by the Securities Investor Protection Corporation (SIPC.)
Apparently, the SIPC hadn’t gotten the memo — the backlash was rapid.
The product quickly rebranded “Cash Management” and the previous sign-up page was removed from the app.
In 2019, the revamped Cash Management product debuted. On the current version, customers can do basic banking things like receiving paychecks and paying bills. There’s a debit card too.
Crypto on Robinhood
In early 2018, Robinhood began a waitlist for a highly-anticipated new product: commission-free cryptocurrency trading. By the end of the first day, the waitlist had over a million people on it.
Robinhood Crypto debuted the same year, allowing customers to trade cryptos 24/7. However, since it requires a different account, trading on margin isn’t permitted.
In 2016, Robinhood debuted its premium product, Robinhood Gold. For an added fee, subscribers get added perks like bigger instant deposits, Level 2 market data, professional research provided by Morningstar, and access to investing on margin.
What’s the Difference Between Robinhood and Other Platforms?
If you asked this question five years ago, when Robinhood debuted, it would have been easy to answer. Back then, they were the first broker to offer free commissions.
The trade-off was its less than “Best Executions.” FINRA even assessed a $1.25 million penalty in 2019 for these ‘Best Execution’ violations.
2019 was also the year that many major brokerages went to a no-commission model. I’m no fan of no commissions. Inexperienced traders shouldn’t trade so much that they can’t afford commissions. But these days. commission-free doesn’t even make Robinhood special.
So what’s left? To me, Robinhood was always all sizzle and no steak. And some people still love sizzle.
To those of us who’ve been in the markets a while, it seems like Robinhood has gamified the world of trading. It’s not just me, either.
Other market experts think the same.
And Robinhood allegedly stopped sharing data on the stocks its users were buying in August. That’s likely because the rest of the trading world used it to bet against them.
Is Robinhood Safe?
Alright, enough with the warnings. You want to know whether Robinhood is safe. Here’s what I can say…
Robinhood is insured, just like any other broker. It’s got the standard $500,000 SIPC protection per account, so you’d be covered if it ever implodes. This doesn’t cover money in its high-interest checking or savings accounts.
And you better believe they pay for that protection with the standard fees on sell orders.
Is Robinhood safe to link your bank account to? Seems so.
Is Robinhood safe to give your social security number to? Also seems so.
Will you like what you find if you search “is Robinhood safe” on Reddit? Probably not.
The danger that Robinhood traders face isn’t in getting scammed. Robinhood isn’t like one of those boiler rooms that the films warn you about. I mean, it can’t be — you’d be hard pressed to be able to trade most of the penny stocks that I love.
If you’re to believe the internet, the real danger is in the lack of “Best Executions” and reports of frequent service outages. This isn’t normal stuff. They’re now facing multiple SEC and FINRA probes.
What Are the Risks of Trading on Robinhood?
When you ask “is Robinhood safe,” you want to know how it will affect you personally.
I get that. So here’s how I think Robinhood’s quirks will affect YOU.
Maybe you held it too long and you need to get out NOW.
Either way, a less than “best” execution can absolutely kill you.
And if your broker is unavailable when you need to make a trade? Then you’re just like all the other unlucky traders who report getting burned.
Robinhood issues a statement as to why it’s crashing, basically saying they suck and admit it for once
— Timothy Sykes (@timothysykes) March 2, 2020
Free Stocks on Robinhood: What’s the Catch?
You may be too young to remember when banks gave away toasters. I know I am.
That’s what Robinhood’s gimmicky free stock promotion seems to be. Don’t get too excited. 98% of the free stocks given out have a value of between $2.50 and $10.
Let’s stack that up against what other brokers offer. Merrill Lynch offers a cash reward of up to $1,000 on a new account. The catch is that you have to invest $200,000 to qualify. There are no givebacks for investing less than $20,000.
Or maybe TradeStation’s $5,000 promo caught your eye. Again, don’t get too excited. That won’t be much compared with the $5 million you’ll need to give them.
So Robinhood’s free stock offer starts to look better. And there’s always the chance that you’ll win the lottery with your 1% chance of getting a stock valued between $50 and $200.
How Does Robinhood Make Money?
There’s a good saying that I think applies here:
“If you’re not paying for the product, you are the product.”
What does that mean? It all comes back to the routing.
When Robinhood settled up for $1.25 million with FINRA, it didn’t have to admit or deny any wrongdoing. The penalty was for failing to ensure its customers got the best prices on their orders.
Why would a brokerage not want to deny that? Any ideas?
One of the ongoing SEC investigations is into a related practice. The company allegedly sells its client order flow to high-frequency trading firms. It kept this income stream off its website until 2018.
If you’ve read Michael Lewis’s 2014 bestseller “Flash Boys,” you’ll know that this practice is kinda suspect. Even so, most online brokers in the no-commission age do this. At least they disclose it.
Another thing also surfaced in the SEC complaint. Robinhood allegedly charges market makers a variable percentage on each trade. This is instead of a fixed rate. Critics say that Robinhood traders suffer because of this too.
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Should You Use Robinhood to Trade?
Oh … you’re gonna make me say it again.
OK, here goes: Ultimately that decision is yours to make. I personally don’t like Robinhood because I think there are much better alternatives out there for my needs. To me, it fails to meet my minimum criteria across the board.
It blows my mind people still aren’t using @StocksToTrade or brokers listed at https://t.co/Ens8xBmXPm and missing fucken gimmies like $KBEVF $SHMP $MTP or $PURA due to not seeing Level 2 or not being able to trade them at shitty Robinhood…be better prepared, stop wasting $!
— Timothy Sykes (@timothysykes) February 28, 2019
There’s so much information on what’s wrong with it. And yet they saw a 30% bump in new users in the first quarter of 2020.
It’s clear that the new traders and investors who have flooded the market this year aren’t doing the work. And if you’re not doing the work, you’re just gambling. And there’s no 1-800-GAMBLER hotline for trading.
But if you’re asking about yourself or anyone you know, then you need to hear this…
The only people who make money trading are the people who do the work. So you’ve found out that I don’t recommend Robinhood. But that’s the easy part.
There are a lot of online brokers. The trick is finding the right one for you.
I use E-Trade and Interactive Brokers. I like a lot of things about them and dislike some things about them too. But they have one thing in common that I need in a broker: size.
They’re both huge companies. I feel like my money is safer with them. They have shares to borrow, and they execute trades pretty quickly.
These brokers don’t work for everyone. There’s no one size fits all. The way that you learn is through experience.
Most Frequently Asked Questions (After the “Is Robinhood Safe” One)
OK, one more time — in my opinion, Robinhood is safe if you’re talking about ticking off all the regulatory boxes like insurance … BUT…
Is Robinhood Good for Beginners?
Um, no. Not in my opinion.
What Is the Catch With Robinhood? Is it a Scam?
The catch is that they’re known for less than “Best Executions” and frequent service disruptions. Is that enough of a catch? And they’re under SEC investigation. Don’t worry, I imagine they’ll probably just pay the $10 million to not admit any wrongdoing.
Does Robinhood Take Your Money?
Robinhood will take your money, just like any broker. Your job as a trader is to prepare. So it’s crucial to do your research on everything from which broker you use to your trading platform to your strategy. Never underestimate the power of investing in a good trading education.
Is Robinhood Safe to Link to a Bank Account?
On this count, Robinhood is fine. They won’t withdraw money without your OK.
How Do I Get My Money out of Robinhood?
This one is also easy. You’ve got to wait until any deposits and trades settle first. Then you can withdraw from your ‘Withdrawable Cash’ to your linked bank account.
Is Robinhood Illegal?
Settle down. No, this broker that gamifies trading is not illegal. In the end, it’s no one’s fault but your own if you lose money on a trade. This is why I always tell you to study and do your research.
Conclusion: Is Robinhood Safe?
Let’s put Robinhood aside. Sure, we can find reports of them screwing up executions and occasionally putting trades on ice. And others have reported bad customer service. And it may be difficult if not impossible to trade OTC markets on their platform.
OK, there’s a lot. But bottom line, your trades are ultimately on you.
They’re a product of your work and studying. It’s a grind, but if you want to achieve your goals there are a lot of resources to help you get there…
If you want to get up to speed fast, try my 30-Day Bootcamp.
And if you’re ready to make a real commitment to your trading, apply for my Trading Challenge.
I don’t accept everyone in my Challenge. My students commit to their goals. They work hard to get better every day. Some days they teach me new things.
The best among them make more money than I ever have.* It’s such a cool thing to see.
And I want more people to join us. I love seeing people start out with nothing but a small account and dedication then end up self-sufficient traders.
It doesn’t happen often, but for me, it’s the best thing in the world when it does.
I want you to use that dream as fuel for your dedication instead. We’re waiting for you in the Challenge chat room.
What do you think about Robinhood? I want to hear it all. Let me know in the comments!