Robinhood is one of the most popular online brokers out there. And in recent years, it's become an industry leader in the world of mobile trading apps, letting millions of customers quickly trade from their phones.
But is Robinhood safe? And what security practices are in place to ensure your personal data and assets are protected?
This article is breaking down exactly how Robinhood handles security. It's also covering how the business model works, some potential risks, and how to decide if it's the right trading app for you.
Founded in 2013, Robinhood is an online broker that lets customers trade stocks, ETFs, crypto, and options from its mobile app. It's one of the more beginner-friendly investing apps out there, known for its low-fees and ease-of-use.
But like any broker, it's important to know if your cash and investments are safe before you open an account. That's why we're examining Robinhood's security practices and company history to see where it stands.
Is Robinhood Safe?
Yes, Robinhood is a safe stock broker that's regulated by the Securities and Exchange Commission (SEC) and follows the same regulatory requirements as other popular brokers. It's also a member of the Financial Industry Regulatory Authority (FINRA), an organization that works under the SEC to create and enforce rules that determine how registered broker-dealers and brokers can operate in the United States.
Furthermore, both Robinhood's broker-dealers, Robinhood Financial LLC and Robinhood Securities, are members of the Securities Investor Protection Corporation (SIPC). This provides up to $500,000 in SIPC insurance for securities (including $250,000 for cash claims). Robinhood has also purchased additional insurance through Lloyds of London to supplement its current SIPC protection limits.
Finally, Robinhood Cash Management accounts also have FDIC insurance. And customers can use its cash sweep program to have uninvested cash moved into deposits at a network of partner banks. This provides $250,000 in FDIC insurance per bank for up to $1.25 million in total.
That was a lot of jargon, but the bottom line is that Robinhood is safe and regulated. Its SIPC and FDIC coverage protects your investments and cash in the event Robinhood goes under. And it even carries crime insurance to protect its cryptocurrency assets and holds most crypto offline in cold storage.
Note: All of Robinhood's insurance policies don't protect investors from suffering losses from bad trades. It's your responsibility to research your investments and decide how much you're comfortable investing. Robinhood isn't liable for bad trades or trading mistakes, like buying the wrong stock accidentally.
Robinhood's Security & Protecting Consumer Data
So, Robinhood is a regulated broker that has numerous policies in place to protect cash, securities, and crypto (to some extent). But what does Robinhood do to protect customer data and to improve account safety?
According to its website, some of the security measures Robinhood takes include:
- Password Security: Robinhood hashes passwords with an industry-standard algorithm instead of storing your password in a plain-text version on its server.
- Encryption: Information is encrypted, including sensitive personal information like your Social Security Number, name, and bank account details. And once Robinhood verifies your identity to comply with KYC requirements, it relies on secure third-party integrations like Plaid to access your information moving forwards.
- Two-Factor Authentication: All Robinhood accounts must use two-factor authentication to help improve overall account security.
You're still responsible for protecting your password and not sharing it with anyone. It's also worth mentioning that Robinhood suffered a data breach in late 2021 in which millions of email addresses and names were taken by a hacker. The hacker also got more sensitive information about a very small number of customers.
Plenty of brokers and crypto exchanges have also experienced hacks in recent years, so Robinhood isn't alone in this regard. And some hacks have resulted in customers actually losing crypto. But just know that anytime you sign up with a broker and give your personal information, you're trusting them to keep it secure.
What Are The Trading Risks?
While Robinhood is a safe and secure online broker, investors are ultimately responsible for the trades they place. And this is where it's important to understand the trading risks of using Robinhood and similar investment apps that make trading so frictionless.
With Robinhood, you can begin trading stocks, ETFs, and crypto without paying high fees very quickly. But you can also start options trading and, if you have at least $2,000 in your account, trading on margin is also available.
The ability for new investors to dabble in options and margin is where people get into trouble. And not the sort of trouble like buying Tesla at its peak and then losing 20% of your investment when it dips. We're talking about losing your entire portfolio in a day, and then some, if you place put and call options without understanding the risks.
Take this example from r/wallstreetbets, where one investor “yoloed” $400,000 on call options just before Slack announced its earnings. As you can see, this investor lost $337,325, or 98% of their portfolio, in just one week:
In fairness, Robinhood has numerous risk disclosures in place that explain the risks of options and margin trading. And you could just as easily make these trades using plenty of other brokers.
However, this is just one of many posts to r/wallstreetbets where investors share their portfolios evaporating in a matter of days. And some investors have even gone bankrupt because you can go into debt if enough trades go poorly.
The Solution: At Investor Junkie, we think it's crucial that investors learn how to research stocks and also learn some fundamental investing terms so they're educated investors. Also consider using long-term investing strategies to build wealth and avoid day-trading or speculative trades with money you can't afford to lose.
Robinhood's Business Model & Complaints
We believe that Robinhood is a safe broker and that it takes numerous steps to protect consumer data and assets. And, it has plenty of disclosures and warnings that outline the risks of trading options and on margin.
However, it's still important to understand how Robinhood makes money and what the business model is before you sign up. It's also important to understand the company's more recent history so you can decide if it's right for you.
One of the main complaints Robinhood has faced is that it uses payment-for-order-flow (PFOF). This occurs when a broker (like Robinhood) gets paid by a market maker in exchange for the broker routing its customer's trade to that market maker.
This model receives backlash because it can create a conflict of interest; the broker could value getting paid over routing your order to the best possible market maker. And the SEC seems to agree with this complaint seeing as Robinhood paid $65 million for failing to satisfy the duty of best execution and inform customers about its PFOF.
Many other brokers use PFOF, so Robinhood isn't alone on this front. However, the company fell into arguably even hotter waters when it temporarily halted trading of “meme stocks” like Gamestop. The backlash from traders was instantaneous, and Robinhood now faces a class action lawsuit because of that decision.
This was a serious event in trading history, not just a hiccup. Robinhood's CEO Vlad Tenev even had to testify before the House Financial Services Committee about the decision. For some customers, this event was the final straw. But Robinhood remains one of the more popular trading apps out there with competitive pricing. Ultimately, you have to decide if the business model and its practices are right for you.
Want Other Investing Options? >>> The Best Robinhood Alternatives.
Is Robinhood Right For You?
If you want a simple way to start investing, Robinhood is one of the most popular apps out there. Like other commission-free brokers, you don't pay commissions for stock and ETF trades. And it's one of the leading options trading platforms out there since it has competitive pricing.
However, there are other alternatives you can consider if you want more resources or don't like the business model. For example, online brokers like TD Ameritrade are excellent for beginners because of its educational library and great customer service. And if you prefer mobile trading, apps like Public are similar to Robinhood, except Public doesn't rely on PFOF to make money.
Whatever you decide, make sure you research any investment you plan on making. And be cautious of trading options or on margin without any experience. This holds true for Robinhood and every broker, and learning how to invest wisely is ultimately your responsibility.