Robinhood is a free-trading app that lets investors trade stocks, options, exchange-traded funds, and cryptocurrency without paying commissions or fees. However, Is Robinhood app reliable?
May 20 2020 | AtoZ Markets – Launched in 2013, the Robinhood app has become especially popular among young adults thanks to the brokerage’s commission-free trades, easy-to-use interface and real-time trading functionality.
However, Robinhood has made the news recently due to an outage that spanned two days. The outage frustrated investors at an inconvenient time when the stock market was booming.
This issue, along with some of the trading practices that Robinhood encourages has made some ask the question, “Is the Robinhood app reliable?” If you’re a beginner, it’s worth learning about the risks of using Robinhood before getting started with trading.
Recapping the recent Robinhood outage
Right in the middle of the major stock market rebound on March 1, 2010, the Robinhood mobile app experienced service issues. The app had locked users out and kept them from buying and selling stocks and other securities during the time the Dow experienced its biggest point gain of all time.
Not only did the issue frustrate investors for 17 hours that Monday, but another shorter outage followed on Tuesday along with some general performance issues. It took until later on Tuesday afternoon for Robinhood to return to normal operations.
Robinhood cited infrastructure issues due to the overload of trades as the problem. At the same time, investors expressed outrage online about missing out during the big stock market rally. As users blamed the company for losses, Robinhood started giving some users a $15 discount for its Robinhood Gold service. Nevertheless, that didn’t make all traders happy.
For example, a Florida trader had begun the process of suing Robinhood. His dissatisfaction stems from the company’s failure to provide a system that could keep up with the trades during Monday’s market rally.
How does Robinhood work?
Like other online trading platforms, Robinhood allows traders to buy and sell common U.S. securities like stocks, options contracts and exchange-traded funds along with cryptocurrencies. However, it has a weaker product range and doesn’t support mutual funds, foreign stocks, bonds or preferred stocks. What makes Robinhood different from many other platforms is that the firm does not charge for trade commissions. Rather, it earns its money through rebates it gets from directing trades to other trading parties. The company also makes money through its Robinhood Gold upgrade.
Making trades through the Robinhood app or website is simple after you create and fund your Robinhood account. You just have to do a search for what you want to buy, specify whether you’re buying or selling. The app also lets you state how many shares you want and choose the order type you want to place. You can then confirm and submit your trade order quickly.
Traders can use the app to make diverse portfolios and even buy fractional shares for their convenience. Robinhood also supports real-time trading and offers some basic learning tools to help investors understand the basics of trading. It also has a watchlist for tracking stock performance and deciding when’s the best time to place an order.
Is the Robinhood app reliable?
If you’re wondering whether it’s reliable and safe to invest money using Robinhood, know that the Securities and Exchange Commission (SEC) regulates it like other brokerages. This means that beyond dealing with the regular ups and downs of the stock market, you have protection when it comes to the cash ($250,000) and securities ($500,000) you hold. Along with the SEC, the Financial Industry Regulatory Authority (FINRA) monitors Robinhood for integrity issues.
Robinhood falls under the US investor protection scheme, the SIPC. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.
Not all investments are protected by SIPC. In general, SIPC covers notes, stocks, bonds, mutual funds and other investment company shares, and other registered securities. It does not cover instruments such as unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency, and interests in gold, silver, or other commodity futures contracts or commodity options.
Should beginners use Robinhood?
But despite the comfort traders can get from proper regulation, Robinhood has some features that can make it particularly risky for new investors who haven’t learned the best practices for trading. For example, the app might pressure inexperienced investors to buy riskier stocks and cryptocurrencies. This can lead to more potential for loss and unstable portfolio performance. In addition, Robinhood’s tracking and educational tools don’t make it easy for new investors to create balanced portfolios.
What is more, Robinhood’s sleek interface and setup can encourage new investors to make trades too frequently. The ability to make real-time trades can mean investors end up spending more than they wanted as prices change often. The app also tends to show frequent notifications that push users to make another trade and even will show rewards like visual effects on the screen to celebrate such practices. And while the app has some basic learning guides, new traders may learn the hard way when they use the app’s promoted trading practices.
Is the Robinhood app right for you?
If a streamlined trading platform or the ability to trade cryptocurrency is important to you, Robinhood is a solid choice. However, due to the risks of using Robinhood, beginner investors may benefit more from a trading platform that supports less risky investments like mutual funds and bonds and that includes more helpful educational tools. Young adults wanting to begin funding retirement accounts will also be out of luck with Robinhood. The reason is that the app doesn’t support individual retirement accounts.
On the other hand, experienced traders may find Robinhood helpful alongside other tools to invest in fractional shares and products like cryptocurrencies and flashy stocks. Such traders might consider paying the monthly $5 fee for Robinhood Gold and having options to trade before and after normal trading hours, make large deposits for day trading and trade on margin.
However, the app’s limitations when it comes to managing holdings and checking performance data might push some experienced investors to look elsewhere as well.
Currently, there are many online brokers who have joined Robinhood in offering commission-free trades. As a result, casual investors can afford to shop for the broker that suits them best. Interested in other brokers that work well for new investors? See AtoZ Markets rankings of forex broker reviews for beginners.
Tips for using Robinhood safely
Any investor who chooses to use Robinhood should practice some smart trading strategies to minimize their risk. This means avoiding the temptation of real-time trading, remaining patient to avoid too many quick buys and sells. This also means spending time to carefully research each investment online before placing the order.
Since Robinhood encourages traders to frequently monitor stock performance and act on the results, it helps to understand how stock prices change to avoid making sudden trades out of fear of what might happen.
Robinhood app may be technically reliable thanks to regulation. However, keep in mind the financial risks you might face if you’re a beginning investor using the platform. Before making trades on any app or website, consider taking some time to read about the basics of trading. Do well to ask for advice from a financial advisor or mentor. Don’t forget to keep a close eye on stock market performance.