If you are a new forex investor that is looking for an online brokerage, then you must have heard of the Robinhood platform. The first question that almost all new investors ask themselves is whether Robinhood is a safe, trustworthy platform.
Undoubtedly, Robinhood has won a loyal following. The company is backed by major players such as Google Ventures and Index Ventures. But many investors want to know if the platform is safe. So, if you are among those investors, then keep on reading to find out.
What is Robinhood?
The company was founded by Stanford physics graduates Vladimir Tenev and Baiju Bhatt. They believed that the platform would motivate a new generation of would-be investors.
The company’s primary goal was to offer commission-free trades, no account minimums, an easy-to-use mobile app, which will make the financial markets more accessible to both experienced and inexperienced traders.
The mobile-only online brokerage was launched in December 2014 with a waitlist of more than 500.000. Robinhood is an easy-to-use app that charges no commissions on stock trades, options, ETF (exchange-traded fund), and cryptocurrency trades and has no account minimum.
However, if you want to trade mutual funds or bonds, you will have to look for another brokerage. There are also no retirement accounts on this platform.
Robinhood also launched a premium trading platform called Robinhood Gold, which offers extended-hours trading, margin accounts, and more significant instant deposits in exchange for a flat monthly fee. For example, margin accounts in the $3,000 to $6,00 range with $3,000 of margin buying power are charged $15 per month.
So, Robinhood is best for:
- Frequent stock, options or ETF traders
- High-yield checking and savings
- Mobile users
Is Robinhood Regulated?
Similar to all other brokerage firms that handle securities, Robinhood is regulated by the Securities and Exchange Commission (SEC). For those who are unaware of what the SEC is, the primary purpose of SEC is to oversee the securities market to ensure transparency and fair dealings. Congress established it after the stock market crash of 1929.
Also, most brokerage firms voluntarily participate in SROs (self-regulatory organizations). FINRA (Financial Industry Regulatory Authority) is one of them. The SEC oversees the SROs. However, SROs are not part of the government.
Robinhood is a FINRA member. Brokerages that maintain membership in FINRA must follow and submit to the organization’s rules and regulations. Testing and licensure of agents and brokers and transparent disclosure framework that protects investors is what FINRA monitors.
Are Other Protections Available?
Congress created the Securities Investor Protection Corporation (SIPC) in 1970 under the SIPA (Securities Investor Protection Act). SIPC can restore up to $500,000 for securities and cash or $250,000 for cash only per account.
SIPC (Securities Investor Protection Corporation) is a nonprofit membership corporation. If a brokerage, like Robinhood, files for bankruptcy or encounters other financial difficulties, SIPC protects the money invested in that brokerage. Robinhood’s’ accounts are protected under the SIPC.
Are There Risks Associated With Trading on Robinhood?
There are no potential risks involved with using Robinhood that are associated with the regulatory framework. For most experienced investors, Robinhood does not offer a lot of tools compared with other major brokerages. The limited information traders have access to might lead to uninformed decision making, especially for new investors.
The Robinhood platform does not offer bonds and mutual funds, which makes it challenging to manage a well-diversified portfolio. Currently, Robinhood allows customers to buy and sell stocks and ETFs (exchange-traded funds). Also, tracking more than three positions isn’t possible with this platform.
Robinhood has no IRA account (individual retirement account) option and does not integrate with other financial management tools, such as Mint or Quicken.
The Bottom Line
If you are a new investor, then Robinhood may be the right platform for you. Robinhood is a safe platform backed by FINRA and SIPC, and with its commission-free trades, Robinhood has won a loyal following.
After all, the savings for investors who trade frequently are significant. Not to mention that every dollar investors save on commissions and fees is a dollar added to their returns.
Despite not having access to all the data, charts, tools, and educational resources that other platforms offer, Robinhood still gives its users the information they need to make decisions.