When an investment app advertises free stock trades, it is normal to be suspicious. After all, most people understand that if something sounds too good to be true, it is probably a scam. As a result, many wonder whether Robinhood, the commission-free online broker is legit. Here’s what you need to know.
What is Robinhood?
Robinhood is an investment app and online brokerage firm. The app launched in December 2014 and initially had a waiting list of more than half a million people. Now, anyone can take sign up with the company through their free mobile app.
When the app was released, the minds behind Robinhood were aiming to disrupt the brokerage market. They sought to make investing accessible to the masses – creating a method that included commission-free trades to keep user costs low.
Additionally, they improved accessibility by eliminating account minimums. That’s right; your account can hit $0 with Robinhood without any form of penalty. However, you do have to reach $2,000 to qualify for Robinhood Gold
Investment Vehicles Available Through Robinhood
Robinhood gives investors the ability to invest in a variety of securities and assets. Along with stocks, ETFs, options, and some cryptocurrencies are also accessible through the Robinhood app. However, crypto investing isn’t available in every state yet.
Is Robinhood a Scam?
To put it simply, no, Robinhood is not a scam. When they say they offer commission-free trading, they mean it.
The company is able to remove the need for commissions by keeping their overhead expenses low. For example, they do not have any brick and mortar locations, opting for a cheaper online-only approach.
Additionally, they are a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). This means users are protected and the app meets all security requirements.
Yes, Robinhood does have a few shortcomings. One of the reasons they are able to offer commission-free trades is by limiting what else the company offers. For example, you won’t find much in the way of research through the app or website. Additionally, both are incredibly basic, providing you with just enough features to handle your trades, bank transfers, and portfolio, and not much else.
While Robinhood does offer customer support through email, there aren’t really any other options for receiving assistance. Along with no brick and mortar locations, the company does not provide support over the phone. While the online help center can handle most questions, you will have to wait for a response to an email if you need answers beyond what is available through the app or website.
Also, you won’t find mutual funds or bonds through the Robinhood app. The company also doesn’t have an automatic dividend reinvestment program, so your dividends end up coming in as cash credits instead of being reinvested automatically. Further, you can only open individual taxable accounts. Tax-advantaged accounts, like IRAs, are not available through Robinhood.
Beware of Risky Behavior
It’s also important to note that the company does encourage some risky behavior. For example, they often push stock-picking, an approach that comes with substantial risk, especially for newbies. Digging up information on the low-cost, diversified ETFs (which can mitigate risk) is pretty difficult, as they don’t display these details are readily as they do individual stocks and even cryptocurrencies.
The Robinhood app’s default settings also result in a ton of notifications, many of which try to encourage you to trade more often. The company actually benefits when you make trades (hence why increased activity is usually promoted), even though they don’t charge commissions, by selling your orders to market makers. You can turn the notifications off, but that is an extra step you have to complete.
Should You Invest Through Robinhood?
Whether Robinhood is the right brokerage for you depends on your preferences. If you already have retirement plans in place elsewhere and want to invest in taxable accounts, the commission-free offerings through Robinhood are worth exploring.
However, if you aren’t smartphone-savvy and might need a lot of support, want a lot of research and the ability to invest through one platform, this may not work for you. Furthermore, if you don’t want to rely on stock-picking, or prefer automatic reinvesting, you might want to look elsewhere.
Do you use Robinhood? Tell us about your experience in the comments below.