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Is Robinhood a Safe and Legitimate Broker? Is Robinhood Stock Trading App a Scam?


Is Robinhood a scam or a fraud? Is Robinhood a safe and legitimate investment firm? Robinhood BBB rating, stock trading app complaints.



Is Robinhood a Scam?


Have you heard about Robinhood, the zero-commission broker? Is this legit? Or is it a scam? We’ve done all the research for you, and here’s the answer.


Robinhood’s History


Robinhood was founded in Silicon Valley in 2013. Its mission was to provide free stock trading. Before Robinhood, a typical stock commission was around $10, and this was the price in the discount industry. A traditional full-service firm might charge much more than that.

Robinhood accomplished its task largely by trimming overhead. This meant the company had to provide minimal trading platforms and reduced customer service. The broker continues to operate with this structure to this day.


Size of Robinhood


Robinhood now has about 13 million customers. Impressive number for a young company.

Robinhood is a private company that has raised a great deal of cash during its short existence. It received an infusion of $280 million from Sequoia Capital. In previous years, the brokerage firm has received funding from Thrive Capital, DST Global, and Greenoaks Capital.


Regulation of Robinhood


Robinhood is regulated by multiple watchdogs. The first is the Financial Industry Regulatory Authority, Inc., better known as FINRA. This group isn’t a government agency, although it is congressionally mandated.

FINRA’s job is to police the American securities industry. It does this by creating rules that member firms must follow. It enforces these rules with sanctions and other measures.

Robinhood is a member of FINRA and must follow all of its guidelines. Robinhood’s FINRA ID number is 165998.

On Robinhood’s FINRA profile, we see that the broker has two disclosures. Most brokerage firms have some disclosures, so this isn’t a major alarm. One claim alleged that Robinhood wasn’t performing best practice in its order routing. Another disclosure alleges that Robinhood made account related errors. Typically, brokers don’t deny or admit to allegations. Robinhood paid fines to settle both allegations.

Robinhood is also a member of the Securities and Exchange Commission (SEC). Unlike FINRA, the SEC is a government agency. It works with FINRA to make sure everyone is playing by the rules. Robinhood’s SEC identification number is 8-69188.


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Protection of Brokerage Accounts at Robinhood


Besides the notable organizations working with Robinhood, the brokerage house also has insurance from the Securities Investor Protection Corporation (SIPC). This group is like FINRA (not a government agency but created by the U.S. government); although instead of policing, it provides insurance for brokerage accounts. You can think of SIPC as a sort of FDIC for brokerage accounts.

SIPC provides up to $500,000 of protection for each brokerage customer. Of the half million dollars, $250,000 can be used to cover uninvested cash.

Robinhood also provides its customers with a bank sweep program where free cash balances are swept into participating banks that have FDIC insurance. This program is not obligatory. If you sign up for it, any uninvested cash you have will be protected by the FDIC.


Alternatives


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Despite our conclusion that Robinhood is a legitimate company, if you’re hesitant for any reason to open an account with the firm, there are a few other ultra-low-cost brokers out there that can serve as substitutes.

One is Webull. Like Robinhood, Webull charges no per-contract, assignment, or exercise fees on option trades. It has both mobile and computer platforms and provides more research tools than Robinhood.

Firstrade also doesn’t charge any per-contract option fees (or fees for exercises and assignments). Unlike Robinhood, Firstrade offers mutual funds and bonds (but not cryptocurrencies).


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Clearing Firm


Most brokerage firms use clearing firms to help them process trades and perform various bookkeeping services. Robinhood uses Apex Clearing Corporation, one of the biggest and most widely used clearing firms in the industry. Other brokers that use Apex include Firstrade, tastyworks, and Ally Invest.


Other Safety Measures at Robinhood


Robinhood uses a variety of security measures to protect accounts, such as data encryption and Transport Layer Security (TLS) technology. The broker has experienced some outages periodically of its trading platforms, and these have been quite widely publicized in the media.

Robinhood’s most recent outage came during the second week of November 2021. Several other brokerage firms, including TD Ameritrade and Vanguard, also experienced outages during this week.

When outages occur, clients aren’t able to log in and/or place trades. Robinhood has a status page that shows whether its systems are operating normally or not.


Is Robinhood safe?


Is Robinhood a Scam: Judgment


We see no absolutely reason to believe that Robinhood is a scam. This broker is a legitimate company, although as with any other brokerage firm, there are always risks, including the risk of loss of principal due to fluctuations in the stock market.


Robinhood Review


Robinhood Trading rating

For more information about the Robinhood online trading account take a look at Robinhood Investing Review.


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Robinhood Financial Pricing


Let’s start with the basics. Robinhood charges no fees or commissions on any trade made through its trading platform. With its completely online system, Robinhood requires very little overhead compared to the traditional stock brokerages. With zero fees and commissions, Robinhood allows users to start trading quick and easy, and allows users who would normally be turned off by the high fees charged by traditional brokerages to break into the market. Robinhood also has no minimum balance requirement like many brokerages meaning users can ease their way into trading with a very low barrier to entry.


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Robin Hood Features


Robinhood is very barebones when it comes to trading though. It does not offer investment advice, so be extremely careful when placing trades. Robinhood requires users to do their own research prior to trading with little more than a basic data table with highs, lows, volume, market cap, and only the P/E ratio. Do not expect sophisticated charts, trading tools, and research from Robinhood.

What Robinhood lacks in complexity, it makes up for in a simple and easy to use mobile platform. Everything is done entirely through the mobile app including bank transfers, buying and selling stocks, and all account settings.


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How Robin Hood Makes Money?


So by this point you’re probably wondering how Robinhood makes money. Well according to their website, they make money in two distinct ways:

1. Collecting interest from customers who choose to upgrade to a margin account.

2. Accruing interest from customers’ uninvested cash balances at no charge to the customer.

Nearly all traditional brokerages do the same things and therefore there is little difference between Robinhood and the Schwabs of the world in this regard.


Is Robinhood app legit


Trading On Robin Hood


Moving on to the actual trading on Robinhood. It’s incredibly simple and easy. The lack of huge amounts of data actually can be refreshing to stock traders that do their own research. Buying a stock is as simple as logging in, searching for the ticker of the stock you’re looking to buy, putting in the number of shares, and swiping up.

For the more sophisticated investor, Robinhood offers multiple types of trades in order to maximize returns. Set stops on stocks you already own so you aren’t forced to monitor the market constantly while sitting in your desk job cubicle, and make either market or limit buy orders so you get into a stock at the right time.


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Robin Hood IRAs


Robinhood Financial does not offer any IRA accounts at this time.


Robin Hood Investing Drawbacks


For Robinhood’s incredible value offered, there is a good amount of drawbacks, especially for the very sophisticated trader. While you can trade over 5,000 individual stocks through Robinhood’s platform, these types of securities are currently ineligible for trade:

  • Foreign domiciled securities*
  • OTC equities
  • Preferred Stocks
  • Warrants
  • Mutual Funds
  • Bonds and fixed income trading

*Certain foreign domiciled securities are tradable on Robinhood. These include the securities of companies domiciled in Canada and Israel that trade above $5.

You also cannot expect to be a day trader on Robinhood as you cannot buy and sell a security on the same day more than four times in a five trading day span.

Robinhood Financial also limits trades of stocks it deems “highly volatile.” While this isn’t normally an issue for the average investor, you may want to do some digging into the stocks you intend to buy and sell on the platform to see what requirements Robinhood has for them.


Is Robin Hood Safe Conclusion


Overall, Robinhood Financial allows stock traders of all skill sets to trade fee and commission free. If you are looking for an easy way to break into the stock market, or are a savvy investor who is tired of paying high fees for your trades, then give this broker a try. And rest assured: Robinhood Financial is legitimate and not a scam.