Robinhood, the commission-free stock trading app, has become popular among investors, especially casual ones and beginners. But with its rise in popularity, questions about its legitimacy and safety have also surfaced.
This article discusses whether Robinhood is a scam, the security measures implemented by Robinhood and a few things to consider when using Robinhood.
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Is Robinhood a scam? Is it safe?
No, Robinhood is not a scam, and it is safe to use.
Robinhood is a fintech company registered with the Securities and Exchange Commission (SEC) and a member of the Securities Investor Protection Corporation (SIPC). This means it adheres to regulations set by governing bodies and offers protection for investments up to $500,000 in securities and $250,000 in cash in case of Robinhood’s failure.
The Gamestop Saga – Shady Robinhood practices
However, their tactics are questionable at times. One curious case is the Gamestop saga, where a Reddit community (r/wallstreetbets), alongside some financial influencers, banded together to pump up Gamestop’s stock prices by investing heavily; many of these people used Robinhood to buy the stock.
At the same time, several hedge funds were betting against the stock — the more Gamestop stock prices fell, the more they earned. But due to the bull run fuelled by the Reddit community, Gamestop stocks went through the roof, putting the hedge funds in jeopardy, even to the brink of collapse.
That’s when Robinhood infamously turned the tables and froze further investment from individual investors, limiting their ability and forcing them to sell the shares. In contrast, hedge funds and investment firms could continue trading as usual. This scenario resulted in a lot of panic selling, which caused stock prices to plummet.
The aftermath was tens of thousands of negative reviews about Robinhood on app stores and the web. A lawsuit was also filed against Robinhood for restricting Gamestop stocks trading in collusion with Robinhood’s partner Citadel Securities, a market maker that handles Robinhood’s order flow. Interestingly, Citadel Securities’ parent company, Citadel, is a multinational hedge fund, which may or may not have had a dog in this fight.
For those looking for a visual treat, check out “Eat the Rich: The GameStop Saga” on Netflix to see how the drama unfolded.
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Security measures
Robinhood employs various security measures to safeguard user information and assets. These include:
- Two-factor authentication: This provides additional security by asking for a code from your phone alongwith your password during the login process.
- Encryption: Robinhood encrypts your data to protect it from unauthorized access.
- Regular security audits: Robinhood conducts regular security audits to identify and address potential vulnerabilities.
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Things to consider
While Robinhood is a legitimate and secure platform, it’s essential to understand its limitations:
- Limited investment options: Robinhood primarily focuses on stocks, ETFs, and cryptocurrencies. It doesn’t offer options trading, mutual funds, or other investment vehicles.
- Margin trading risks: Robinhood offers margin trading, which allows you to borrow money to invest. However, this can amplify losses, so be cautious if you choose this option.
- Focus on research: Robinhood offers a user-friendly interface, but in-depth research tools are limited. Investors should conduct their research before making investment decisions.
- Potential for fraud: Be wary of phishing attempts or social engineering scams targeting Robinhood users. Never share your login credentials or security codes.
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Correction (08/04/2024)
The story was updated to reflect that Citadel Securities is a market maker and its parent company, Citadel, is the hedge fund, as pointed out by a Citadel spokesperson to Candid.Technology. We had previously referred to Citadel Securities as the market maker and hedge fund.
