If you are from the United States and have thought of investing recently, you may have come across the name Robinhood. After all, it’s one of the most recognized investing apps out there. With more than 22 million active users, investing with Robinhood has become extremely popular in recent days, and its popularity doesn’t seem to wane off anytime soon.
One thing that makes Robinhood stand out is its commission-free trading model. It makes its money in a model called “payment for order flow” (PFOF), which basically involves directing its users to a particular market maker in options, equities, and cryptocurrencies.
While this model of revenue is still under investigation from the SEC, it still hasn’t stopped meme-stock traders from going into a frenzy (similar to what we saw with Gamestop) and driving stock prices up. So, what exactly is Robinhood? Is it a safe investing app for beginners?
In this guide, we’ll look at everything you need to know about Robinhood and how you can start investing with it.
Related Article: Investment Strategy for Beginners: How to Start with Just $100
What Is Robinhood?
Robinhood is a US-based online trading brokerage firm established in 2013. It enables its users to invest in stocks, ETFs, ADRs, and certain cryptocurrencies without any fees or commission. Robinhood aims to be easily approachable and attract as many young and first-time investors as possible.
Given that the average age of a Robinhood user is 31, it succeeds at it. Although it’s mostly considered a mobile-first app, users can still navigate its services through a desktop or laptop.
Who Should Use Robinhood?
Robinhood is aimed at young, first-time investors who are looking to get started in the world of investing. This is made more apparent by its almost game-like presentation and usability.
If you’re someone new to investing and want to get started with as little as possible, then you should consider Robinhood as an option. Not only does it serve as a good introduction to investing, but it can also help you build up your financial portfolio.
But be advised that Robinhood is not something thing that provides a sure-shot way to beat the market. Even the savviest of investors cannot often predict which way the market is going to go.
Although going with the flow might sound like an appealing option, it is worth putting in your time when you start investing for the first time. You must do your research before you start investing through any app. This applies even when you are investing with Robinhood. Do not consider this as a shortcut to creating wealth.
Pros & Cons of Robinhood
- Fast and easy account opening
- No account minimum
- Aerodynamic user interface and functionality
- Great mobile investing app for beginners
- IPO access available
- $0 fees per trade
- Investing in cryptocurrency is available along with free trading
- Limited customer support
- No retirement accounts can be opened
- Investing in mutual funds is not available
- Lackluster research capabilities
- Attracts risky investment activities
- Limited investing options
Is Robinhood a Safe Investing App for Beginners?
Robinhood has had its share of history with multiple controversies, which makes many people wonder if it’s safe or not. Recent years have seen Robinhood face various regulatory fines and lawsuits. So, that brings us to the question – is investing with Robinhood safe? Well, yes, it is.
Just like any other investment platform, Robinhood is regulated by the Securities and Exchange Commission (SEC), which makes it a highly secure option. Other than that, accounts with Robinhood are also protected by the Securities Investor Protection Corporation (SIPC), which is a corporation that secures money invested by a user in a brokerage. So yes, investing with Robinhood is safe.
The controversies associated with Robinhood are not related to the security of the app or its compliance with the SEC. Rather, the notoriety associated with the app can be attributed to the way it is used.
As you may remember from the notorious Gamestop episode, the PFOF process became a subject of controversy as it directed individual investors to off-exchange, high-speed traders.
Robinhood also comes with certain limitations, which by no means make it unsafe for trading. For instance, it doesn’t offer any extensive research materials, and the investor tools offered here are rudimentary to some extent. This often leads to beginners making uninformed decisions and risking a loss.
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Precautions to be Taken Before Investing with Robinhood
Here are a few important things you must know before you start investing with Robinhood:
- It can attract risky investment activities. You need to do your research outside the investor tools and research information offered by the app. Do not go with the meme-frenzy when investing for solid returns.
- It is a short-term trading and investing platform, so don’t expect that you’ll build long-term wealth using it. In simple words, don’t look at Robinhood as a money-making tool.
- If you plan on investing in cryptocurrency, just remember that you won’t be able to transfer it in or out of your account.
- There’s a sheer lack of any investing research. The only way you can take advantage of research tools is by buying a Robinhood Gold membership.
How to Start Investing with Robinhood
Getting started with Robinhood is quite simple. First, you need to make sure that you’re 18 years or above and have a valid U.S. address. If you meet these requirements, you’re good to go.
Create an account using your email address and verify it. After completing the verification process, you can start investing and trading assets. The three major investing options Robinhood offer include:
- Investing in stocks/fractional shares – With Robinhood, you can start investing in stocks with as little as $1. This includes fractional shares, which are considered to be one of the best investment options for beginners.
- Investing in ETFs – Exchange-traded funds or ETFs are also available to invest when using Robinhood. ETFs are getting more and more popular each day, and right now would be a great time for investing in them. Some popular Robinhood ETFs include Vanguard S&P, SPDR S&P, and ARK innovation ETF.
- Investing in cryptocurrency – Robinhood allows you to invest in many popular cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), etc. The trading, as mentioned above is commission-free and you can get started with as little as $1.
Invest with Knowledge & Caution
If you’re someone entirely new to investing, getting started with Robinhood would be a good choice. It is easily approachable and requires no fees for trading. Also, you can benefit from the variety of assets and trading options available.
Robinhood can help you start building your investment portfolio with ease. So, understand the working of the app before you get started. Reddit is full of tales (both good and bad) associated with Robinhood. Do read it and gain some knowledge before you start out.
Also, don’t forget to download our FREE personal finance toolkit that can help you identify the best tools you can use to manage your wealth!