Robinhood is one of the most famous fintech apps in the world. As of 2019, it had over 6 million registered users. One of the biggest draws for investors is the lack of transaction fees with this app. It has become an incredibly popular way to buy and sell stocks, especially for millennials. Robinhood has truly democratized access to the stock market. However, there are some important questions to ask about this app and the way it promotes itself.
Robinhood was founded in 2013. The app sets itself apart by eliminating the transaction fees associated with sites like eTrade. In this way, Robinhood did a great thing. The organization made markets more accessible to young people than ever before. Critics, though, have suggested that Robinhood hasn’t done enough to promote responsible trading. The most secure stock market investments tend to be funded, which combines a number of stocks in one product. Robinhood doesn’t emphasize these, though. Instead, they emphasize single-stock trading.
Trading single stocks involve much more risk than trading funds. ETFs spread risk around. Suppose one stock craters, the rest in the fund can make up for it. The opposite can be true when people are selecting single stocks. Robinhood arguably encourages trading by celebrating each transaction. When users make a trade, emojis and virtual confetti congratulate them. Critics say that for young people who are just starting to invest, this is encouraging risky, day-trade style behavior.
The app is also known for promoting specific stocks in its advertising. When people register, they get one share of stock. Robinhood also offers a premium level that is fee-based. With Robinhood Gold, users can get access to buy stocks on the margin. This is even riskier behavior. There’s no account minimum to use Robinhood. Young people are able to make moves with small amounts of money that can create real jeopardy for them. They don’t have to be qualified investors in the same way that some fintech apps require.
Robinhood is registered with the SEC and, so far, has not broken any regulatory rules. Financial educators do wish that this app would encourage more stable, long-term investing. Over time, that strategy tends to have better outcomes for users than multiple small trades.