written by reader Robinhood?

By reneeweaver, January 30, 2021

In a recent article, Travis mentioned Robinhood taking measures to ensure it doesn’t become insolvent. I wanted to find out more about the risks of that ever happening, and what that would mean if it did.

My husband and I are in our mid to late 50’s, each has a retirement plan with work, and currently contribute monthly to Wealthfront. But we started all of that rather late in life. I researched a couple years ago when I saw Biotech looked like it was going to come out with a new Alzheimer’s drug treatment. I ended up choosing Robinhood and bought two shares. Over time, I’ve picked up various other stocks, sold some, and have managed to make $3,600 net over that time. (I made some with Ameritrade too). But I currently have approx $6,000 in Robinhood, and it never once occurred to me that the whole company could fold. I assumed Robinhood made money with its premium options, but I’ve always been surprised I’ve never had to pay anything to trade with their system. So to me it seemed irrelevant to their company whether individual investors lost money.

I know this betrays being hugely uninformed about how all this works. I’ve been reading and learning a lot over the last few years as time allows.

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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Travis Johnson, Stock Gumshoe
February 5, 2021 9:49 am

Brokerage accounts are protected by the SIPC, which is very like the FDIC and insures investor accounts for up to $250,000 in the event of a failure at a brokerage firm (details at https://www.sipc.org/). I would not personally be worried about losing my shares if I had some money in Robinhood (I haven’t used them lately, but have experimented with them in the past), but there are lots of low-cost brokers who would be happy to take your account if you want to move it.

I expect Robinhood is doing fine, they make money both with premium services like margin accounts and by selling their order flow to market makers — it’s possible that they could fail if there’s something like a bank run, if the current incendiary environment among Reddit traders causes them to lose their brand power and everyone moves their accounts to another broker (which is pretty easy to do), but in that case I would expect the shares that Robinhood traders own to just be tied up for a little while while the SIPC sorts out the guarantees… and given the willingness of Robinhood’s private investors to step in with major equity investments to buttress them in the past couple weeks, I think that’s an extremely unlikely scenario.

I love the no-commissions trading offerings, and I think every broker should offer that to investors just starting out with a small account, and many of them are starting to do that thanks to the pressure from Robinhood and the other free trading apps. Not so crazy about the degree to which Robinhood makes it feel like a video game to invest real money, but to some degree that’s probably worthwhile too if it gets new people interested in investing.

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