In February 2021, financial trading app Robinhood faced multiple lawsuits based on two scandals. Investors who found themselves restricted from taking market positions on stocks such as AMC and GameStop filed legal complaints claiming Robinhood was rigging the market in favor of hedge funds and to the detriment of day traders seeking to cash in on a rally fueled by social media speculation. A more troublesome lawsuit was filed by relatives of Alex Kearns, a 20-year-old trader who took his own life after thinking he has incurred more than $700,00 in debt after a margin call.
What Robinhood Offers
Robinhood is a financial services provider that operates a trading platform for stocks and other financial instruments; its mobile app caters to novice investors who plan to be very active in major markets such as Wall Street. In just a few years, Robinhood has gathered a fair amount of controversy no just because of the aforementioned lawsuits but also its business model.
If you have experience with online trading or even internet personal banking, you will likely find that the Robinhood user interface feels like a smartphone game. On the surface, this is not bad, but critics of the app have pointed out that such gimmicks are not conducive to letting users know that the money they invest could be lost if their transactions do not go as planned. Another complaint about Robinhood is how freely it offers margin trading; sometimes doing so with little explanation about how this practice effectively amplifies investing risk.
Cautions with Using Robinhood
On the surface, and even though Robinhood executives may deny it, this app strongly caters to young and inexperienced day traders. You would think that the app does not have anything to offer to compound interest investors, but this is not completely. Cash balances in Robinhood accounts, meaning the funds that are not tied up in market positions, actually compound on a daily basis at the rate of 0.30%, which can be considered a competitive annual percentage yield these days.
The bottom line of Robinhood and other apps that provide trading platforms filled with gimmicks is that they should be approached with caution. These apps are duly licensed by financial regulators, but their playful interfaces and transaction flows can be risky to uninformed investors.