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What are the biggest problems with the Robinhood stock trading app? Why is Robinhood in trouble with lawmakers?
Robinhood’s user-friendly trading platform has created a fiercely loyal community. The app has gained popularity because it makes trading cheap, accessible, and fun. However, there are two major issues with Robinhood.
Read on to learn the two biggest problems with stock trading on Robinhood, according to critics.
A Critique of Robinhood Stock Trading
The Robinhood stock trading company claims it wants to democratize investing by removing barriers, and it insists its design elements are aimed at making trading easy, not addictive. However, two things make critics question the company’s sincerity.
Problem #1
First, the app limits accessibility in some crucial ways. It halts trading after 3 p.m. Pacific Standard Time, leaving investors vulnerable to market movements sparked by events outside those hours (some users have suffered massive losses this way). Additionally, the company can halt trading or freeze accounts with no warning in the face of what it deems dangerous volatility—for example (and to great public outcry), it halted trading during the recent GameStop frenzy, again leaving many investors powerless to extract their money as the market nosedived. Some users’ accounts were locked for weeks after that incident as the Robinhood customer service arm for stock trading struggled to sift through the aftermath.
Problem #2
Second, before Robinhood stock trading burst onto the scene, democratization was already well under way through the rising use of index funds, which allow small investors to easily enter the market and outperform many seasoned money managers. Critics argue that Robinhood may have actually set democratization back by popularizing individual stock picking rather than the use of index funds or the closely related exchange-traded funds (ETFs). Studies consistently show that even the most savvy, experienced stock pickers can’t outperform the market for long, leading to the charge that Robinhood’s encouragement of stock-picking may not be in the best financial interest of the masses.
Critics note that if Robinhood were sincere about wanting to democratize responsible trading, it would offer a free ETF to new users instead of a free stock, and it would highlight the importance of diversification.
Regulators Respond
Lawmakers are taking notice of Robinhood’s stock trading tactics and influence. After the GameStop surge, Congress grilled Robinhood executives, and last April, Massachusetts filed a complaint seeking to revoke the company’s broker license, alleging the company puts its own financial interests ahead of its users in violation of state law.
Unsurprisingly, Robinhood disputes these allegations and is suing to block the complaint.
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