9 Ways Robinhood is LOSING You Money

If you are looking for a broker, Robinhood is a great start. Once you become more sophisticated, you will slowly start to notice the many pitfalls of such a barebones beginner friendly platform. In this article we will review why Robinhood is terrible for everyone beyond an absolute beginner. Another reason why Robinhood is popular is because of its referral feature, so it will constantly be recommended by influencers, your friends, and your family, whereas most real brokers do not offer this gimmick.

1. Tax Lots

There are so many reasons not to use Robinhood, but the biggest one for me is the inability to control Tax Lots. This is one of the reasons in this article that will cost you a ton of money in the long run.

With a real broker, you are able to choose which specific shares to sell, which is very important if you care about how you are taxed. In Robinhood, they force you to use the FIFO method, which is First in, First out. FIFO just means that you sell the first shares that you bought. Let’s assume you bought a stock on January 1st for $100 and you bought the same stock again on June 30th for $125. Let’s say it’s the end of the year, and the share price is $110. Your unrealized gain on the share bought on January 1st would be $10, while the unrealized loss on the June 30th share will be -$15. Let’s say you like to Tax Loss Harvest by selling the June 30th share at a loss. Robinhood will not allow you to do this because it follows the FIFO method, and they will instead sell your January 1st shares first, which would lock in a $10 gain that will be taxed.

Imagine if you gained or loss significant money on a stock, you can see how this can quickly add up in lost money. Move to a real broker. A real broker will let you choose which share to sell (tax lots), giving you many more options.

2. Downtime

Here is another way Robinhood is costing you money. If you trade actively, you will notice that Robinhood has a lot of downtime and server issues compared to most brokers. This is because they generally use the cheapest methods to deliver their product. Again, if you are a casual trader or completely newbie, this doesn’t affect you much, but if you are an active trader or have a lot of money in a brokerage, you better be sure they have minimal downtime.

While Robinhood has had outages during random times, they often go down during critical high volatility events. Early in the Coronavirus Pandemic, Robinhood had outages. This means that during high volatility times, you will not be able to open Robinhood and trade. This is also why I avoid all sorts of non major brokers for any of my finances, such as investments or betting.

3. Donations of Securities

I donate to charities and foundations. If you do the same, you should know that donating stocks is one of the most cost effective ways of achieving this. When you donate a stock that has appreciated, you generally do not have to pay taxes on the capital gains while still donating the full amount. You can then generally deduct this full amount during tax time. Robinhood does not allow for this.

4. Delayed Quotes

Robinhood has delayed quotes on their app. Open up a real broker and Robinhood and look at the real time price for any security at the same time. Notice how they are different? If you open up a 3rd screen and check out another real broker, you will notice that the two real brokers show the same price, but Robinhood’s is different. Is Robinhood’s data incorrect? No, but it is delayed. In order to save costs, it is much cheaper to use delayed data. Are real time prices important? Well, if you ever intend on trading a large sum of money, a few pennies per share add up drastically.

5. Payment For Order Flow

Payment For Order Flow or PFOF is how Robinhood makes a lot of money. In 2000, the SEC said “Payment for order flow is a method of transferring some of the trading profits from market making to the brokers that route customer orders to specialists for execution.” When you enter a trade, they sell the information of your trade to high frequency trading firms or market makers that use that information to make a profit. Essentially you are losing money. It’s not much, but it adds up over time, and there are many brokers that do not engage in this practice.

6. Customer Service

Why is customer service important? Well if you have your life savings in a mobile phone application, you better hope that you can have someone helping you immediately if something should ever go wrong.

Open up a support ticket and see how long it takes to get a response. Imagine if you need immediate help. You would be screwed. Also try calling them. It’s easier to get a phone number from a 1 million follower Instagram model than Robinhood.

7. Lack of Investment Types

If you like to trade in many different types of securities, Robinhood probably doesn’t have them.

Want to invest in

  • Fixed Income/Bonds? Nope
  • Foreign companies? Nope
  • OTC equities? Nope
  • Forex? Nope
  • Mutual funds? Nope

While I do not suggest investing in all of these, the fact that you cannot invest in bonds, which are the most basic security is alarming.

The one advantage that Robinhood has is the offering of Cryptocurrency, but let’s see why it still sucks.

8. Crypto Platform is Lacking

You do not actually own the cryptocurrency in your Robinhood account. You cannot transfer or withdraw your crypto from Robinhood. What is the point of owning crypto if you cannot do this? Isn’t cryptocurrency a currency that can be used? Not according to Robinhood.

Cryptocurrency has a wallet address. Can you tell me what your wallet is on Robinhood? Nope. Do you have the private keys for your cryptocoins? Nope. Do you even own the cryptocurrency in you Robinhood account? Not really sure after typing out these sentences.

Oh yeah, I forgot to mention–you do not have many options in terms of coins, so you might as well use a real crypto broker if you are interested in this stuff.

9. Money Transfer Time

There are many other cons to Robinhood, but honestly, it would take too much time to list them out. The last reason I will talk about is the money transfer or clearing time. It takes around 5 days for Robinhood to transfer your money. With Robinhood Gold, you can access your money instantly, but that costs money. Other brokers have capabilities of instant transfers without paying. Isn’t Robinhood supposed to be cheaper than other brokers? Apparently not.

Why is money transfer time important? Let’s say you got a fat paycheck and want to invest it right away because of analysis you did on a company, and the catalyst is happening tomorrow. You will be unable to make a play on that company because your money takes 5 days to clear.

Should You Avoid Robinhood?

If you have more than just ‘play money,’ I would avoid Robinhood. Full disclosure, I use Robinhood for my ‘meme fun money’ where I make dumb trades for fun. That is the extent of my use of Robinhood.

I will also note that I got started with Robinhood because of free trades back in 2016. When you are young and have only a few thousand to invest, a $5 or $10 trading fee quickly adds up. All major brokers were simply too expensive. However 2019, Charles Schwab led the way by offering free trades on their brokerage. Other major brokers followed suit. Robinhood is no longer the only broker who offers free trades, so Robinhood is obsolete unless they catch up on all the factors mentioned above and more.

The only thing Robinhood has done correctly is their UI/UX design. It is extremely user friendly, and all the other brokerages are way behind in this. Also the “All” chart is very iconic in terms of sharing and bragging about your gains with your friends or on the internet, such as WallStreetBets. If you are an absolute beginner, sure, use Robinhood to get your feet wet and grab a free stock using my promo code, but don’t stick with it.

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