In January 2021, Robinhood, a popular trading app, made headlines when it restricted trading on GameStop stock and other “meme” stocks. Recently, the company made headlines again for agreeing to pay $65 million to settle allegations from the Securities and Exchange Commission (SEC) that it misled customers about how it makes money. Another recent incident involving Robinhood was the $22.5 million payment to the family of a young trader who took his own life after mistakenly believing he owed the company $730,000. In this article, we will explore the details of the Robinhood 22.5M Junebeaudette Wall incident and everything else you need to know about the case.
Table of Contents
- Who Was Alex Kearns?
- What Happened on June 11, 2020?
- The Aftermath and Investigation
- Robinhood’s Response to the Incident
- The Lawsuit and Settlement
- How Does Robinhood Make Money?
- Common Criticisms of Robinhood
- The Future of Robinhood
- Trading Safely with Robinhood
- Pros and Cons of Robinhood
- Robinhood vs. Traditional Brokerages
- Alternatives to Robinhood
Who Was Alex Kearns?
Alex Kearns was a 20-year-old college student from Illinois who started trading options on Robinhood in 2019. According to his family, he was an inexperienced trader who was using the app to learn about investing. Kearns was also dealing with depression and anxiety, which may have contributed to his decision to take his own life.
What Happened on June 11, 2020?
On June 11, 2020, Kearns was trading options on Robinhood and believed he had lost more than $730,000. In reality, the negative balance was a temporary figure that reflected the cost of the options he had sold. Kearns tried to contact Robinhood customer support to get clarification on the balance, but he received an automated email response. Later that day, Kearns took his own life.
The Aftermath and Investigation
After Kearns’ death, his family discovered that he did not actually owe Robinhood any money. The incident sparked outrage and raised questions about the safety and transparency of Robinhood’s platform. The company faced scrutiny from lawmakers and regulators, and the SEC launched an investigation into the incident.
Robinhood’s Response to the Incident
In the wake of Kearns’ death, Robinhood promised to improve its customer support and make its platform safer for users. The company also changed its policy on options trading to prevent similar incidents from happening in the future. Robinhood CEO Vlad Tenev appeared before Congress to answer questions about the incident and pledged to make changes to the platform.
The Lawsuit and Settlement
In December 2021, Robinhood agreed to pay $22.5 million to settle a lawsuit filed by Kearns’ family. The lawsuit accused Robinhood of wrongful death, negligent infliction of emotional distress, and unfair business practices. As part of the settlement, Robinhood did not admit to any wrongdoing but agreed to implement changes to its platform and customer support.
How Does Robinhood Make Money?
Robinhood is a commission-free trading platform that makes money primarily through a practice called payment for order flow. When users place trades on the platform, Robinhood sends the orders to market makers who execute the trades. In exchange for sending the orders to market makers, Robinhood receives a small fee from the market makers. Critics argue that this practice creates a conflict of interest because Robinhood has an incentive to send orders to market makers who offer the highest fees, rather than the ones that offer the best execution for the user.
Common Criticisms of Robinhood
Robinhood has faced criticism for a variety of reasons, including:
- Lack of transparency: Some users feel that Robinhood is not transparent enough about its practices, fees, and risks associated with trading.
- Gamification of investing: Robinhood’s app is designed to be user-friendly and engaging, but some critics argue that it encourages users to trade impulsively and without proper research.
- Lack of investor education: While Robinhood has made investing more accessible, some critics argue that the platform does not do enough to educate users about the risks and rewards of investing.
- Technical issues: Robinhood has faced technical problems in the past, including outages during periods of high volatility.
The Future of Robinhood
Despite the controversies and criticisms, Robinhood remains a popular platform for retail investors. The company went public in 2021 and has continued to expand its offerings, including cryptocurrency trading. However, it remains to be seen how the company will respond to future challenges and whether it will be able to maintain its user base in a competitive market.
Trading Safely with Robinhood
If you choose to trade with Robinhood, it’s important to do so safely and responsibly. Here are some tips to keep in mind:
- Do your research: Before making any trades, make sure you understand the risks and potential rewards associated with the investment.
- Start small: Don’t invest more than you can afford to lose. Start with small trades to get a feel for the platform and the market.
- Diversify your portfolio: Don’t put all your eggs in one basket. Invest in a variety of assets to reduce your overall risk.
- Monitor your trades: Keep an eye on your portfolio and make adjustments as needed. Don’t be afraid to sell if an investment is not performing as expected.
- Stay informed: Keep up to date with news and developments that could affect your investments.
Pros and Cons of Robinhood
Like any platform, Robinhood has its pros and cons. Here are some of the most notable:
- Commission-free trades: Robinhood does not charge fees for trades, making it an attractive option for small investors.
- User-friendly interface: Robinhood’s app is designed to be easy to use and navigate, making it accessible to novice investors.
- Access to fractional shares: Robinhood allows users to buy and sell fractional shares of stocks and ETFs, making it possible to invest in expensive stocks with small amounts of money.
- Limited research tools: Robinhood’s research tools are relatively basic compared to other platforms, which could be a disadvantage for investors who want more in-depth analysis.
- Lack of customer support: Robinhood has been criticized for its poor customer support, which can be frustrating for users who need help with their accounts.
- Limited asset offerings: Robinhood offers a limited selection of assets compared to traditional brokerages, which could be a disadvantage for investors who want a wider range of options.
Robinhood vs. Traditional Brokerages
Robinhood is often compared to traditional brokerages like Charles Schwab and E-Trade. Here are some of the key differences between the two:
- Fees: Robinhood does not charge fees for trades, while traditional brokerages typically do.
- Asset offerings: Traditional brokerages offer a wider range of assets, including mutual funds and bonds, which are not available on Robinhood.
- Research tools: Traditional brokerages typically offer more in-depth research tools and analysis than Robinhood.
- Minimum account balances: Some traditional brokerages require a minimum account balance, while Robinhood does not.
Alternatives to Robinhood
If Robinhood is not the best fit for you, there are a number of alternative platforms to consider. Here are some of the most popular options:
E-Trade is one of the oldest and most established online brokerages. The platform offers a wide range of assets, including stocks, bonds, mutual funds, and options. E-Trade charges $6.95 per trade, but offers discounts for frequent traders and high-volume investors.
2. Charles Schwab
Charles Schwab is another popular traditional brokerage. The platform offers a wide range of assets, including stocks, bonds, mutual funds, and ETFs. Charles Schwab charges $4.95 per trade, but also offers discounts for frequent traders and high-volume investors.
3. TD Ameritrade
TD Ameritrade is a well-established online brokerage that offers a wide range of assets, including stocks, bonds, mutual funds, and options. The platform charges $6.95 per trade, but offers discounts for frequent traders and high-volume investors.
Webull is a newer online brokerage that offers commission-free trades on stocks, ETFs, and options. The platform also offers a range of research tools and analysis to help users make informed investment decisions.
Fidelity is another established brokerage that offers a wide range of assets, including stocks, bonds, mutual funds, and ETFs. The platform charges $4.95 per trade, but also offers discounts for frequent traders and high-volume investors.
Robinhood has revolutionized the world of investing by making it more accessible and user-friendly. While the platform has faced criticism for its lack of transparency and limited research tools, it remains a popular option for small investors. If you choose to trade with Robinhood, it’s important to do so safely and responsibly. Start small, diversify your portfolio, and stay informed about news and developments that could affect your investments. And if Robinhood is not the right fit for you, there are a number of alternative platforms to consider.
- Is Robinhood safe to use?
Yes, Robinhood is safe to use. The platform is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
- Does Robinhood charge fees for trades?
No, Robinhood does not charge fees for trades.
- What assets can I trade on Robinhood?
You can trade stocks, ETFs, options, and cryptocurrencies on Robinhood.
- Can I use Robinhood if I am not a US citizen?
No, Robinhood is currently only available to US citizens and permanent residents with a valid Social Security number.
- Can I trade on Robinhood using a web browser?
No, Robinhood’s trading platform is currently only available through its mobile app.