The Truth About Trading Risks on America’s Popular Investment App
Hey there! I’m a regular trader who’s spent countless hours on various platforms, and today we’re gonna talk about something that many new investors wonder about – can you lose money on Robinhood?
The short answer? Absolutely yes, you can lose money on Robinhood. But don’t click away just yet! Understanding exactly how you might lose money is crucial to becoming a smarter investor.
I’ve made plenty of mistakes in my trading journey (some pretty expensive ones too ) and I’m hoping I can help you avoid the same pitfalls. Let’s dive into the realities of trading on Robinhood and how to better manage your risk.
Why Robinhood Makes it Easy to Lose Money
Robinhood has revolutionized investing with its user-friendly interface and commission-free trades. But this accessibility comes with a catch:
- Easy access can mean easy losses – The app’s simplicity makes it tempting to trade without proper research
- Gamified experience – The confetti animations (which they’ve since removed) and smooth UI can make investing feel like a game rather than a financial decision
- FOMO factor – Seeing popular stocks and others’ gains can lead to emotional rather than rational investing
One of my buddies lost nearly $3,000 in his first month because he thought trading options would be “easy money.” Spoiler alert: it wasn’t.
Different Ways You Can Lose Money on Robinhood
1. Standard Stock Market Volatility
When you buy stocks on Robinhood, you’re exposed to the same market risks as any other platform. Stocks go up AND down, and sometimes they drop like a rock.
The S&P 500 has historically returned about 10% annually on average, but that doesn’t mean it goes up 10% every year. Some years it’s up 20%+, other years it’s down significantly.
2. Options Trading Losses
This is where things can get really dicey. Robinhood offers options trading, which can amplify both gains and losses.
According to the Profit and Loss (P/L) charts on Robinhood, options strategies have specific profit and loss profiles. For example:
- Long calls – While your potential profit is theoretically unlimited, you can lose 100% of your investment (the premium paid)
- Spread strategies – These have defined maximum losses, but can still result in significant financial damage
The P/L chart on Robinhood helps visualize these outcomes, showing:
- The vertical (Y-axis) representing theoretical profit (+) and loss (-)
- The horizontal (X-axis) showing the stock price at expiration
But as Robinhood’s disclosures state, “actual losses may exceed calculated values” due to various factors
3. Margin Trading Risks
Robinhood allows margin trading through their Gold subscription, This means borrowing money to buy more stocks than you could afford otherwise
If your investments tank while using margin, you not only lose your own money but now owe Robinhood for the borrowed funds too. Talk about adding insult to injury!
I once used margin to increase my position in what I thought was a “sure thing” tech stock. When it dropped 20% in two days, I got a margin call and had to sell at the worst possible time. Not fun.
Understanding the Profit and Loss (P/L) Chart on Robinhood
Robinhood provides a helpful tool called the P/L chart that can give you insights into potential outcomes BEFORE you make a trade. This is especially useful for options strategies.
The P/L chart works like this:
- It shows the theoretical profit and loss range at expiration
- Anything above zero on the vertical axis represents profit
- The area below zero shows potential losses
- The horizontal axis represents the underlying stock’s price at expiration
For example, if you buy a YOWL 237 call with a $2 premium:
- Your theoretical max profit would be unlimited (no cap on how high the stock could go)
- Your breakeven point would be $239 (strike price of $237 + $2 premium)
- Your maximum loss would be $200 (the $2 premium × 100 shares per contract)
Remember though, the chart assumes you hold until expiration. Your actual experience could vary if you close positions early.
Real Talk: My Personal Robinhood Losses
I’m not gonna pretend I’ve never lost money on Robinhood. In fact, my first year was a disaster. I jumped into options trading after watching a few YouTube videos (big mistake) and lost about 30% of my initial investment.
My biggest losses came from:
- Chasing trends – Buying GameStop after it had already jumped 300%
- Overtrading – Making too many moves and racking up taxable events
- Option spreads – Creating complicated options positions without truly understanding the risk
- Emotional decisions – Panic selling during market dips
How to Reduce Your Risk of Losing Money on Robinhood
After learning some expensive lessons, here are the strategies that have helped me minimize losses:
1. Set Realistic Expectations
If someone promises you’ll make 300% returns in a month, they’re either lying or taking enormous risks. Successful investing is usually boring and takes time.
2. Only Invest What You Can Afford to Lose
Seriously. Don’t put your rent money or emergency fund into stocks. I keep 6 months of expenses in a high-yield savings account BEFORE putting money into Robinhood.
3. Learn How to Read the P/L Chart
Robinhood’s profit and loss chart can be your best friend. It helps you:
- Gauge theoretical risk and reward
- Understand your breakeven point
- Visualize maximum potential losses
4. Start Simple
Before diving into complex options strategies, master the basics:
- Buy quality companies you understand
- Learn how to read financial statements
- Understand basic market mechanics
5. Use Stop-Loss Orders
These automatically sell your position if it drops to a certain price, limiting your downside.
6. Diversify
Don’t put all your money in one stock or sector. Spread it across different assets to reduce risk.
Important Disclosures About Robinhood’s P/L Charts
According to Robinhood’s own disclosures, there are some limitations to their profit and loss charts:
- The P/L chart assumes positions will be held until expiration
- Actual losses may exceed calculated values due to changes in implied volatility, early assignment, and ex-dividend dates
- The calculations don’t incorporate taxes, fees, or dividend yields
- Maximum loss on a spread position remains limited only if the integrity of the spread is maintained
Is Robinhood More Risky Than Other Brokerages?
This is a question I get all the time. The truth is, you can lose money on any trading platform. The underlying investments are the same whether you use Robinhood, Fidelity, or Charles Schwab.
However, Robinhood’s simplicity might encourage some users to trade more frequently or take bigger risks than they would on more traditional platforms.
On the plus side, Robinhood has improved their educational resources significantly in recent years, offering materials on options strategies and risk management.
The Bottom Line: Can You Lose Money on Robinhood?
Yes, you absolutely can lose money on Robinhood – just like any investment platform. The key difference is how Robinhood’s user experience might influence your behavior and risk tolerance.
As Robinhood themselves state: “All investing involves risk.” There’s no getting around this fundamental truth.
But with proper research, risk management, and a long-term perspective, you can reduce your chances of significant losses.
My Final Thoughts
I’ve had my share of wins and losses on Robinhood. While the platform has democratized investing, it doesn’t change the fact that markets can be unpredictable and unforgiving.
Before placing any trade, ask yourself:
- Do I understand this investment?
- Can I afford to lose this money?
- Does this fit into my overall financial strategy?
Remember, even professional investors lose money sometimes. The goal isn’t to avoid losses entirely (that’s impossible), but to manage risk intelligently so that your winners outpace your losers over time.
Have you experienced losses on Robinhood? What strategies have helped you manage risk better? Share your experiences in the comments!
Disclaimer: I’m just sharing my personal experiences and what I’ve learned. This isn’t financial advice. Options trading involves significant risk and isn’t appropriate for all investors. Always do your own research and consider consulting with a financial professional before making investment decisions.
Don’t be the gravy
Ranjan here. Today I’m writing on Robinhood, what investing means to me, and whether you should be trading options.
For someone who clearly has strong opinions they enjoy communicating with others, investing occupies a weird place for me.
I have stared at markets, tick-by-tick, for tens of thousands of hours. I spent nearly eight years as a trader, and as I was trading mostly Asian markets in a NY office, staring at those screens would often extend to sometimes 24-hour cycles. I can tell you every price fluctuation in AAPL since 2007 or the VIX since 2014. I love this stuff.
Yet I’m incredibly cautious in how and when I talk about it. Investing is a very personal thing for me. Its taken me on incredible journeys and made my life a helluva lot more comfortable than it otherwise wouldve been. But, for the most part, my investing is this quiet space where its just me and the markets. Dont get me wrong. I’ll talk your ear off about economics and the markets. I just won’t talk about specific trades, and especially, position sizes.
Its mainly because, over the years, Ive learned that a general rule is anytime anyone tells you about an investment, you shouldnt listen. Theyre most likely telling you a quarter of the full story, or theyre trying to sell you some investment newsletter, or maybe some newfangled financial product, or just getting in a good old-fashion dick-swinging competition, but in investing, more than probably any other area of life, assume everyone is at least partially lying.
Which, naturally, brings me to Robinhood.
GIVE ME SOME FRICTION
Ive been following the company very closely for years now. I was always a bit confused by the allure of zero-commission trading. At worst, those $5 Fidelity trade fees were the price of a sense infrastructural security and business model transparency; I’m paying for a stable and transparent trading environment. At best, it was a behavioral roadblock from trading too much.
I opened up a Robinhood account very early on, but for me, the mobile-only functionality was a dealbreaker. I didnt want to be trading “on-the-go”. If I wasnt sitting at a desk, in front of a large screen, fully at attention, it was best not to trade. Sitting at a desktop is a different mindset, and that’s where I wanted to be if I was transacting. Fidelitys mobile apps were “fine” if there was some kind of trading emergency where I needed to transact suddenly.
I’d argue that trading fees and not-great mobile experiences both, oddly enough, made me a better investor.
I was much more interested in how the hell Robinhood made money. While the universal rule of “everyone talking about their investments is partially lying” might not be a widespread axiom, the rule of “if youre not paying, you are the product” is a bit more well-known.
In writing this post, I was trying to find when I first learned about how Robinhood routes their order flow to shops like Citadel Securities. According to my Instapaper archives, it was April 2017. From some googling around, this Hacker News thread from December 2013 is the first instance I can find of “Robinhood Citadel”.
For those unfamiliar with what ‘routing order flow’ means, it might help to explain how my job in bank trading as a market-maker worked:
Most people associate being a “trader” as taking bets all day. Thats not most traders at banks do. As a market-maker, your job was to….make a market. I traded foreign currency products, and FX is probably the easiest way to understand this for most people.
When you go to a foreign exchange teller at an airport, for each currency, youll see two prices. It can be confusing to understand the exact rate youll get, but thats kind of the point. The only safe assumption is you will have your face utterly ripped off. Again, thats the point.
This is an extreme example of market-making. Travelex or whoever is running the stand doesnt care whether you need to buy or sell EUR or USD or HKD or CHF. They make money every time you transact. It works well because, for the most part, the customer needs the transaction done immediately and they dont understand the true cost. It’s why Travelex doesn’t say something like “to exchange $100 into EUR, I will charge you $9.”
Now extend this onto a large bank trading floor with hundreds of people staring at screens and shouting into phones. A typical transaction for me couldve looked like:
Note, my description of how this all works is circa 2009, and things are a lot more automated, but the concept of market-making is the same:
- A salesperson is talking to their institutional client thats a pension fund manager. The client is exploring Thai Bonds and, if they trade, they’ll have an associated currency transaction needed.
- The salesperson wants the client to trade as their compensation is usually based on a complex commission structure (a percentage of an assumed spread).
- If the client is ready to trade, the salesperson would call over and ask me, the trader, for “a price”. Id provide a bid and an offer, and the salesperson would shout over whether the client “dealt” and “which way” they dealt – meaning, whether they bought or sold.
- The great and beautiful tension came from how wide the bid-ask spread the trader makes was. The trader’s incentive was to try to get the deal done, but also make as much money as they could off of it.
- The client was likely, at that moment, asking multiple banks. Salespeople at different banks were yelling at their traders to “tighten up that spread, its so wide you could drive a truck through it” because if the client didnt deal with them, they wouldnt get their commission.
- At a large bank, most of your clients were institutional, meaning they were pension and hedge funds. They were sophisticated investors that were ready to dance. The “client” was an execution trader at a large fund whose compensation was directly tied to getting the best possible price. They were talking to the salesperson whose compensation was tied directly to getting the client to trade. As the trader, my compensation was tied directly to how well I could manage the risk involved in getting the trade done.
I always did love just how unabashedly capitalistic these interactions were. Every party involved had an aggressive and clear profit-making motive. There was cajoling and yelling and nudging all happening in real-time in this great, collective exercise to find the most efficient capital transaction and there was just a lot of money to be made.
But those were the institutional clients.
There was also “the gravy”.
These were the less sophisticated clients. These were fewer and further between, but when they came, it was a breath of fresh air for everyone involved. It could be a risk manager in a corporate treasury group who played golf with the bank salesperson. They didnt follow these markets and didnt really care. Their compensation was not directly tied to infinitesimal basis point spread calculations. They would call in the deal, the salesperson would call over for a price, and Id happily make the price, knowing the person on the other side didnt really care. It was like the person who just landed for vacation looking to get taxi money at the airport. A deal needed to be done and they didn’t really care about the price.
There are clearly many more levels to the above explanation, but the most important thing to remember is, the entire trading floor was set up to make clients trade more. Every bonus structure and every job title and every five-year strategic plan was about getting people transacting. And the more gravy, the better.
Robinhood traders, yall are the gravy.
And I’m not just saying that. The recent NY Times feature on Robinhood quantifies it:
The professional trading firms like Citadel Securities are literally begging for Robinhood orders.
Can I Lose Money On Robinhood?
FAQ
Can you lose more than you invest on Robinhood?
You can lose more money than you deposit. You’ll be responsible for any deficit if falling prices reduce the value of your securities below the total maintenance requirement, and you may have to deposit additional funds to your investing account on short notice to cover market losses.
Can my Robinhood account go negative?
Is investing $100 in stocks worth it?
If you invest $100 a month in good growth stock mutual funds at prevailing market rates from age 25 to 65, you’ll end up with about $1,176,000. The secret isn’t the amount. It’s that you didn’t miss a single month for 40 years. $100 can make you a millionaire when you’re steady, predictable, and disciplined.
Is it safe to keep my money in Robinhood?
Yes, Robinhood is FDIC insured like most major brokers and banks. However their execution times and glitches can be a pain. If you are looking for long term holds then it’s completly fine as slow execution rates won’t affect you.