October 26, 2021

Are Investing Apps Safe

Read more about Investing
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Investing apps make it convenient to trade and manage your portfolio. But can you trust them with your money? Read on to find out if they are safe.

Investing apps have become a super popular way to invest. And for good reason.

With just a few taps on the screen, you can deposit money and make trades at any time.

But you may be wondering, are these apps safe? After all, it seems a little scary to share bank info and entrust your hard-earned money to an app.

In this article, we'll cover concerns like:

  • How to know if the app is safe
  • What happens if the company goes out of business
  • Risks to using investing apps

Types of Investing Apps

There are three main types of investing apps:

No matter what kind of investing app you choose, it's important to feel comfortable and safe using it.

Here's what to look for in a trustworthy app.

What to Look For in an Investing App

It's easy to find a trustworthy investing app if you know what to look for. Here's your ultimate checklist to find the ideal investing app that you feel confident using.

Checklist for determining if an investing app is safe:
  1. It's protected by the SIPC
  2. It's registered with SEC and FINRA
  3. It's transparent with their fees
  4. It has reliable customer service
  5. It offers educational resources
  6. It has strong security measures
  7. It has good user reviews

    1. The Company is a Member of SIPC

    The SIPC (Securities Investor Protection Corporation) is nonprofit organization that protects investors in case the brokerage fails.

    If the investing app goes out of business and your assets go missing, the SIPC helps you recover them. It insures your investments up to $500,000 per account type, including up to $250,000 for cash. You'll have peace of mind knowing that your money is protected.

    Note that the SIPC does NOT protect against investment losses due to the market. It also does not protect against crypto investments.

    All registered brokers need to be a member of SIPC by law. Check if your investing app is a member here.

    SIPC insures up to $500,000 per account type. This means if you have multiple accounts with the app, each account type will be protected up to $500,000. For example:

    • If you have 2 individual taxable accounts, you are protected in total up to $500,000.
    • If you have an individual and a joint account, each account will receive $500,000 in protection.
    • If you have a Traditional IRA and Roth IRA, each account will receive $500,000 in protection.

    2. It's Registered with SEC and FINRA

    If the investing app is registered with the SEC and FINRA, you can trust that it's a legit broker and is operating under the proper regulations.

    The SEC (U.S. Securities and Exchange Commission) is a government agency that regulates the securities market. It protects investors by making sure the company is transparent and honest.

    FINRA is an independent organization that handles the licensing and regulation of all brokerages. It makes sure that the broker is tested and qualified to sell securities.

    Be sure to look up the investing app on SEC and FINRA.

    3. The App is Transparent About Fees

    Make sure you completely understand what kind of fees the app charges. You don't want any nasty surprises that could cut into your profits. Look for:

    • Trading fees (most apps now don't have trading fees)
    • Broker-assisted trading fee
    • Monthly fee: This is not too common, but for example, Stash has a monthly fee for using the app
    • Management fee: Most robo-advisors have an advisory fee (either a flat monthly fee or a percentage of your portfolio)
    • Transfer/withdrawal fee
    • Account closure fee
    • Paper statements

    The company should have their fees clearly listed on their website and/or on a schedule of fees.

    The app should also be transparent about how they make money, especially if they let you trade for free. This can usually be found somewhere on the company's website and disclosures.

    Free investing apps generally make money in one or more of these ways:
    • An optional paid premium service
    • Interest off of your uninvested cash
    • Lending shares to short sellers
    • Rebates from market makers

    4. It has Reliable Customer Support

    When you're investing your hard-earned money, you want quality support if something goes wrong.

    Does the investing app make it easy for you to contact customer support? Some companies may only have email support or in-app messaging.

    Not being able to talk to a human may not be a huge deal to you, but you should still get speedy replies when you have questions.

    If a company resolves issues quickly, it's a good sign that they care about their users.

    5. It Offers Educational Resources

    These days, investing apps offer more than just trading. Many also have resources to teach you about investing and personal finance.

    This is a good sign that the app cares about providing the proper education so that users can make informed decisions.

    Many apps have tools to help you set goals and plan your financial future. You can also find blog posts, mini-classes, and online webinars.

    For example, Wealthfront offers advanced planning tools for retirement, buying a home, travel, and sending kids to college. These tools are available for free whether you use its investing service or not.

    Some apps may feature a list of "hot stocks." But you shouldn't let investing apps influence which stocks you buy. This is a decision you should research yourself.

    6. It has Strong Security Measures

    Look at what security measures the app takes to keep your data safe. Look for things like:

    • Encryption (the industry standard is 256-bit SSL)
    • Two-factor authentication
    • PIN, facial or fingerprint recognition to access account

    These features will give you peace of mind that your information and account will be protected from unauthorized access.

    7. It has Good User Reviews

    Finally, check the app's reviews on the Apple App Store or Google Play. Reading about users' experiences is one of the best ways to see if the app meets the needs of other investors.

    You can also do a search for the company on the Better Business Bureau. The BBB ratings are based on customer complaints and how responsive the business is.

    A company with a high rating most likely means that it provides excellent customer service and transparency.

    Are There Any Risks with Investing Apps?

    All investing involves a certain level of risk. Your stocks can decline in value as the market fluctuates. Short-term losses are common (and even expected).

    Some people argue that investing apps make it too easy for beginners to invest. For example, Robinhood gives beginners access to options trading. This is an advanced trading strategy that takes time to understand. But giving beginners such easy access could lead to risky behavior.

    And plus, free trades can encourage frequent trading, which leads to worse returns.

    It's always important to use your head when investing. Don't make emotional trades. To reduce risk, it's better to hold your investments for the long term. This way, you can ride out ups and downs in the market.

    For short-term goals of less than 5 years, you may be better off storing your money in a high-yield savings account.

    Are Robo-Advisor Apps Trustworthy?

    If you're unsure about investing on your own, a robo-investing app may appeal to you. They use computer algorithms to make investment choices for you. But you may be wondering just how trustworthy this is.

    Robo-advisors are obligated to act as fiduciaries by the SEC. This means they are legally required to act in your best interests and avoid conflicts of interest. They have to make the best decisions possible.

    And plus, robo-advisors like Betterment and Wealthfront don't have their own funds. So there's no motive to push certain funds.

    One big benefit of robo-advisors is that it removes the risk of emotional investing. You don't get a say, so there's no chance of making poor choices.

    Bottom Line

    Investing apps have made it possible for everyone to invest. This is certainly a good thing.

    As long as the app is registered with the SEC and FINRA and is a member of the SIPC, you can trust that it's safe to use. Your money will be protected.

    The most important is to invest responsibly. Even though investing apps are simple to use, it doesn't mean you should go overboard with trading. Research your investment options carefully and don't make rash decisions. It's best to hold your investments so you can see some real long-term returns.

    Write to Anna G at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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