March 22, 2021
A quick look at the “Loss Porn” section of famed subreddit r/WallStreetBets shows the full effects of ill-informed, emotion-based stock trading. People losing 99% of their life savings in a matter of minutes is a common theme here. We have all heard the story of GameStop stock, rocketing from about $18 per share to almost $500 per share in a single trading week; an outrageous 2700% increase. However, the fall back down was just as swift. Why?
Well, it all begins with popular amateur investing platform Robinhood. From the time of the creation of the stock market until 2014, investing as a form of income was only for the richest part of society and massive investment banks. However, Robinhood sought to change the game, and they certainly did. They attracted new customers with smaller accounts by offering what are called ‘zero commission trades,’ which means the investor buying shares does not pay for the price of execution, which had been an industry standard for over one hundred years. This caused Robinhood’s platform to force popular brokerages like TD Ameritrade, Webull, Fidelity, Charles Schwab, and so many others to throw this commission fee out the window (Kelly, Kate, et al.). Consequently, Robinhood’s only specialty was no longer exclusive. Unfortunately, Robinhood’s brief time in the spotlight had lured far too many relatively young and unsuspecting investors to it, including myself. Robinhood boasts the most intuitive and user-friendly interface design of any platform out there. There are no flashing tickers or confusing numbers; no Chaikin Money Flow charts or 14-period Wilder’s Slow Stochastic oscillators. But with this simplicity comes forced ignorance. Other trading platforms give traders access to what are called indicators, things that help investors predict where the market will move to help guide informed trades. Robinhood, on the other hand, displays stock research tools that are “severely lacking when compared to $0 brokers such as TD Ameritrade, Charles Schwab, and Fidelity,” provides a “bare-bones trading experience,” and is a “poor choice for investors seeking the best trading platform” (Reinkensmeyer). Due diligence―commonly referred to as ‘DD’―is when a trader backs up their trades with the support of multiple unique indicators. This is standard practice before putting your hard-earned money into something. Robinhood’s platform, completely devoid of these indicators, forces amateur investors to base their trades solely off what they see on Reddit or what companies they personally like. Making emotion-driven trades without first consulting any stock fundamentals is highly discouraged, and is not a profitable investment strategy.
Additionally, diversification is “the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time” (Fidelity). In other words, you want your money spread out across the market because if your investments are all focused within one sector, and that one sector fails, you will incur very heavy losses. Robinhood “currently permits only stock and ETF trades—bonds and mutual funds are excluded. This risks tilting your portfolio toward a single asset class” (Olson). Because Robinhood makes it technically impossible for an investor to diversify, it can have a major negative impact on the portfolio worth of a young investor who may not even know what diversification is. Essentially, Robinhood lures new investors who are just starting out into what is metaphorically similar to an electric bug zapper, hides users from what they are missing out on, and pockets hefty profits whenever a trade is made. Robinhood takes advantage of uninformed, amateur investors by disallowing them to find out exactly what features are being intentionally, and thus criminally, concealed. This business model, while extremely profitable for Robinhood, is far from ethical and completely contradicts their mission to “democratize finance” (Our Mission).
Furthermore, Robinhood hides these indicators and other useful data from investors behind a paywall, branded as Robinhood Gold. This offers access to margin, which is essentially borrowing money from them that is to be paid back later with interest; level II market data, which is data such as earnings per share, gross revenue, and real-time bid-ask quotes from different exchanges; and larger instant deposit limits, which allows you to use up to $5,000 before your bank actually deposits your money into Robinhood (Gitlen). However, congruent with Robinhood’s other business decisions, access to this service costs $5 per month. This may seem like a good deal for an uninformed, amateur investor at first, but after doing a small amount of research, one can ascertain that this falls just short of a scam. Investors at other brokerages get all of this information and more, not to mention completely free of charge.
I began investing solely because secondary education is becoming increasingly costly and I was not going to have nearly enough to pay for it. Like many other innocent new traders looking for a home, I fell for the trap and chose Robinhood. I remained on Robinhood for many months, and had no knowledge of the stock market or how it worked. I figured ‘you can’t lose in a winning market.’ Fortunately, I dug my way out of this vicious circle at the end of 2020, when I began my switch to TD Ameritrade’s far superior platform aptly named Thinkorswim. As I actively looked for ways to educate myself, I quickly began to realize just how much information was being suppressed by Robinhood. Relevant to this realization is the Albert Einstein quote, “as our circle of knowledge expands, so does the circumference of darkness surrounding it.” If our circle of knowledge is to ever grow, we must first break out of the Robinhood straightjacket, blindfold, and shackles.
It is paramount for anyone considering investing their money into the stock market to do their research. Start with the basics: learn about options, spreads, what earnings are, and how to read candlestick charts. Then, as I did, you can begin to go deeper and learn to read and analyze financial assets using popular oscillators like Moving Average Convergence-Divergence (MACD), Relative Strength Index (RSI), and Stochastic Slow. The best part is that you are not required to purchase an expensive four-week course or read a dusty, antiquated textbook to learn. Use resources on the internet; YouTube has millions of helpful videos about stock trading. Please, inform your trades, and I promise you will make more money.
It’s not all dark and gloomy, though. Robinhood can easily pull back their customer base with a few very well-defined changes. Due to recent controversial business decisions, Robinhood is currently engaged in a class-action lawsuit, and is also pinched under Congressional and SEC scrutiny following their decision to lock users’ accounts during the initial GameStop (GME) hysteria. Because of this, Robinhood’s public perception has been utterly obliterated, and rightly so. If Robinhood wants to have a smooth IPO (Initial Public Offering) later this month, they will give all investors access to level II market data, be more transparent about how they make money, create a platform for investor education, and streamline their customer support channel. If they fail to do any of those things, believe me, Robinhood’s stock will feel the full wrath of Reddit and the retail investor community, and everything they stand for.
References
Gitlen, Jeff. “Is Robinhood Gold Worth It?” LendEDU, 3 Feb. 2021, lendedu.com/blog/is-robinhood-gold-worth-it/.
Kelly, Kate, et al. “Robinhood, in Need of Cash, Raises $1 Billion From Its Investors.” The New York Times, The New York Times, 29 Jan. 2021, www.nytimes.com/2021/01/29/technology/robinhood-fundraising.html.
Olson, Sheila. “Is Robinhood Safe for Investors?” Investopedia, Investopedia, 26 Feb. 2021, www.investopedia.com/investing/is-robinhood-safe/.
“Our Mission.” Robinhood, robinhood.com/us/en/support/articles/our-mission/.
Reinkensmeyer, Blain. “Robinhood Review: 3 Key Findings for 2021.” StockBrokers.com, StockBrokers, 28 Jan. 2021, www.stockbrokers.com/review/robinhood#:~:text=Robinhood%20provides%20a%20bare%2Dbones,%2C%20Charles%20Schwab%2C%20and%20Fidelity.&text=See%20%22Robinhood%20Gold%22%20under%20Commissions%20and%20Fees%20below.
“What Is Portfolio Diversification?” Fidelity, Fidelity Learning Center, www.fidelity.com/learning-center/investment-products/mutual-funds/diversification#:~:text=Diversification%20is%20the%20practice%20of,of%20your%20portfolio%20over%20time.&text=recoup%20your%20losses.-,One%20way%20to%20balance%20risk%20and%20reward%20in%20your,is%20to%20diversify%20your%20assets.
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