Robinhood Markets has made plenty of headlines in 2020, not all of them good. Nonetheless, it has attracted a flood of new retail investors who have opened up millions of new accounts since the onset of the coronavirus outbreak.
While much of the investing universe has shifted to passive, automated and otherwise hands-off methods and strategies, the popularity of Robinhood, a commission-free stock trading mobile app, is opening some eyes. “For me, there are more positive things than negative about Robinhood, and I’m actually a big fan of all robo-advisors and anything that drives greater innovations or greater access,” says Brent Weiss, co-founder of digitally driven investment and advice provider Facet Wealth. “The big story here is the democratization of financial advice.”
Now boasting more than 13 million user accounts through this year’s second quarter, Robinhood closed a $660 million funding round in late September that valued it at $11.7 billion.
Weiss believes that Robinhood is primarily a force for democratizing investing. With no account minimums and fractional share stock investing, users can average into a basket of stocks for a handful of dollars at a time.
The investing app says that half of its new users this year have been first-time investors, and the average age of its user is 31. But Robinhood is also seen as a potentially dangerous and problematic platform. It places sophisticated tools like options and cryptocurrencies just a few clicks and swipes away from most users, and the guidance on how to use these more complex securities isn’t easy to find.
“I object to the easy availability of options trading,” says Weiss. “The vast majority of Americans were not trained in the ways of personal finance or quality investing for their financial futures. I could go into Robinhood and with two clicks—answering two easy questions about whether I’m capable of doing this—I have access to an incredibly risky tool in my toolbox.”
TradeZero, another commission-free trading platform offering users access to fractional shares, options, margin and the ability to short stocks, is after a more sophisticated level of investor than Robinhood, says founder Dan Pipitone. TradeZero, which has seen a 300% spike in monthly and daily trading volume during the outbreak and what Pipitone calls an “exponential” increase in new accounts, places stricter limits on access to its more sophisticated capabilities.
“Access is not robo-approved on TradeZero,” Pipitone says. “We don’t open margin to account holders less than 21 years old. We don’t want to be synonymous with a dating app where you can just swipe up to trade.”
TradeZero monitors user activity, says Pipitone, and if it doesn’t match with what a user has told the app about their risk preferences and goals, the company will intervene with some mitigation.
Robinhood also adds behavioral encouragement and gamification to investing—after making a trade with a swipe, users are sent a congratulatory message complete with animated confetti or fireworks.
An additional behavioral risk has been created by success—millions of new users have experienced only an up market since the March lows, and they may have an inflated opinion of their own abilities, Weiss says. “A lot of people don’t understand that while they feel like they’re winning, they’re not actually being successful. My friends don’t understand that. They’re not sure how to gauge the potential future earnings of companies like Southwest, Disney and the cruise lines. They’re celebrating that Southwest went up 10% from the bottom but didn’t realize that the S&P 500 completely recovered its losses in the same amount of time.”