Robinhood Financial and other online brokerage firms are overrun with rubes and gamblers naively bidding up U.S. stock prices and destabilizing the entire market. 

That has been the dominant narrative around U.S. stocks since the market began its surge in late March. It’s not true, or at least there’s scant evidence for it. It’s also not new. The narrative borrows from a Wall Street saw that ordinary investors are fools not fit to handle their own money, a caricature that has long been used to exclude them from markets.   

If ordinary investors are less sophisticated than the well-to-do, it’s not entirely their fault. They have too little money to gain access to elite financial firms, so they often lack the full range of investments and financial services available to well-heeled investors. Even worse, financial regulation bars ordinary investors from “complex” investments such as venture capital, private equity and hedge funds on the theory that they’re too simple to understand them. The paradox is plain: How can ordinary investors become savvier without access to markets? 

Thankfully, the walls are beginning to crumble. A growing number of automated investment platforms, or robo-advisors, now offer money management to anyone who wants it. Hedge fund strategies are increasingly showing up in mutual funds and exchange-traded funds. And federal regulators, led by the Securities and Exchange Commission and the U.S. Department of Labor, are taking steps to open private markets to more investors. 

Perhaps the most visible symbol of the movement to democratize investing is Robinhood. Since its founding in 2013, the trading app has allowed anyone to open a brokerage account with no minimums or commissions, eventually forcing other discount brokers to follow. As Robinhood co-CEO Baiju Bhatt put it recently, “People that previously didn’t feel like the markets were for them are for the first time feeling a sense of inclusivity.”

There are seemingly lots of those people. Robinhood opened more than 2 million accounts in the first quarter, topping the number of new users at Schwab, TD Ameritrade and E*Trade combined. More than half of Robinhood’s 10 million customers opened their first brokerage account using the app, and the median age of its users is just 31, according to the company. 

If those new investors expected a red-carpet welcome, they were in for a disappointment. Robinhood’s users have been mocked endlessly for their inexperience and even blamed for a stock market many view as out of touch with reality. While the number of U.S. coronavirus cases continues to soar and the economy struggles to restart, stock market gauges such as the S&P 500 Index are approaching record highs and the technology-led Nasdaq Composite Index has eclipsed its pre-Covid peak. The culprit, according to a popular theory, is the horde of Robinhood users wasting their extra time and money gambling on stocks they know little about.  

It’s a silly explanation. For one, Robinhood’s users are playing with small sums, so they aren’t likely to move markets. Research firm Alphacution estimates that Robinhood’s average account size is $4,800, which puts the total value of its accounts at roughly $48 billion. That’s a tiny fraction of the roughly $11 trillion in market value added to U.S. stocks since the market bottomed on March 23, according to Bloomberg data.  

There’s also little indication Robinhood users favor companies that are moving the market higher. The most popular stocks on the trading app represent a broad cross section of the market, from highflying technology companies to struggling banks and airlines. In fact, Robinhood’s customers may be betting on losers more often than winners. Barclays recently examined the account activity of Robinhood users and concluded that, “More Robinhood customers moving into a stock has corresponded to lower returns, rather than higher.”   

A better explanation of the disconnect between the stock market and the wider world, as I recently pointed out, is that there has never been a reliable relationship between the market and the economy or the broader political or social environment. The market’s only job is to tabulate investors’ consensus view about the health and prospects of publicly traded companies, and right or wrong, the unmistakable consensus is that a robust earnings recovery is on the way. Robinhood users are indeed part of that consensus, but only a small part.

First « 1 2 » Next