That doesn’t mean Robinhooders are faultless, obviously. Like all first-time investors and most seasoned ones, they will inevitably make costly mistakes — particularly the ones who are day trading, a notoriously ruinous game. The answer, however, isn’t to impose restrictions on them and other retail investors, as some have suggested, or to roll back efforts to open markets to everyone, but to give Robinhood users the information they need to make smart decisions.
There’s not much to it: 1) Day trading is entertainment, not investing. And like all entertainment, it costs money. If you don’t want to lose money, don’t day trade. 2) Owning one stock, or even a handful of stocks, is risky because companies can and often do go out of business. The way to protect yourself is to own many stocks. The easiest and most sensible way to do that is to buy a low-cost fund that tracks the broad market and hang on to it for as long as possible. 3) Don’t trade derivatives or use margin unless you’re an expert investor — and even then, it’s a dangerous game. If you don’t know what that means, you’re not an expert investor.
There are good reasons to believe ordinary investors make responsible investment decisions when given the opportunity. “The bigger, badder retail investor army is the $8 trillion sitting in low-cost index funds,” my Bloomberg colleague Eric Balchunas told me. “More and more people are seeing that the way to build wealth is by keeping costs low and being patient, not chasing hot stocks and investment fads. And it’s very likely Robinhood’s day traders will arrive at the same conclusion at some point. Whether it ends in laughter or tears, it will be an education they can use for the rest of their lives.”
Robinhood can do its part by educating customers about the dangers around trading, especially with borrowed money. It should also tone down features on the app that make it feel more like a game than an investment platform. Those steps will go a long way to determining whether the app enriches ordinary investors, as its namesake implies, or leaves them poorer.
But it’s ultimately up to Robinhood’s users. Markets are finally opening to them. What they do with that access must be their choice.
This article was provided by Bloomberg News.