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Robinhood & Reddit: Key Takeaways

Robinhood & Reddit: Key Takeaways

February 26, 2021
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Robinhood: the stock trading and investment app that has become wildly popular in the past couple of years. As of May 2020, there were over 13 million users of the app and some have estimated that this number could have grown to over 20 million since.

The draw to Robinhood is obvious – the possibility of winning big and making a lot of money is extremely enticing for the average person. Combined with the ability to buy partial shares and the general culture of the app, I am not surprised that Robinhood has amassed so many users. 

I also believe it to be a dangerous combination. I used the word “winning” purposefully. Robinhood has gamified stock trading. The numbers spin akin to a slot machine, confetti rains after you place your first trade, and the app sends you push notifications to keep you coming back. The company is currently under scrutiny by securities regulators for this gamification. Regulators have said, “The problem is that Robinhood’s strategies encourage frequent trading … which can lead to significant losses for investors.”

The truth of the matter is that day traders are rarely successful. Many have estimated that less than 10% of amateur day traders will make money. The dream of financial independence from trading is just that: a dream.3

Online trading: An addiction? 

Online trading can also become an addiction and get out of control. The constant checking of your positions, seeing the real time losses or gains, and trying to time the market is a recipe for disaster. Traders end up making sale or purchase decisions based upon their emotions, rather than thoughtful investment strategies. Robinhood sees this cycle and adds fuel to the fire. 

Robinhood makes it so that investing is accessible for young people, who traditionally ran into barriers such as account minimums they could not meet. Great! But it’s a double-edged sword. The issue is that there is no education of these novice investors. Robinhood has made investment instruments like margin and options trading accessible to a population that they are not suitable for. 

As a licensed securities professional, if I were to recommend one of these complex investment vehicles or strategies, I would have to be able to justify that it was a suitable recommendation and in the best interest of the client. I would have to ensure that the strategy was in alignment with the client’s risk tolerance, age, goals, investment experience, etc., etc. If I were to make a wildly inappropriate recommendation to a client, such as a complex strategy or product to an amateur investor, there would almost certainly be severe consequences for me (regulatory) and the hypothetical client (loss of capital).   

 

Keith Gill – What did he do wrong? Why were his actions unethical? 

If you’re not aware, Keith Gill is at the crux of the Reddit GameStop fiasco. He, himself, was invested in GameStop stock and encouraged others to invest in the same stock, citing his own investment research. The problem isn’t that Mr. Gill recommended a stock. The problem lies within the fact that he is a licensed securities professional. As aforementioned, we are held to a higher standard and different rules than the average joe off the street.  

To put it concisely: I definitely think he should’ve known better. 

 

Online investing advice – TikTok, Reddit, Instagram 

As social media has grown, so has the plethora of investing advice online. Some of it is good. Some of it is bad. Some of it is unbelievably bad. A lot of the creators of this advice are not licensed securities professionals. As such, they are not subject to the regulatory nature of the finance industry.  

“The worst part is that they get all the upside of being a financial advice giver with none of the consequences – or responsibilities – that should come with it.”4

When browsing the web or an app for investment advice, it’s crucial to vet your sources. Here are some of the questions you should be asking yourself: 

Are they a licensed securities professional? 

Are there disclosures? Disclosures are one of the signs that a source may be reputable. 

Are they recommending a high-risk strategy that may not be suitable for you? 

Does it seem too good to be true? It usually is! 

Of course, I believe the safest route when it comes to investing is to consult with a licensed financial advisor who understands your individual financial situation. It’s our job to be knowledgeable and guide clients on their financial journeys.  

 

Getting started investing without heading straight to Robinhood 

So, you’re not ready to start a formal relationship with an advisor, what do you do? The commission-free aspect of Robinhood is not unique. Companies like Fidelity and TD Ameritrade have zero minimum balance accounts and zero-commission trades. Just. Like. Robinhood. 

“But they’re not as fun!” 

That is the point. True investing, as opposed to trading, is not a game to be won. There are risks involved with investing, such as potential loss of principal, that should not be taken lightly.  

When done correctly, investments can be a great tool to support your financial future. When mishandled, they can be the biggest threat. 

This is meant for educational purposes only. The comments and/or opinions mentioned are those of the author, not Kestra Investment Services, LLC or Kestra Advisory Services, LLC.  The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Kestra Investment Services, LLC or Kestra Advisory Services, LLC as to the accuracy and is not intended to be used as the basis for any investment decisions. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial professional before making financial decisions. Kestra Investment Services, LLC and Kestra Advisory Services, LLC are not affiliated with any other entities referenced.

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1. https://www.businessofapps.com/data/robinhood-statistics

2. https://www.investmentnews.com/robinhood-under-pressure-for-bringing-gamification-to-investing-200607  

3. https://www.investopedia.com/articles/investing/071713/downward-spiral-trading-addiction.asp

4. https://www.advisorperspectives.com/articles/2021/02/22/dont-let-your-clients-kids-be-the-next-reddit-victims?bt_ee=r%2BM11i%2FILSOb9NLEbeM5YjcGnniTB%2FpURJms8%2BH6UPKYj4yTtyTcsHjCVIMNb%2BRy&bt_ts=1614033716911&textlink=