Started in 2012, Robinhood has grown to become arguably the most disruptive technology in investing and securities trading. They have transformed investment in many ways and have removed the decades-old barriers that previously existed in securities trading. They have opened up the market to minnows with the smallest of incomes. They even forced many brokerage firms to remove the charges they previously levied on stock trading.
Robinhood has, in many ways, lived up to its name by giving everyone an equal chance at trying their efforts in stocks. Never before have people enjoyed this level of freedom with securities. To date, the platform has over 13 million users, most of whom are below 35 years. The app has demystified securities trading for young people and has provided them with a glitzy approach to buying and selling stock.
How Robinhood works
As a broker, the firm facilitates the buying and selling of securities, but they do not execute the trade themselves. Instead, they send these orders to market makers in exchange for PFOF (Payments for Order Flow). In turn, the market makers use the spreads associated with those orders to make profits.
Robinhood has what many would consider the bare minimum requirements for signing up. All you have to attain is to be a US citizen or holder of a valid U.S. visa, be 18 years or older, have a valid social security number, and have a legal residential address in the U.S.
- New members are given a free stock, which, as the platform says, has a 1% chance of being worth up to $200. In addition, one gets additional free stock for referrals who sign up to the platform.
- Investors can buy and sell securities for free. Robinhood is credited with bringing an end to the era of brokers charging investors for their trades. The move prompted brokerage firms to remove their charges.
- Robinhood has removed two of the most difficult barriers to trading by enabling the purchase of fractions of shares and removal of the requirement for minimum deposits. This, therefore, means that you don’t have to be in the high-income bracket to buy the stock you want.
- The application is user-friendly, and the signing up process is relatively easy. Its interface is easy to navigate, and one can open an account and start investing within a few minutes. In addition, it has a guide that helps investors manage their tax obligations with ease. It is quite easy to follow the changing trends on your investment using the eye-catching user interface.
- With APY earnings of 0.30%, Robinhood’s yields are higher than those offered by many established investment firms. Many such firms give yields less than 0.1%.
High-risk trading and death
Robinhood has been criticized in some quarters for its “casual” approach to investment, with little regard to the fact that money is always on the line. It has even been suggested that they have designed the platform to simulate video games.
This “gamified” approach to trading, coupled with an almost free-for-all access to trading, has been pointed out as exposing inexperienced investors to emotional distress. Not only that, but Robinhood has also been on the receiving end for allowing such traders to expose themselves to complex trading options like margin lending.
Nothing exemplifies the dangers that come with trading on the edge as Alex Kearn’s suicide in mid-2020.
On June 12, 2020, the world woke up to the sad news that Kearns, a 20-year-old college student, had committed suicide after apparently having seen his account balance spiral down to -$730,165. In his suicide note, Kearns lamented that Robinhood has allowed him to leverage such a huge amount, despite his obviously disadvantaged financial status. In the end, it was proven that he owed less than he had thought, but it was too late. The jury was out, and Robinhood bore the brunt of the backlash that followed.
In January this year, Robinhood was in the eye of the storm once more, this time becoming the target of an onslaught by members of the popular Reddit group, Wall Street Bets. After a sustained period of massive buying of GameStop shares, orchestrated by the group, the stock went into a short squeeze.
The video game retailer was on its deathbed, and many investors had expected it to fold. Instead, the avalanche of buy orders, mostly executed through Robinhood, sent the company’s stock soaring by almost 3,000% in less than a month. The trading app was forced to temporarily halt all trading involving GameStop, but the damage had already been done.
In the aftermath of the event, there was widespread speculation as to the possibility of collusion between Robinhood and hedge funds. The collusion claims came because of Robinhood’s business model, which is heavily reliant on revenue from PFOF funds it gets from hedge funds.
There have been several incidents of outages involving Robinhood whenever there is an above-normal flow of traffic to the platform.
For example, information from the tracking site, DownDetector shows that the platform had outages every month of 2020, with the most notable one being the March 2 outage that lasted nearly 20 hours, caused by S&P’s 3.2% single-day ascent.
Robinhood is undoubtedly a proven and effective platform for trading. It may be more appealing to millennials, but its simplicity and low-cost trading options are worth every investors’ time and money. However, its efficiency is still shaky, and you should therefore have a backup plan. Importantly, understand the market before committing your money to a stock.