As social media has sparked interest in a variety of stocks recently shorted by hedge funds, Robinhood and similar, low-cost trading and investment platforms have served as an important tool.
During this saga – even after some of these platforms temporarily banned the buying and selling of shares like GameStop – Robinhood saw JMP record growth, according to an analysis by JMP.
On Friday, retailers downloaded the Robinhood app more than 600,000 times, well above the record set in March last year.
But Robinhood is not the only trading or investment platform that has seen growth in recent times. Participants such as Webull and SoFi saw a similar number of app downloads last week, JMP noted.
“Although there is intense focus today, we believe in the long run that companies that offer their customers the best experience, the most innovative tools and services to manage their finances, and competitive pricing will continue to enjoy the strongest growth in the industry,” JMP said. Security analyst and head of business development Devin Ryan and vice president of equities research Brian McKenna said in the research note.
Here are five considerations that day traders and investors should make before using an app to leverage the markets:
Investment programs can be good learning tools if used properly
Some financial experts believe that platforms like Robinhood, Acorns or Stash can be good learning tools for novice investors.
“Anything that saves democracy and invests for your future is a good thing,” said Scott Hammel, a certified financial planner at Apeiron Planning Partners, a consulting firm in Dallas, Texas. “If a robo platform lowers the traditional ‘old guard’ barriers and enables the consumer to feel more in control, they will be more involved in their financial lives.”
Because of their cheap and easy access, people will use these apps as a platform to learn more about investing or stock trading. And because they are popular with novice investors, many of these platforms work to provide educational content to their users to help them learn the basics – especially during volatile periods in the market.
Stash, for example, published reports explaining the concept of a ‘short press’ in light of the GameStop frenzy, and the company’s founders hosted an Instagram Live discussion to answer customers’ questions. If customers also search for volatile stocks like AMC, they will receive pop-up messages in the app indicating the risks involved.
“While we believe everyone should have access to investment, we do not advocate day trading and have never promoted it with our clients,” a Stash spokesman said. “We warn against speculating stocks and trying to time the market, so we always work with just four trading windows throughout the day.”
Other digital investment platforms limit where clients can direct their investments. For example, enhancement does not allow users to trade individual stocks. Instead, clients are investing in a diversified portfolio of ETFs tailored to their needs, a spokesman said.
“One of the biggest concerns is that newer investors see a ‘hot’ stock, but do not understand the consequences of investing in it and take serious risks,” said Dan Egan, vice president of behavioral finance and investment at Betterment.
These programs can encourage riskier behavior if you are not careful
Many people compare the convenience and access that platforms like Robinhood offer to ‘Vegas in your hand’. This has become especially true in recent weeks, as retailers have ventured into ventures such as GameStop.
“This kind of trading is closer to gambling than investing,” Hammel said.
But studies have shown that investors can unknowingly act more dangerously when buying and selling investments via mobile applications.
A recent paper distributed by the National Bureau of Economic Research found that using a smartphone for investment encourages the purchase of riskier assets. People who trade in their phones were 67% more likely to buy so-called “lottery shares”.
Part of the problem is that trading apps give you instant access, said Joe Sallee, managing partner and financial advisor at Bay Capital Advisors, in Virginia Beach, Va. “It allows investors to make trading decisions without looking at the full picture of why they are buying or selling a stock,” Sallee said. “Too many people make investment decisions based on their emotions instead of the fundamentals of a company. “
To make matters worse, there is evidence that the more dangerous behaviors that smartphones promote are being translated into other platforms. The NBER article noted that the investors studied – who were on average 45 years old – were also looking for risky investments on more traditional platforms.
A Robinhood spokesman said Robinhood was designed “to be mobile first and intuitive, with the aim of making investment feel more confident and less discouraging for an entire generation of people previously cut out of the financial system.” break down barriers to investment.
Remember, $ 0 commissions can cost a price
No one likes to pay more when they can pay less, which is why it is understandable why $ 0 commission fees at Robinhood – or a wide range of other trading platforms – can be so striking.
But investor protection advocates say there may still be costs, though not seen.
Brokerage dealers are their clients ‘duty of best execution’. This means that they should try to offer their customers and users the best conditions. Price and speed are two important factors, but not necessarily the only ones.
For retail investors, it comes down to two points, says Tyler Gellasch, executive director of the Healthy Markets Association, a nonprofit pension fund association that strives for investor protection. The best execution is about executing a trade ‘quickly and getting the best price’, he said.
In December, the SEC announced a $ 65 million fine against Robinhood for allegedly failing to comply with the duty, and also not directly with customers about how he earned his money.
When the fine was announced, Robinhood said the interviews’ behavior was related to “historical practices that do not reflect Robinhood today.”
But Gellasch and others say the bigger problem in the industry has not disappeared.
The duty to perform the client in the best possible way can conflict with the source of income of a broker from the so-called ‘payment for order flow’. This is where the trading companies pay brokers for the privilege of trading – and this can lead to brokers putting their own financial interests above their clients.
“The SEC and FINRA have inexplicably allowed payment flow to continue for years,” Gellasch told MarketWatch.
Disclosure of best-performing duties and their details can be difficult for average investors, Barbara Roper, director of investor protection at the Consumer Federation of America, said earlier. Therefore, it may be important for regulators to intervene, she said.
They will try to sell you other financial products
In recent years, most digital trading and investment platforms have built in bank-like accounts. In most cases, the platforms have partnered with banks to offer the accounts. Stash, for example, has partnered with Green Dot Corp. to offer FDIC-insured banking services.
These accounts can be attractive by design. Most carry attractive interest rates – when Robinhood unveiled its cash accounts (after a critical initial announcement), the accounts offered an annual return of 2.05%. Today, the APY has fallen with interest rates and now rests around 0.3%, still well above the average interest rate on savings accounts at major banks.
However, some businesses have taken different approaches. Stash’s accounts do not bear interest. Instead, the investment platform offers debit rewards, which offer clients fractional shares in individual stocks based on where they spend their money. So if you spend money on Amazon AMZN,
For example, you will be rewarded with fractional shares of Amazon.
However, these platforms do not offer these accounts from their friendly heart. Bank accounts can be a treasure trove of customer data, giving insight into the spending and saving habits of people, which can help the apps improve their investment offerings.
In addition, bank accounts are rather ‘tough’, which means that people do not tend to open and close bank accounts regularly. So an investment platform that catches a bank client may be less worried about them taking their money elsewhere.
The benefit for consumers is that these bank accounts may not best suit their financial needs. From a savings rate point of view, multiple online banks offer savings accounts with a higher return than those usually offered by these companies, according to Bankrate.
If you are dissatisfied with your service, you may have trouble taking an app to court
Many retailers were excited about Robinhood’s decision to restrict trading in stocks that were popular on Reddit. And some have decided to try to sue the platform. However, it is not clear if they will even have their day in court.
This is because Robinhood includes an arbitration clause as part of its client agreement. “By signing an arbitration agreement, the parties agree as follows: (1) All parties to this agreement waive the right to sue each other in court, including the right to be tried by a jury, except as determined by the rules of the arbitration forum in which a claim is submitted, ”reads the agreement.
When a case is resolved in arbitration, the documents are not submitted in public and there is no jury that can rule. Some have argued that the process benefits businesses, although business proponents argue that it is fair and efficient.
Either way, arbitration clauses are very common. “I’ve never seen a business that does not have a business,” said Samuel Edwards, a partner at Shepherd Smith Edwards & Kantas in Houston, and a former president of the Public Investors’ Bar Association.
Indeed, Acorns and Stash both have arbitration clauses as part of their employment agreements.
Clients can try to circumvent arbitration clauses by filing a lawsuit, but they must first convince a judge not to send the case to arbitration first.