Guiding your life’s biggest financial moments

When asked to comment, a Robinhood spokesperson wrote: “The entire Robinhood platform offers US stocks, ETFs, options, as well as six different cryptocurrencies, allowing clients to create diversified investment portfolios. “

But unless you’re looking to trade stocks, cryptocurrencies, and options – a practice Money generally doesn’t recommend – you need to understand Robinhood’s main pitfalls.

Robinhood encourages stock picking, and it’s dangerous

When you sign up for the app, a list of popular stocks like Apple, Tesla, Netflix, and even well-known cryptocurrencies like Bitcoin appear on your screen. You won’t see low cost diversified ETFs on this list. To invest in a fund, you have to find the fund yourself.

In general, stock picking is not for amateurs. Economists who study the stock market tend to believe that short-term stock market fluctuations are essentially random. Longer term, studies have shown that most investors find it difficult to control their emotions, rushing to buy late in bull markets when prices are high, then selling in a panic environment when prices are low. In other words, they shoot themselves in the foot.

Over many years, for example as you save for retirement, index funds outperform other strategies because this type of investing doesn’t try to time or beat the market, it just tracks the performance of the whole. of the market.

Robinhood’s design might cause you to trade more often than you should

When you tap on an action in Robinhood, you receive information about its performance over time and some stats. If you buy it, confetti will fall. You will then receive notifications throughout the day on the movement of the stock. This type of setup promotes frequent interaction, says Piyush Tantia, chief innovation officer at Ideas42, a nonprofit design company that uses behavioral science to tackle social ills.

Tantia hadn’t tried the app before speaking with Money, but generally said that users will “choose from the choice sets you give them,” instead of doing their own research. He added that certain app settings, such as frequent notifications, encourage users to respond – and, therefore, chat – more often.

The Robinhood spokesperson said these notifications “are meant to keep investors up to date with news, earnings and price movements, and can be personalized or turned off.”

Robinhood’s premium services are not worth your time (or money)

One way Robinhood can provide commission-free transactions is by earning money from the interest on the assets it holds in the accounts, a practice that is not unusual for brokerage firms. The other way to make money, however, is to subscribe to gain access to margin (or borrow money to invest more than you can afford with your own money).

For these subscriptions, you basically pay a monthly fee to borrow money to trade stocks. And if these transactions go wrong, you could lose your money very quickly.

Robinhood says subscriptions are only for experienced traders, but it seems like a profitable part of their business.

For the inexperienced, however, use the app to buy this low-cost ETF, then turn off notifications and don’t log back in except to make sure it’s working properly every few months.

Better yet, you can simply invest through index funds via the much more boring 401 (k), IRA, or even into a vanilla brokerage account from Vanguard, Schwab, or Fidelity.

A previous version of this article incorrectly stated that you can use the Margin Subscription service to trade options. Robinhood’s premium subscription only allows you to trade stocks on margin. This post has also been updated with new user numbers.

You may also like...

Leave a Reply