How to Use Robinhood Without Losing Your Shirt

Photo: OpturaDesign (Shutterstock)

As WSJ columnist James Mackintosh recently pointed out: the stocks that did best last year were priced below $1, which is odd, because a stock’s price tells you almost nothing about the company. This market behavior coincides with the recent rise of individual investors using trading apps, with users flocking to Robinhood because of its ease-of-use—but is the app too easy to use? Do hobbyist traders even know what they’re doing?

The gamification of stock trading

The benefits of democratized trading shouldn’t be dismissed out of hand, but it exists in tension with the fact that some people should simply stay well clear of trading apps. Per a recent New York Times feature, studies have shown that the more small investors trade stocks, the worse their returns are likely to be.

Robinhood, like other retail trading apps, lets individuals buy and sell stock, as well as other, more complicated trades. The knock against Robinhood is that, compared to other apps, it’s a hotbed of aggressive trading made worse by how the app gamifies the user experience. Per the Times :

More than any other retail brokerage firm, Robinhood users trade the riskiest products and at the fastest pace: In the first three months of 2020, they traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter.Robinhood users also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis by the research firm Alphacution.New members are given a free share of stock as a welcome bonus, but only after they scratch off images that look like a lottery ticket. Other features like falling confetti and emoji-filled phone notifications make trading feel like a game.Robinhood initially offered stock trading only, but later added options trading and margin loans, which make it possible to maximize investment gains—and losses. Customers who want to use these trade options have to answer just a few multiple-choice questions.At the core of Robinhood’s business is an incentive to encourage more trading. They don’t charge fees for trading, but they’ll get paid more when customers make more trades, through a complex practice known as “payment for order flow.” The practice is used by retail brokers like E-Trade and Schwab, but Robinhood makes significantly more at it than they do.

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Tips for using Robinhood safely

The golden rule of trading is to never invest what you can’t afford to lose. Unless you’re an experienced trader who knows how to evaluate a company based on its balance sheet, cash flow, market share, or management, you’re probably better off thinking of trading as gambling, and applying the same precautions. Here are some tips on staying responsible with your money. Otherwise, if you’re interested in trading, Nerdwallet has a good overview of best practices for day trading that can help you from getting fleeced in the long run.

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