Robinhood trading and investing have become hugely popular over the past few months as we’ve seen increased volatility in the market. The Coronavirus pandemic has forced many individuals to stay at home and attract them to financial markets. We’ve seen the wave of day traders emerge on Robinhood’s platform. So the real question is, can you make good money on Robinhood?
What is Robinhood?
Robinhood is a free-trading app and platform available in the US. They offer traders commission-free trading in stocks, ETFs and options. Which is outstandingly attractive for traders all over. This attracts new traders and experienced traders.
However, with the recent situation in the world (COVID pandemic) causing markets to go array and a lot of people to stay at home. A lot of retail traders are being attracted to the markets. Retail traders being non-institutional traders just like you and I. This is amazing, anyone can learn from the market, and now is a good time. The question you should ask yourself, is Robinhood the right way to get into the markets?
How does Robinhood work?
Robinhood is an app-based trading platform, which seems to be the first of its kind. Traders can invest any amount of money they want into the platform to start investing and trading. If you want to invest or trade on margin you need to deposit a minimum $2,000 into the account.
The platform lets you trade stocks and options for $0 each. Which is unlike any other platform. You do have to ask yourself, if the platform is free, then how do they make money? You are the product in this case. Your trading information along with everyone else on Robinhood is getting sold.
There are no annual fees or inactivity & ACH transfer fees. However, there is a $75 ACAT outgoing transfer fee. If you are a Robinhood gold member ($5 a month). Robinhood gold lets you buy and sell on margin. It also includes access to Morningstar Research Reports and Nasdaq Level 2 Market Data.
Robinhood has a variety of different assets to choose from when you trade. From Stocks, ETFs, Options & Cryptocurrencies to American Depositary Receipts. Robinhood also offers fractional shares, just like Interactive Brokers. That means you can get part ownership of a share for as little as $1.00.
How have Robinhood traders been doing?
What we’ve seen in the market from March to June has been outstanding, to say the least. A lot of analysts and media have attributed the rally to the Robinhood traders who have entered the market and pumped prices up without finding any real value in the market. This is an interesting idea, I’m not saying it’s true or false. However there is very little investor money in this rally, it seems like the retail traders are the only ones that managed to take advantage of the pop. There is roughly $5 trillion of investor money sitting in cash without being in on this rally.
That being said, there have been a lot of new retail traders in the market that has been sporadically trading, and those who are newer have been having a harder time. Finding early success and then learning the reality of trading. Especially for those who venture into options with little to no knowledge on the matter. A website has been created, called Robintrack.net; which monitors the influx of Robinhood traders into stocks. This acts as somewhat a contrarian indicator. A lot of Robinhood traders have been buying stocks simply because their dirt-cheap without realizing that the majority of those stocks are going bust.
Above is what robintrack.net looks like. The left-hand side with all the symbols is what Robinhood traders are buying. The chart maps out the relationship between the price of the asset (pink/purple line) and the shares bought by Robinhood traders (green line). The more these traders flood into these stocks, the more contrarian the opinion appears for the smart money, another wave lower in the markets? There have been success stories from Robinhood, but those are from slightly more experienced traders.
Some new traders are even rivaling hedge funds and the “smart” money. Why? Because their portfolios are full of airlines, cruise lines, oil, and big tech names. These Robinhood traders have bought the stocks because they’re cheap and “have to go up” without the thought of bankruptcy. On average those portfolios have gone up about 60% while a diversified portfolio at a fund is up about 45%. This is great in the short term, however, are they smart enough to take profit when given the chance?
They have helped boost the price of some indices, but to what extent? Leon Cooperman, billionaire investor warns Robinhood investors, they’ll “end in tears”. Claiming they don’t know what they’re doing. Claiming these new day traders are taking the markets by storm and are sporadically making traders without real backing or research. Quoting “they’re just doing stupid things, in my opinion”. However, even with all the mocking of the Robinhood traders, they really did time the market better than the rest of the institutional investors. There may be a little more Merritt to be given around than all this backlash. They could come out on top of this whole pandemic and find new careers.
There is the one case we feel obligated to mention, of a young 20-year old man that entered the Robinhood market and a few bad trades later, ended up taking his own life. This is a story all new traders should know, and understand. Financial mishaps are not worth more than your life. Alexander Kearns, a student at the University of Nebraska from Illinois. He was a student that ended up taking his own life on June 12th, 2020, after waking up to a negative balance of $730K in his Robinhood account. So how does a person that age, without income get access to nearly $1 million dollars worth of leverage we have to ask? There are a lot of questions here to be answered. Our condolences go out to him and his family.
Is Robinhood good for beginners?
Why did we tell you the devastating story above? Because, we want to help traders, especially new ones that don’t know what they don’t know. We don’t want to see anyone else go down the same path. Get educated before risking in the financial markets. There are a lot of free education platforms like Youtube. Learn the basics especially before you take on leverage and use margin.
However, Robinhood is a good platform for the new trader. Robinhood trading is made extremely easy. However, you have to be aware of how you can take advantage of what they offer even if they do sell order flow data to other companies. Educate yourself extremely well if you are planning on trading derivatives like options. Understand what other alternatives there may be, know what is going on the economy, and research stocks that may be going bankrupt.
Overall Robinhood does need some work on the education frontier and their leverage management, but it is a good place to start for free. Watch out when you trade on margin.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.