Robinhood and the rise of young stock investors | Business and Economic News

It was the fascination with history that led the teenager Zachary Cox to trade stocks.

“I like history and have seen events related to the stock market in history books,” Cox told Al Jazeera. “When my current agent advertised on YouTube, I decided to open an account.”

This 13-year-old investor from southwest England used his pocket money and miscellaneous expenses to start trading on the Trading 212 platform in the UK.

The initial hobby quickly became more: Cox launched his own “Young Investor” YouTube channel in August, which has since had 8,000 subscribers. He also uses the handle @investor_2 to post tweets about the latest financial news.

Although there are plenty of stock tips there, and many social media influencers have offered two cents, Cox did his homework carefully.

Cox said: “I get information from all areas of the Internet, and always check what someone says and make my own decisions about stocks.” “For stocks, my favorite fact-checking is the company’s documents and companies. Own information.”

Getting involved in the stock market was once the patent of mature professional investors, who had savings to bet. But during the coronavirus pandemic, this stereotype has changed, as the boring, user-friendly trading platform at home and the rapid rise of so-called “memetic stocks” have attracted a large number of retail investors-even teenagers are not immune from the stock market. The alarm sound.

The rise of Robin Hood

One platform favored by new investors is Robinhood, whose declared mission is to “democratize finance for all”-even though investors must be over 18 years old to register.

The company will make its debut on the Nasdaq Composite Index on Thursday. The company and its investors sold 55 million shares at a price of $38 per share on Wednesday, raising $2.1 billion, bringing the company’s market value to just under $32 billion at the initial public offering (IPO) price. Robinhood has reserved up to 35% of Class A shares for its customers.

The company also disclosed in a regulatory document on the eve of the IPO that Robinhood CEO Vlad Tenev was not registered with the Financial Industry Regulatory Agency (FINRA), one of the top regulators on Wall Street.

As Robinhood’s popularity among investors soared, this disclosure exacerbated a series of controversies surrounding Robinhood.

Earlier this year, the company came under fire for suspending trading of the original meme stock GameStop during a buying frenzy triggered by online traders.

In the blog post, the company Defend this move.

“This is not because we want to prevent people from buying these stocks,” the company wrote. “We did this because the amount we had to deposit in the clearing house was so large—the deposit requirements for individual volatile securities were as high as hundreds of millions of dollars—we had to take measures to restrict the purchase of these volatile securities to Make sure we can easily meet our requirements.”

But the resulting anger saw the company CEO Tenev Barbecued by American legislators.

Vlad Tenev, the co-founder and CEO of investment app Robinhood, is not registered with the Wall Street regulator FINRA, and the company disclosed in regulatory documents on the eve of the IPO [File: Brendan McDermid/Reuters]

Earlier this month, Robinhood settled a negligent death lawsuit filed by the parents of Alex Kearns, a 20-year-old college student, He committed suicide by mistakenly thinking that he had lost $730,000 and his family would be forced to repay.

FINRA considered the case Robin Hood fined 57 million U.S. dollars And ordered it to pay approximately $12.6 million in damages to thousands of damaged consumers-the largest fine ever imposed by regulators on systemic regulatory failures, interruptions, and misleading communications. Robin Hood neither admitted nor denied these allegations.

The company did not respond to Al Jazeera’s request for an interview.

In response to the FINRA penalty, the company wrote in a blog post that it “invested in expanding customer support” and “strengthened our option offerings, option education, and the way information is displayed in apps.”

Robinhood wrote: “Our customers are at the forefront of every decision we make, and we are committed to continuous improvement so that everyone can invest.”

But some critics believe that the company’s self-proclaimed financial democratization mission is a spin.

“This is a very charitable explanation,” Vasant Dahl, a professor of information systems at New York University’s Stern School of Business, told Al Jazeera. “[Robinhood] Just care about how much money they will make from people who want to make more transactions. “

Gamification problem

There are many factors that push new investors into the stock market.A month Report (PDF) The FINRA Investor Education Foundation found that some of the biggest drivers are the ability to make small investments and buy stocks at attractive price points during periods of market downturns.

The report found that compared with experienced entrants or deferred account owners, new investors are more likely to be younger, lower in income, and more ethnically diverse.

Earlier this year, video game retailer GameStop became a favorite of retail investors [File: Mario Anzuoni/Reuters]

But experts say where these new investors get their information, and while app-based platforms, Reddit forums and YouTube channels make transactions easier than ever, investment has never been risk-free.

Gerri Walsh, senior vice president of investor education at FINRA, told Al Jazeera: “First-time investors are more likely to use the app and get advice from friends and family, rather than from investment professionals.”

Critics of trading apps point out that the use of push notifications and behavior-shaping boosters typical of social networking platforms can control young investors and induce them to participate and trade more—if they are unlucky—to lose more.

Kate Lamberton, a marketing professor at the Wharton School of Business at the University of Pennsylvania, told Al Jazeera: “What you see is a media that is mainly used for entertainment being used for other purposes.”

“There may be a mix of entertaining and learning mentalities, which may attract young investors to turn to less diagnostic information. I think this is something we must pay attention to,” she said.

Regulators are also paying close attention.

FINRA’s Walsh said: “Gamification-the behavioral element of marketing in all aspects of our lives-can be used for good and for less good purposes.” “Regulators are carefully studying this issue. “

The user will definitely use the application.One The Alphacution Study of The New York Times It was found that in the first quarter of 2020, Robinhood users traded 40 times as many stocks as customers of Charles Schwab, a more traditional broker, and the average transaction volume per dollar in customer accounts was 9 times that of E*Trade Financial customers.

Reddit forums like WallStreetBets have boosted meme stocks this year [File: Dado Ruvic/Reuters]

Earlier this year, Terrance Odean, a professor at the Haas School of Business at the University of California, Berkeley, co-authored a paper that looked at attention-induced transactions and Robinhood users.

Odean and his co-authors concluded: “The simplicity of the Robinhood app, coupled with the lack of experience of its users, makes them more likely to herd or hoard smaller stocks.”

The author of the report also saw social media at work, and by zooming in on social media platforms such as Reddit’s r/WallStreetbets forum, compared GameStop’s January surge to the field of “extreme grazing” events.

“A little supervision and a lot of education”

Experts say that although today’s digital first-generation members may be more susceptible to social media in terms of stock alerts, this does not mean they should give up altogether.

There are benefits to teaching people to invest when they are young. The longer any investor spends in the game, the more time their earnings will generate more earnings.

“If you start investing 10 years earlier than otherwise, then 20 years later is significant,” Dahl said. “It’s a good thing that young people are interested in investing because you get a compounding effect, which is what Warren Buffett often talks about.”

Some people have not discouraged young people from participating in the market, but advocated providing them with the tools they need to act cautiously.

Instead of discouraging young people from participating in the market, some people advocate providing them with the tools they need to proceed with caution [File: Brendan McDermid/Reuters]

Nan Morrison is the CEO of the Economic Education Council, a non-profit organization whose mission is to provide financial education to children.

“Education authorities need to realize that the way of economic flow and wealth accumulation-especially in marginalized communities-is to carry out some financial education in schools,” Morrison told Al Jazeera.

“People making wrong decisions because they are not educated means that we have to educate people,” she added. “I believe in personal agency-a little supervision and a lot of education.”

The first step is to be reasonably skeptical about the stock alerts on TikTok or Reddit.

“Some FinTok educators provide very good advice, while others offer very unfortunate advice — sometimes it’s fraudulent; sometimes it’s biased,” Walsh said, noting that “a lot of fraud happens. Outside the scope of supervision.”

One way is to learn to invest as part of the school curriculum. Timothy Olsen said that he published his book “The Young Investor” in 2003 when he was 13 years old.

“We should really make financial knowledge a part of the student curriculum,” Olsen told Al Jazeera. “I think this will also really benefit the wider economy, because then people will have a basic understanding of financial and economic concepts.”

For young investors who want to start entering the market now, Cox suggests that they do research—or relax.

“If you are really unsure,” he said, “put your money into an index fund and learn along the way.”

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