How RobinHood is altering the best way we make investments
Robinhood is struggling a little during the pandemic. Even so, this is a tool that has done a lot of people good. It’s changing the way we invest. It makes investing more accessible to many people. Additionally, despite the issues, there are things about the investment platform that could offer benefits during and after COVID-19.
Robinhood was instantly popular
Robinhood is a stock trading app. When it only launched five years ago, a lot of people in the industry didn’t immediately notice it. Maybe they thought, “Oh, this is just another fintech app.” But the app started like wildfire.
According to Senior Investing Reporter John Divine, more than 100,000 people signed up for the Robinhood app in the first month after it launched. By 2018, the app had more than four million users, surpassing E-Trade. More than six million people now use the website to trade stocks.
Biggest change: Trading doesn’t have to cost any fees
The most important way Robinhood has transformed the way we invest is by eliminating the cost of trading. Commissions were common in the old days of trading stocks. Even in the 21st century when stock trading went online, companies were charging fees for trading. However, Robinhood has proven that a business model with no trading costs exists.
Divine tracks the history of trading costs and reports that a single trade would typically cost:
- Hundreds of dollars by the early 1970s
- $ 70 in the mid-late 1970s and 1980s
- $ 20 or less in the 1990s
- $ 5- $ 8 in 2014 if you’ve used the cheapest online broker
Robinhood changed everything by creating an app that lets you trade stocks without paying a per-trade fee. Others in the industry took notice when Robinhood was successful. Existing brokers eliminated their own trading fees. New apps offer free trading. But that wasn’t all Robinhood brought to the table.
Robinhood adds a social aspect to commerce
The other big thing that Robinhood did differently was the combination of stock trading – usually a solo experience – with the popularity of social media and social networking. As a Robinhood dealer, you can invite others to use your link or personal code to sign up for an account. In return, you would receive a free share yourself. This was surely one reason Robinhood grew so quickly; The company harnessed the power of social media and motivated referrals to grow the business.
Other things Robinhood got right
Here are some of the other game changers Robinhood got right:
- No minimum accounts, which means that stock trading becomes very accessible to a lot more people
- Penny stocks, popular for investment during the coronavirus pandemic; While this is not a game changer per se, they really got attention for how well they implemented it into their platform
- “Cryptotrading and Margin Buying” (according to John Divine) who also suggests that all of these make investing “smooth, cheap and accessible”.
Robinhood: The downside
Robinhood has been particularly controversial recently after a young investor reportedly died of suicide after a flaw in the system that led him to believe he had lost hundreds of thousands of dollars. While this is an extreme example, it does reflect a potential downside to Robinhood’s innovation and popularity. The downside is that the app is especially popular with very young investors who often don’t know what they are doing and sometimes it actually leads to big losses.
The New York Times tells the sad story of someone who took out credit card loans to fund his Robinhood account and who was deeply in debt. You say:
“One-click trading, easy access to complex investment products, and features like falling confetti and emoji-filled phone notifications that make you feel like you’re playing.”
This gamification that makes the app so fun and easy can also be misleading. Some users may not feel like they are spending real money. As a result, they can make terrible life choices, as illustrated in this article. The article argues that Robinhood’s approach, which relies heavily on the social media and gaming feel of the app, is driving people to make the riskiest investments, and faster than other platforms.
Where does Robinhood go from here?
That said, online trading and investing through the app is likely here to stay with or without Robinhood. These mistakes could only be part of the learning curve. Young investors are more prone to risk taking anyway, and Robinhood just makes it easier. Will the app continue to use push notifications and other tools from the world of social media to promote investor activity? Only time can tell.
John Divine predicts that there could be two options for Robinhood. One way is for the larger companies that have been around longer to survive by adapting Robinhood’s tools to their own. In response to Robinhood’s success, investing companies have already started cutting their fees. If all other things are the same, people may choose to invest in the company that has been around for longer rather than the “new kid on the block,” especially after controversy.
On the other hand, Robinhood could continue to innovate. If they can, they may be able to continue to outperform and outperform the older companies in the investing world. Of course, simply eliminating trading fees won’t move the needle in the future. That changed the game. It changed the industry. It changed our expectations of an investment. However, as more companies take this approach, Robinhood is less noticeable.
Your niche could be advancing the technical aspect of fintech. You may be doing best to keep advancing the social media aspects of investing. But whether this is the path they will go and whether they will succeed if they choose to do so will be left to the test of time.
Are You Using Robinhood To Invest? What’s your favorite part of it? What do you think they could do better?
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