Robinhood the new wall-street piped piper drawing retail investors in hoards, What is driving this trend? 

Summary

• COVID-19 induced lockdowns have led many young people to make stock-trading as their primary income source, post losing their jobs or living on a pay cut.
• Federal Stimulus and gradual decline in brokerage rates have also pushed the Millennials to encash on the pandemic fueled bear stock market.
• These investors have embraced Robinhood, a no commission-based e-trading app to trade primarily in struggling stocks and penny stocks, marking themselves as “Robinhood investors”.
• The “Robinhood investors “definition has now been extended to all rookie investors who entered the market during the pandemic and are investing in poor stocks globally.

Stock trading has always been deemed risky. Still, for many long-haul investors, stock trading has been a passion. In contrast, few enter to make quick bucks. With the pandemic making stock markets volatile globally, a new set of retail investors have emerged who are young, beginners, or amateur. They want to make fast money and are investing in the stocks that are dreaded by the global hedge fund managers.

The trading sentiment rests on a simple notion - The stock market has gone down, only to go up once the economy revives. There are many companies whose stocks are performing very poorly or are at a precarious state because of the challenges stemming from the pandemic. Stock prices of companies operating in hospitality or airlines are currently trading below their intrinsic value. The price movement shall experience a rapid surge whenever news indicating a buoyant market is announced.

Investing in such undervalued stocks can benefit investors whose purpose is to make quick money.

Please Read: Robinhood Traders Responsible for Moves in Markets

What encouraged these investors towards trading?

According to market theory, a set of young investors have started home-bound trading during the pandemic. Covid-induced lockdowns have created economic downfall, leading to many people losing their jobs or accept living on a pay cut. Such financial situation has persuaded young crowds to invest in stocks that are available at low prices.

These investors have embraced the e-trading app “Robinhood” offering traditional securities and crypto. This app users are known as “Robinhood investors”. The app had a feature showcasing stock popularity data feature. The feature had enabled many users to see a list of companies whose shares are surging because of popularity among traders. The company has currently disabled the feature.

Other features such as trading in fractional shares and commission-free trading have also attracted young crowd including millennials and investment rookies to use the brokerage app. Robinhood stated that they served 3 million new accounts in the first quarter of 2020 when stocks had witnessed a roller-coaster trajectory during the first quarter on record. Robinhood app has more than 10 million users, with an average age of 31. These Robinhood’s have invested mostly in struggling stocks, penny stocks, and stocks of bankrupt companies, crushed by the economic shutdown such as airlines, hotels, and casinos. Young newcomer investing in broken, battered stocks aggressively are conveniently named as “Robinhood investors” currently. The effect of the app known as “Robinhood Effect” has encouraged many hedge funds managers to rope in profit.

Also Read: Is this Robinhood Moment for Australia? Zip, Afterpay Back the New Trading Platform

Other Reasons

The Stimulus has helped 50% of its recipients to invest in low cost trading to make quick gains. Many investors are switching to trading as a leading source of income, with no primary income at hand.

Brokerage rates have also declined to almost nil globally, attracting a wave of retail investors towards speculation. Robinhood traders are in raptures because of the stock market gains made during the pandemic, primarily because they invested during a bear market.

Many industry experts in the US consider that Robinhood trading is influencing the recent uptick in the American stock markets, though it may be temporarily. The rise in Robinhood trading is making traditional investors keep a tap on their actions and become more open-minded towards day-trading.

Robinhood under the watchful eye

The suicide of a 20-year-old investor after seeing a huge negative balance in its account has pushed US lawmakers to compel Robinhood to build more self-service tools and educational tools in its platform, ensuring investors’ safety. According to Robinhood's co-founder and co-CEO Vlad Tenev, the company is dedicated towards providing the best customer experience, product and democratizing finance for all. Robinhood intends to use the capital raised from its fundraising round towards building a better trading platform and customer experience. Though, the company recently announced halting its UK launch indefinitely.

As per media reports, Robinhood is under a civil fraud investigation with allegation that the company has neglected to fully disclose its practice of selling clients’ orders to high-speed trading firms earlier. High-speed trading involves using computer programs to transact a huge number of orders in fractions of a second. The company may have to settle the case by paying a fine of more than US$10 million to the SEC.

Good Read: Three Unique Investment Tips to Build Recession-Proof Portfolio in COVID-19 Crisis