Robinhood and the rise of teenage inventory traders | Enterprise and Economic system Information

It was a fascination with history that led teenage Zachary Cox to trade stocks.

“I love history and have seen events related to the stock market in history books,” Cox told Al Jazeera. “When my current broker ran an advertising campaign on YouTube, I decided to open an account.”

The 13-year-old South West England investor used his pocket and labor money to start trading on the UK Trading 212 platform.

What began as a hobby quickly turned into something more: Cox started his own YouTube channel “Young Investor” in August and has since built a fan base of 8,000 subscribers. He also tweets the latest financial news with the handle @ investor_2.

While there is an abundance of stock tips out there and many social media influencers are offering their two cents, Cox makes sure to do his homework.

“I get information from every corner of the Internet and I always check what someone is saying and make up my own mind about a stock,” said Cox. “For stocks, my preferred fact checks are company records and information from the companies themselves.”

Romping on the stock market used to be reserved for adult professional investors who had to rely on savings. But that stereotype was turned on its head during the coronavirus pandemic, as a combination of boredom at home, easy-to-use trading platforms, and the meteoric rise of so-called “meme stocks” are attracting new legions of retail investors – and even teenagers are not immune to the siren call Stock exchange.

The rise of the robinhood

One platform preferred by new investors is Robinhood, whose stated mission is to “Democratize finance for all” – although investors must be at least 18 years of age to register.

The company will debut on the Nasdaq Composite Index on Thursday. The company and its investors sold 55 million shares for $ 38 each on Wednesday to raise $ 2.1 billion, giving the company a market value of nearly $ 32 billion at its initial public offering (IPO) price. Robinhood had reserved up to 35 percent of its Class A shares for its customers.

The company also announced in a regulatory filing on the eve of its IPO that Robinhood CEO Vlad Tenev is not registered with the United States Financial Industry Regulatory Authority (FINRA) – one of Wall Street’s premier regulators.

The disclosure adds to a number of controversies that have surfaced surrounding Robinhood as its popularity with investors has skyrocketed.

Earlier this year, the company came under fire for suspending trading in its original Meme stock – GameStop – amid a buying frenzy fueled by online retailers.

The company defended the move in a blog post.

“It wasn’t because we wanted to stop people from buying these stocks,” the company wrote. “We did this because the amount required to be deposited with the clearing house was so large – with individual volatile securities accounting for hundreds of millions of dollars in deposit requirements – that we had to take steps to limit purchases of these volatile securities to ensure that we could easily meet our requirements. “

However, the ensuing turmoil resulted in the company’s CEO Tenev being grilled by U.S. lawmakers.

Vlad Tenev, co-founder and CEO of the investment app Robinhood, is not registered with Wall Street Watchdog FINRA, the company announced in regulatory filings the eve of its initial public offering [File: Brendan McDermid/Reuters]

Earlier this month, Robinhood settled a wrongful death lawsuit filed by the parents of Alex Kearns, a 20-year-old college student who took his own life after mistakenly thinking he had lost $ 730,000 and his family would be forced to repay it.

The case was considered when FINRA fined Robinhood $ 57 million and ordered thousands of aggrieved consumers to be paid approximately $ 12.6 million in compensation – the highest fine the watchdog has ever imposed – because of systematic oversight errors, failures and misleading communication. Robinhood has neither admitted nor denied the 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 had “invested in expanding customer support” and “improved our range of options, our clarification of options and the presentation of information in the app”.

“Our customers are at the forefront of every decision we make and we strive to make continuous improvements so investments are accessible to all,” wrote Robinhood.

However, some critics see the company’s self-proclaimed mission to democratize finance as a spin.

“It’s a very benevolent interpretation,” Vasant Dhar, professor of information systems at New York University’s Stern School of Business, told Al Jazeera. “[Robinhood] only cares how much you make with people who want to trade more. “

Questions about gamification

There are many factors driving new investors into the stock market. A February report (PDF) by the FINRA Investor Education Foundation found that some of the biggest drivers were the ability to invest on a small scale and buy stocks at attractive price points when the market fell.

New investors tended to be younger, had lower incomes, and were more racially diverse than seasoned newcomers or holders of residual accounts, the report said.

Video game retailer GameStop became a favorite with retail investors earlier this year [File: Mario Anzuoni/Reuters]

But where these new investors get their intelligence out of affairs, experts say, and while app-based platforms, Reddit forums, and YouTube channels have made getting into trading easier than ever, investing is never without risk.

“First-time investors were far more likely to use an app and seek advice from friends and family than from an investment professional,” said Gerri Walsh, FINRA’s senior vice president of investor education, to Al Jazeera.

Trading app critics point to the use of push notifications and behavior-shaping nudges that are typical of social networking platforms that dominate young investors and can trick them into getting more involved, trading more – and if they’re unlucky have – more to lose.

“You can see that what is primarily entertainment is being used for something else,” Cait Lamberton, professor of marketing at the University of Pennsylvania’s Wharton School, told Al Jazeera.

“There could be a mix of entertainment and learning mentalities that could lead younger investors to less diagnostic information, and I think we need to look out for that,” she said.

The supervisory authorities also keep watch.

“Gamification – the elements of behavior used in marketing in all facets of our lives – can be used for good and they can be used for less good causes,” said Walsh of FINRA. “The regulators are carefully examining this issue.”

The users are definitely busy with the app. An Alphacution study for the New York Times found that Robinhood users traded 40 times as many stocks as clients at the more traditional brokerage Charles Schwab in the first quarter of 2020, per dollar in average client accounts and nine times as much as E * Trade financial clients.

Reddit forums like WallStreetBets fueled the surge in meme stocks this year [File: Dado Ruvic/Reuters]

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

Odean and his co-authors concluded, “The simplicity of the Robinhood app combined with the inexperience of its users has made them tend to tend or amass a smaller group of holdings.”

The report’s authors also see the impact of social media at work, comparing GameStop’s January surge to an “extreme herding” field of events from reinforcement on social media platforms like Reddit’s r / WallStreetbets forum.

“A little regulation and a lot of education”

While the members of today’s digital-first generation are more easily influenced by social media when it comes to stock tips, that doesn’t mean they should sit back and relax completely, experts say.

Teaching people to invest from a young age has its advantages. The longer investors are in the game, the more time their income has to generate further income.

“If you start investing 10 years earlier than usual, it’s huge 20 years later,” said Dhar. “It’s good for young people to be interested in investing because you get the compounding effect that Warren Buffett always talks about.”

Rather than discouraging youngsters from getting involved in the market, some advocate giving them the tools they need to do so prudently.

Rather than discouraging teens from getting involved in the market, some advocate giving them the tools they need to do it prudently [File: Brendan McDermid/Reuters]

Nan Morrison is CEO of the Council for Economic Education, a nonprofit committed to providing children with financial education.

“Education authorities need to recognize that the path to economic mobility and wealth accumulation – especially in marginalized communities – is to have some level of financial literacy in schools,” Morrison told Al Jazeera.

“People who make bad decisions because they are uneducated means we need to educate people,” she added. “I believe in personal freedom of choice – a little bit of regulation and a lot of education.”

And that starts with giving the stock picks on TikTok or Reddit a healthy dose of skepticism.

“Some of the FinTok teachers give absolutely good advice, others give really unfortunate advice – sometimes it’s fraudulent; sometimes it’s biased, “said Walsh, noting that” a lot of fraud happens outside of the realm of regulation. “

One way would be to include learning about investing in the school curriculum, said Timothy Olsen, who published his book The Teenage Investor in 2003 at the age of 13.

“We should really make financial literacy a part of the students’ curriculum,” Olsen told Al Jazeera. “I think it would also benefit the economy in general because people would then have a basic understanding of financial and economic concepts.”

For young investors looking to get into the market now, Cox recommends that they do their research – or get into it.

“If you’re really not sure,” he said, “put the money in an index fund and learn.”