Robinhood struggles a bit during the pandemic. Still, this is a tool that has done many people good. It changes the way we invest. This makes investing more accessible to many people. In addition, despite the problems, there are things on the investment platform that could offer benefits during and after COVID-19.
Robinhood was immediately popular
Robinhood is a stock trading app. When it first came on the market five years ago, many people in the industry didn't notice it right away. Maybe they thought, "Oh, that's 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 launch. By 2018, the app had over four million users, outperforming e-trade. Meanwhile, more than six million people use the website to trade stocks.
Biggest change: trading doesn't have to cost fees
The most important way that Robinhood has changed our investment activity is to eliminate trading costs. Commissions were common in the old days of trading stocks. Even in the 21st century, when stock trading went online, companies charged trading fees. However, Robinhood has proven that a business model exists without trading costs.
Divine tracks the history of trading costs and reports that a single trade would normally cost:
- Hundreds of dollars until the early 1970s
- $ 70 in the mid-late 1970s and 1980s
- $ 20 or less in the 1990s
- $ 5 – $ 8 in 2014 if you used the cheapest online brokers
Robinhood changed everything by creating an app that allows you to trade stocks without paying a fee per trade. Others in the industry became aware of Robinhood's success. Existing brokers eliminated their own trading fees. New apps offer free trading. But that wasn't all that Robinhood brought to the table.
Robinhood adds a social aspect to trading
The other big thing that made Robinhood different was the combination of stock trading – usually a solo experience – with the popularity of social media and social networking. As a Robinhood Merchant, 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 certainly one of the reasons why Robinhood grew so quickly; The company used the power of social media and motivated recommendations to grow the business.
Other things that Robinhood did right
Here are some of the other game changers that Robinhood did right:
- No minimum accounts, which means that stock trading becomes very accessible to a lot more people
- Penny stocks that were popular for investment during the corona virus pandemic; While this is not a game changer in itself, they have really gained attention for how well they have implemented it on their platform
- "Cryptotrading and margin buying" (according to John Divine), which also points out that all of this makes investing "smooth, cheap, and accessible".
Robinhood: The disadvantage
Robinhood has been particularly controversial lately after a young investor reportedly died of suicide after having a bug in the system that made him think he had lost hundreds of thousands of dollars. While this is an extreme example, it reflects a possible disadvantage for Robinhood's innovation and popularity. This disadvantage is that the app is particularly popular with very young investors who often do not know what they are doing, and this sometimes leads to large losses.
The New York Times tells the sad story of someone who took credit card loans to fund his robinhood account and who was deeply in debt. They say:
"One-click trading, easy access to complex investment products and features like falling confetti and emoji-filled phone notifications that made it feel like a game."
This gamification, which makes the app so entertaining and simple, 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 app's social media and gaming feel, causes people to make the riskiest investments, faster than on other platforms.
Where does Robinhood go from here?
That said, online trading and investing through the app are likely here to stay with or without a 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 social media tools to encourage investor activity? Only time can tell.
John Divine predicts there could be two options for Robinhood. One way is that the larger companies that have been around for a long time will survive by adapting Robinhood's tools to their own. In response to Robinhood's success, investing companies have started to cut their fees. If all other things are the same, people may choose to invest in the company that has been around for a long time, rather than the "new kid on the block", especially after controversy.
On the other hand, Robinhood could continue to be innovative. If they can, they may continue to outperform and outperform older companies in the world of investing. Of course, simply eliminating trading fees will no longer 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 adopt this approach, Robinhood is less noticeable.
Your niche could be to advance the technical aspect of fintech. You may do your best to further advance the social media aspects of investing. But whether this is the path they will take and whether they will succeed if they choose to do so will be left to the test of time.
Do you use robinhood to invest? What is your favorite part of it? What do you think they could do better?
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