Robinhood and the rise of teenage stock investors

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It was a fascination with history that led teenager Zachary Cox to stock trading.

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

The 13-year-old investor from southwest England used his pocket and chore money to start trading on the United Kingdom-based Trading 212 platform.

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

While there are a plethora of stock tips out there and many social media influencers are offering their two cents, Cox is careful to do his homework.

“I get info from all areas of the internet, and always fact-check what someone says and make my own mind up on a stock,” Cox said. “For stocks, my favourite fact-checks are the companies’ filings and info from the companies themselves.”

Dabbling in the stock market used to be the preserve of grown-up professional investors with savings to wager. But that stereotype has been turned on its head during the coronavirus pandemic as a combination of stay-at-home boredom, user-friendly trading platforms and the meteoric rise of so-called “meme stocks” lure new legions of retail investors — and even teenagers aren’t immune to the stock market’s siren call.

The rise of Robinhood

One platform favoured by new investors is Robinhood, whose stated mission is to “democratize finance for all” — although investors have to be aged 18 or older to sign up.

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

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

The disclosure adds to a slew of controversies that have surfaced around Robinhood as its popularity with investors has exploded.

Earlier this year, the company came under fire for suspending trading in the original meme stock – GameStop – amid a buying frenzy fuelled by online traders.

In a blog post, the company defended the move.

“It was not because we wanted to stop people from buying these stocks,” the company wrote. “We did this because the required amount we had to deposit with the clearinghouse 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 buying in those volatile securities to ensure we could comfortably meet our requirements.”

But the resulting furore saw company CEO Tenev grilled by US lawmakers.

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 erroneously thinking he had lost $730,000 and his family would be forced to repay it.

The case was taken into consideration when FINRA fined Robinhood $57m and ordered it to pay around $12.6m in restitution to thousands of harmed consumers — the largest-ever penalty the watchdog had imposed — over systematic supervisory failures, outages and misleading communications. Robinhood neither admitted nor denied the charges.

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 “made investments in expanding customer support” and “enhanced our options offering, education about options, and how information is displayed in the app”.

“Our customers are at the forefront of every decision we make and we’re committed to making continuous improvements so that investing can be accessible to all,” Robinhood wrote.

But some critics see the company’s self-styled mission to democratise finance as spin.

“That’s a very charitable interpretation,” Vasant Dhar, professor of information systems at New York University’s Stern School of Business, told Al Jazeera. “[Robinhood] only cares about how much they’re going to make off people who want to trade more.”

Gamification questions

There are many factors pushing 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 during market dips.

New investors were more likely to be younger, have lower incomes and be more racially diverse than experienced entrants or holdover account owners, the report found.

But where these new investors get their information from matters, experts say, and while app-based platforms, Reddit forums and YouTube channels have made trading easier to get into than ever before, investing is never without risks.

“First-time investors were far more likely to be using an app and get their advice from friends and family rather than from an investment professional,” Gerri Walsh, senior vice president of investor education at FINRA, told Al Jazeera.

Critics of trading apps point to the use of push notifications and behaviour-shaping nudges typical of social networking platforms that can hold sway over young investors and entice them to engage more, trade more — and, if they’re unlucky — lose more.

“You’re seeing a medium that was really primarily used for entertainment being used for something else,” Cait Lamberton, a professor of marketing at the Wharton School at the University of Pennsylvania, told Al Jazeera.

“There could be a mixing of entertainment and learning mindsets that could pull younger investors toward less diagnostic information, and I think that’s something that we have to watch for,” she said.

Regulators are also keeping watch.

“Gamification — the behavioural elements that are used in marketing in all facets of our life — can be used for good, and they may be used for less-than-good purposes,” FINRA’s Walsh said. “Regulators are looking carefully at this issue.”

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

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

Odean and his co-authors concluded, “The simplicity of Robinhood’s app, combined with its users’ inexperience, made them more likely to herd, or pile into, a smaller set of stocks.”

The report’s authors also see the influence of social media at work, likening GameStop’s January spike to an “extreme herding” event field by amplification across social media platforms, such as Reddit’s r/WallStreetbets forum.

‘A little bit of regulation and a lot of education’

While members of today’s digital-first generation may be more easily swayed by social media when it comes to stock tips, that doesn’t mean they should lean out completely, experts say.

Teaching people to invest at a young age has its benefits. The longer any investors are in the game, the more time their earnings have to generate further earnings.

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

Rather than discourage teens from getting involved in the market, some advocate giving them the tools they need to do it prudently.

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

“Educational authorities need to realise that the way to economic mobility and wealth building — especially in marginalised communities — is to have some modicum of financial education in schools,” Morrison told Al Jazeera.

“People making bad decisions because they’re uneducated means we have to educate the people,” she added. “I believe in personal agency — a little bit of regulation and a lot of education.”

And that starts with bringing a healthy dose of scepticism to stock tips found on TikTok or Reddit.

“Some of the FinTok educators provide perfectly good advice, others provide really unfortunate advice — sometimes it’s fraudulent; sometimes it’s biased,” said Walsh, noting, “a lot of fraud happens outside the realm of regulation.”

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

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

As for young investors who want to get started in the market now, Cox recommends they do their research — or ease into it.

“If you’re really unsure,” he said, “put the money in an index fund and learn along the way.”

Source: Al Jazeera