Robinhood seeks to educate novice investors about the first steps they need to take. But financial experts say people who are just starting out in their financial journeys need to be careful when using investment applications.

Tuesday, Robinhood HOOD,
has launched a new service called “First Trading Offers”, which is aimed at people who are entering the investment landscape for the first time. The service “allows customers to learn by doing,” the company’s blog post said.

New clients will have the opportunity to receive investment assistance. When they click on this option, they will be guided to fill out a risk-taking question about their appetite, investment goals, and how long they plan to invest.

It will create personalized portfolios with four stock exchanges. “The proposed ETFs will allow clients to learn about the diversity of domestic and international stocks, as well as the US bond market,” the company said in a statement.

(Robin Hood did not immediately respond to a request for comment).

Not everyone believes that this is a good idea. “A broker is not usually considered a trustee, that is, someone who should work in your best interests,” James Royal, Bankrate’s chief journalist, told MarketWatch.

«“My biggest concern with such a program is whether Robinhood should act in the best interests of its customers.”»

– James Royal, Bankrate Chief Journalist

“Robinhood gets paid when its customers do business. “Investors themselves do not pay for transaction costs there, but large investors can pay Robinhood for access to its clients’ transactions, allowing older boys to get better prices,” he added.

“My biggest concern with such a program is whether Robinhood should act in the best interests of its customers. “A broker is not usually considered a trustee, that is, someone who has to work in your best interests,” he said.

“Will Robinhood recommend the cheapest remedies from a leader like Vanguard?” Royal said. “Or will it only offer more expensive means?” And moreover, is it paid for by the fund company for its offers? ”

“It’s a business model. “So this arrangement encourages Robinhood to trade its customers more often than they could otherwise,” he added. With that in mind, here are some warning words and tips for first time investors.

Platforms like Robinhood can be great learning tools

These new features were introduced a year after Robin Hood found a captive audience of fledgling traders seeking to enrich themselves with meme stocks such as AMC AMC.
և GameStop GME,
և cryptocurrencies such as Dogecoin DOGEUSD,

Services like Robin Hood have made low entry barriers attractive to new investors. Unlike more traditional brokers, many services were provided with little or no pay (although clients may pay the price in other, less specific ways).

With instability comes the excitement of new blood. Many investment applications and services, such as Robinhood, have also historically focused on educating their younger, relatively greener users, especially in times of market volatility.

Some experts welcomed Robinhood’s drive to educate its new users and direct them to diversified assets. Dennis Nolte, financial adviser to Seacoast Investment Services in Florida Winter Park, called the initiative “obvious.”

“Knowing who seems to be striving for Robinhood, a lot of younger investors with ‘smaller’ investment dollars,” he said. »:

Portfolio diversification can obviously provide security

Most financial analysts compare the pursuit of big profits to buying and selling stocks to gambling in a casino. As a result, it is a very risky approach, but in some cases it can lead to great rewards. However, diversification provides greater security.

“The risk of owning a stock is known as ‘unique risk’, where you are exposed to the risks of a single stock or company,” George Gagliardi, founder of Coromandel Wealth Management in Massachusetts, told MarketWatch earlier.

So how do you compensate for that risk? “Studies have shown that you need to have at least 10 different stocks in the same amount to reduce most of the original risk, or even better, 20 or more,” he said.

«“Studies have shown that you need to have at least 10 different stocks in the same amount to reduce most of the original risk, or even better, 20 or more.”»

– George Gagliardin, Founder of Coromandel Wealth Management in Massachusetts

One way to compensate for stock volatility is to keep stocks for a long time. Day by day the price will rise and fall. But if the company is generally on an upward trajectory, holding those shares for a long time will avoid that volatility.

Of course, companies go bankrupt, and shareholders can lose when that happens. Because securities trading is so risky, it is not an ideal way to invest money in the long run.

For these purposes it is better to invest your money in something like 401 (k) or IRA. In most cases, that amount will be invested in the funds. Funds, including ETFs, still carry their own risk, but this is different from buying and selling stocks.

The concern here is more about systemic risk. A drop in the shares of one company will not hurt the fund investors much. But if there is a big shift in the stock market DJIA,
+ 0.18%

it can have an impact.

Investment applications can lead investors to risky behavior

However, the service does not completely eliminate some of the issues associated with the ease of investing in commercial applications. Some have previously compared the convenience and accessibility of platforms like Robinhood to “Vegas in the palm of your hand”.

Some technology platforms have gone one step further than what Robinhood has done to help investors avoid reckless behavior. Betterment has historically not allowed its customers to trade in individual stocks, instead restricting them to ETFs.

“One of the biggest concerns is that new investors see ‘hot’ stock but do not fully understand the implications of investing in it, creating serious risks,” said Dan Egan, Betterment’s vice president of finance and investment.

Trading is not the same as investing

Chances are, if not most, people who sign up for Robinhood are interested in stock trading. But this is not the same as long-term investing or planning, Robinhood’s limited ability to encourage long-term thinking.

Of course, many people manage to make a few bucks by buying and selling stocks at the right time. For the average retailer, however, active stock trading is not the best way to build a nest egg.

And here is the problem. Beginner investors can be better served by using a platform that provides them with ongoing financial advice և education, or by turning to a more traditional advisor.

At the same time, Royal says, “ETFs are a great starting point for novice investors as they offer a diversified impact for a specific market area. But that does not make all ETFs a good investment, nor does it make them the same. ”

He recommends a long-term strategy. “ETFs invest in a range of assets, from equity to broadly diversified funds based on the S&P 500 SPX.
The index և your income depends on what exactly the fund is invested in. ”

“This diversification can reduce the risk for new investors to buy a few individual shares,” he added.