Robinhood, the investment program that was the leader in free trade, recorded a record trade in June. But what ‘s good news for a commercial app is probably not good news for a user’ s long – term financial health, say investment experts.

Continuous research has shown that the best way for the average person to acquire wealth is long-term investments. . Investments in a mutual fund or ETF spread risk. it all bets on a handful of stocks.

Of course, apps like Robinhood do not force users to trade, they can be used responsibly. But critics say Robinhood is manipulating investments by sending regular notifications to users about their individual stock positions. When the user makes his first trade, the digital candy “falls” in the application. It also includes a “watch list” of shares to track users. Promoting this behavior can encourage investors to act only in the short-term interests, financial planner Erika Safran told CNBC Make It. A spokesman for Robinhood said the app’s functions “are for informational purposes only; they are not intended as an offer to buy or sell any securities.”

The main aspect of Robinhood is that users can make unlimited free trades. This pushes some people to buy and trade stocks every day, says Safran, owner of Safran Wealth Advisors in New York, a tactic that financial developers almost always warn against. He likens these trading programs to gaming programs, not investment programs.

“I do not see it as a serious way to create wealth,” says Safran. “A better way to create wealth is to realize that investing is not a short-term profit. You need more than luck to succeed in affiliate business. ”

Day’s trade has always attracted some types of investors, but Safran says programs like Robinhood are different because the barrier to entry is very low. started, which has historically been an obstacle for some. In fact, half of Robinhood’s 13 million users never invested before registering.

“We believe that wider market participation is more democratic; it can bring opportunities to many,” a Robinhood spokesman told CNBC Make It. “Those who dismiss retailers as ‘gamblers’ or ‘gamblers’ perpetuate the myth that investments are only for the rich and highly educated.”

There is a level of sexuality, it is attractive, people think it is exciting. Psychologically, it is not like real money.

Erika Safran

Saffron Wealth Advisers

“There is a level of sexuality. “It’s attractive, it’s exciting for people,” said Safran. “Psychologically, it does not feel like real money.”

But it’s true, Robinhood still makes money from its users, even if the company does not charge for each trade.

While the US faces record high unemployment, the stock market is stagnant At present, it is high, some people consider trading a way to earn money. The Robinhood’s three best trading days were in June 2020, with the app adding 3 million accounts in the first four months of 2020, according to a spokesperson. A similar investment service TD Ameritrade also reports record trades.

But trading as an investment strategy often has disastrous results, says Safran. Even the most experienced Wall Street brokers can not consistently win the market. It is very unlikely that the average investor, at home, from a bored social distance, will be able to. The ease of the Robinhood app can encourage users to make bad decisions.

The Robinhood spokesman added that the vast majority of users are not day traders. “Most of our clients use the buy and hold strategy with their investments,” they said.

Robinhood allows users to access risky investment options

The company is so successful in part because of how easy it is to use the interface. But ease of use does not have to be easy to understand what you are shopping for, especially when you are a beginner.

“These are extremely dangerous, because trading in securities can be difficult,” says Whitman. “You really have to weigh the pros and cons before blindly buying stocks.”

And it’s not just stocks. The application provides its basic beginner access to more sophisticated tools such as options. An option contract gives the owner the right to buy or sell the underlying security at a certain price up to a certain date, և Robinhood users have exchanged them at the highest rates of any retail broker. recently analysis from the New York Times. The app encourages users who are looking at their account settings to “speed up the free options trade”.

Traders use sample contracts to speculate. Robinhood, like other brokerage firms, requires clients who want to trade options to disclose, among other things, their investment experience and knowledge. They are required to be aware of the risk they are taking, the spokesman said.

An extreme example of the dangers of trading options came earlier this year when Alex Cairns, a 20-year-old college student in Nebraska, died after his Robinhood account, through which he traded options, struck a balance. negative $ 730,165. Suicide is the result of many contributing factors, not just one event, but his family says Cairns, a novice investor, may have misunderstood his financial statements.

After his death, Robinhood announced that it would make changes to its platform, including making it more accessible for options trading. Other users said they did not understand what they were up to.

“During one of my conversations with a Probono client, he asked me what the difference was between a swing trade and a ‘one-day trade,'” Safran said, noting that a Robinhood client had only invested $ 700. “It’s impossible he did not know what the terms meant, many do not. “The dangerous thing was that it was on his radars.”

Trading does not have to be bad if you already have a strong financial base. You have repaid the debt, built your emergency savings, և consistently invested in long-term stocks և diversified bond portfolio. Most importantly, you need it to: Understand the risks involved և Do some research before investing in additional stocks. (Robinhood offers start-up investor guides on its website).

If Atlantic City were open, I would recommend that they go there. At the very least, you get free drinks while gambling.

Erika Safran

Saffron Wealth Advisers

But day trading should not be your only investment or income strategy. This is especially true for young investors who have not yet built their retirement investments or established their financial independence, says Safran. They need to focus on long-term investments. While Robinhood offers ETFs, it does not offer mutual funds. And there is no candy for a long-term strategy lock.

“If the investor has a core portfolio that they know is not a trading tool, go ahead and play with Robinhood,” says Safran. “If Atlantic City was open, I would recommend that they go there. At least you will get a free drink during the bet. ”

Clarification. This post was updated with an additional comment from Robinhood on the app’s features.

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