Robinhood is particularly appealing to young people because there is no account minimum, and unlike other discount brokers that charge a commission for trading, there are no fees. Robinhood is popular on college campuses including Wake Forest. The sleek and minimalist style of the app makes it easy to purchase securities with little effort. Robinhood makes it easy to act but not necessarily easy to invest.
Many who download the app and register their account immediately begin picking what they believe are going to be “hot” stocks. After all, the allure of easy stock market riches have been ingrained in young people through television spots such as Jim Cramer’s Mad Money, and E-Trade commercials. But trying to pick the next hot stock that will make you a fortune is incredibly difficult to do once and nearly impossible to repeat.
Data collected by S&P Global shows that over the last five years only 17 percent of active stock managers were able to consistently pick stocks that beat the S&P 500. One of the difficulties of trying to pick stocks that will outperform the market is that it requires the trader to be correct twice—you have to both buy and sell the stock at the correct time.
Attempting to pick the next big stock is more akin to speculating or gambling than investing. On the other hand investing involves building a diversified portfolio with an asset allocation that makes sense for meeting your long-term goals. For example, buying a house, saving for college, or retiring. The legendary value investor Ben Graham famously said that investing is about receiving an ‘adequate’ return. The word adequate is very important for the mindset of an investor. It differentiates someone who is looking to protect the value of their assets and earn a sufficient return to meet their goals from someone who is trying to hit a home run and get rich. This isn’t to say that Robinhood is an inherently bad app to have on one’s phone. Even with a small account balance, Robinhood users have access to exchange-traded funds that hold a basket of stocks and eliminate the unnecessary risk of holding a single stock.
To avoid the difficult practice of market timing, it is a good practice to contribute the same amount of money each month to one’s portfolio. This practice (known as dollar cost averaging) ensures that even if the market is high or low when one invests, on average one will buy more securities at a low price and fewer at high prices. For the average person, most of one’s savings should be invested this way.
There is nothing wrong with speculating on single stocks — a little bit, however it should be with a small portion of one’s overall assets. If you do this, you might strike it big or lose it all. Either way, I recommend using Robinhood because you won’t pay any commissions for your gamble. Even if you think you are, you might not be. The mobile app, Robinhood, has lowered the barriers to entry for opening an investment account. Robinhood LLC is a fully regulated and registered investment broker. However, Robinhood is completely free. One can download the app and be trading stocks and exchange-traded funds within a few business days.