Investing with Robinhood | An Honest Review 2022
According to a few experts and regulators, Robinhood, which was founded in 2013, is indeed a free platform that makes buying and selling in the stock market far too easy. Investing with Robinhood is limited since it does not provide tax-advantaged investment accounts, which are essential for building long-term wealth.
The app has 21 million users and more than $102 billion in assets, and it aims to be “easy, friendly, and approachable” to its users. The app provides ease of use as well as a website platform which focuses on the fundamentals of investing.
The simple user interface is designed to make trading and investing with Robinhood quite a good experience. According to a Robinhood spokesperson, the average age of its consumers is 31, and roughly half of them are first-time investors.
Benefits & Drawbacks of Investing with Robin Hood.
- Cryptocurrency Trading : In 48 states, Robinhood offers 7 coins.
- Platform has no fees: the account is free to use, and users can create an account in minutes.
- No account minimum.
- Fractional shares are available: The ability to purchase fractional shares of a company’s stock.
- Very Simple to use.
- Limited in diversified investment products: There are no mutual funds or bonds, making it difficult to build a well-rounded portfolio.
- No retirement or tax-advantaged accounts : This is because Robinhood only provides taxable brokerage accounts; investors seeking tax-advantaged investing accounts such as Roth or traditional IRAs that are key to building long-term wealth must look elsewhere.
- Inadequate educational resources: A newsletter and a few articles on Robinhood’s website are the only educational resources available to new investors. In-depth reports are only available with a Robinhood Gold membership (at $5 per month).
- Gamified Platform : This trivializes the repercussions of trading and investing. Regulators have accused Robinhood of enticing new investors into “unnecessary trading risks” with features such as digital confetti to commemorate trades. (Prior to its IPO, Robinhood removed the confetti feature).
Fees Charged when Investing with Robinhood.
More information about Robinhood’s pricing can be found on its fee schedule.
|Commissions and Trading fees
||Stocks, ETFs, cryptocurrencies, and options: $0 (Fees may be levied on stocks traded on global exchanges via ADRs.)
|Minimum account balance for brokerage and trading services
|Brokerage and trading services, monthly account maintenance cost.
|Data fees, inactivity
|Wire transfers costs
|ACATs (automatic customer account transfer service), account termination fee
||There is no closing fee, however you will be charged $75 to transfer funds out of your account.
|Pricing for gold (in-depth research reports, Level II data, access to margin)
||For a period of 30 days (plus $1,000 in profit margin): $5 For $1,000 and up, the margin is 2.5 percent.
So Who is Really Trading or Investing with Robinhood ?
Robinhood was primarily appealing to relatively new investors who did not have a lot of money to invest. It’s a low-cost way to get your feet wet in the stock market since there are no trading and commission fees, account minimums, or account maintenance fees. It has enticed young traders, often with disastrous results, due to the low fees as well as usability to hook users.
Its customers start trading the riskiest finance products more frequently than consumers at other retail brokerages, but their inexperience can result in massive losses. Earlier in 2021, Robinhood decided to settle a wrongful death lawsuit stemming from the suicide of a 20-year-old user after seeing an erroneous net loss of $730,000 on the app. The main reason for this is its gamified investing approach, which makes it far too easy to trade frequently than usual.
As per a November 2020 study by behavioral finance experts, Robinhood users trade nine times more frequently than users of some of the other low-cost brokerages. Other studies have shown that passive investing, also widely recognized as buying and holding, builds more wealth over time than active trading decisions. As a result, Robinhood’s ease of use may end up working against you.
The Madness of Wallstreet Bets ( r/wallstreetbets).
WallStreetBets, or WSB, is a Reddit subreddit (r/wallstreetbets) where people talk about stock and option trading. It has become well-known for its colorful and profane jargon, as well as its aggressive trading strategies. Jaime Rogozinski founded the subreddit in 2012, but he has since been eliminated as a moderator by Reddit admins. The subreddit, which describes itself as “Like 4chan found a Bloomberg terminal,” is well-known for its aggressive trading techniques.
Their “No Guts No Glory” Approach, primarily revolves around wildly speculative, leveraged options trading not to be confused with binary options trading.
Participants of the subreddit are frequently young retail traders & investors who disregard fundamental investment methodologies and strategies, so their activities are frequently regarded as gambling.
The increasing popularity of zero commission brokers as well as mobile online trading may have contributed to the expansion of such trading trends. Members of the communities frequently see high-risk day trading as a way to quickly improve their financial situation and earn extra money. Some members will borrow money, such as student loans, to gamble on certain “meme stocks” that are popular in the community.
Dictionary of WSB Slang
This subreddit,is infamously known for its profanity and juvenile nature.If you decide to join this community, these are a few words that are commonly used.
- Members frequently refer to themselves as “autists,” “retards,” “degenerates,” and “apes”
- Stonks is an abbreviation for stocks.
- Gains or profits are referred to as tendies.
- Gay bears is a term that describes those who anticipate a stock to fall in value, as a term for stock shorts, or even as a general insult.
- DD is an abbreviation for “due diligence,” which refers to the analysis of potential trades.
- A bag holder is a shareholder who’s been left with completely useless stock shares.
- Diamond hands refers to those who have the strong willpower to keep a stock for extended periods of time regardless of the circumstances.
- A paper hand is someone who gets out of their position at the first sign of adversity.
Robin Hood’s Downfall ; The Gamestop Short Squeeze
On January 22, 2021, subscribers of r/wallstreetbets started a short squeeze on GameStop, significantly increasing their stock price. This happened shortly after a statement from Citron Research forecasting that the stock’s value would fall. By January 26, the stock price had risen more than 600%, and the high volatility ended up causing trading to be stopped several times.
A series of posts on the subreddit by user u/DeepFuckingValue aided in generating interest in the stock. Elon Musk tweeted a link to the r/wallstreetbets subreddit after GameStop stock actually closed 92.7 percent on Tuesday, January 26. Similar to GameStop, r/wallstreetbets users sparked a short squeeze on AMC on January 27. The official r/wallstreetbets Discord server had been banned on January 27 for “hateful and discriminatory content.”
The ban was not related to the ocurring GameStop short squeeze, according to Discord. Moderators claimed in an official statement posted to the r/wallstreetbets subreddit that their attempts to automatically delete content that violated the rules had been frustrated by the sheer influx of users, as well as criticized Discord for not providing tools required to take action to curtail hate speech on the server.
As a result, the r/wallstreetbets Discord server was been restored, and Discord staff have been reported to be assisting with moderation. The moderators made the subreddit private around 7:00 p.m. EST on January 27, prior to actually making it public again about an hour later. Inside one week of the GameStop short squeeze, this same subreddit had gained over 2.4 million new subscribers, whilst it had previously taken the subreddit 9 years to reach 2.2 million. The subreddit ended up having 9.8 million subscribers as of April 18, 2021.
A few days after the short squeeze, some subreddit users began to pay for billboards across the country depicting messages supporting r/wallstreetbets, which also included messages such as “buying” & “holding” GME shares, as well as “we like the stock” and joining the subreddit, labeling it as a “movement.” During Super Bowl LV, Reddit ran a five-second commercial celebrating the subreddit, declaring that “underdogs can achieve just about anything when we come together under a common area.”
How WSB altered Robinhood’s Features.
The wild behaviours of the members of Wall Street bets subreddit have really impacted and caused major feature removals in the Robinhood trading app over the years , some of these are like :
The Ban on Box spreads
This happened around January 2019, a user referred as u/1R0NYMAN sold a box spread, earning him a $300,000 credit that really should have earned him between $40,000 and $50,000 over the course of two years. He saw the trade as a way to make “risk-free money,” but he had no idea about the assignment risk.
Some of the options were exercised against him a few days later, resulting in a loss of more than $60,000; calculating from the initial amount in the user account, $5,000, the negative return on the trade was 1,832.99 percent.
As a result, Robinhood announced shortly after that it would no longer allow box spread trading. The user decided to withdraw $10,000 from the account prior to the positions being closed, and the brokerage is believed to have taken the majority of the loss, according to the news website MarketWatch.
The “Infinite Leverage” glitch
Around November 2019, a user known as u/ControlTheNarrative discovered a bug in Robinhood’s trading platform and used it to leverage his initial deposit of $2,000 all the right up to roughly $50,000, resulting in a leverage ratio of about 25:1.
He sold covered calls, and the credit he received emerged as liquid money on his account as a result of the bug.
He used the funds to purchase put options on Apple stock, resulting in a $46,000 loss, which was enormous in comparison to his initial deposit of only $2,000.
He uploaded a video of his live reaction to his loss to his YouTube channel.
Many other users attempted to take advantage of the glitch, dubbed the “free money cheat code,” before it had been fixed, with one in particular asserting to have opened a $1,000,000 position with a $4,000 deposit.
The Last Straw: Robinhood Restricts Trading
During the GameStop short squeeze on January 28, 2021, Robinhood, TD Ameritrade, E-Trade, and Webull restricted trade on their platforms of heavily shorted stocks such as GameStop, BlackBerry Limited, AMC, Nokia, and Koss Corporation.
Many brokerages, including Robinhood, claimed that the restrictions were imposed as a result of clearing houses increasing the collateral required to execute trades on high volatility stocks. Many community members have since expressed their displeasure with those organizations, particularly Robinhood.
Efforts by r/wallstreetbets users and others across the Reddit platform reduced Robinhood’s star rating for both the iOS and Android app stores to one star by January 28, though Google intervened to raise it to 2.2 (as of January 30) by deleting one-star reviews. Following that, class-action lawsuits against Robinhood for setting trading restrictions on their platform were filed.
It is possible to profit in Robinhood. Earning money on Robinhood is like making money on any other trading platform. Investors, on the other hand, should be wary of Robinhood. Typically, when investing in these platforms, you will be required to invest only an amount that you will not require in the near future, say five years. Even if you invest a tiny amount of your overall portfolio, say 5% to 10%, this is still very risky with Robin Hood because Robinhood has encountered regulatory fines, public scrutiny, as well as lawsuits in recent years.
The Securities and Exchange Commission (SEC) fined Robinhood $65 million in 2020 for misleading customers. (At the time, a representative stated that the agreement “relates to older practices that do not represent Robinhood today.”) The Financial Industry Regulatory Authority (FINRA) fined Robinhood $70 million in June 2021 for outages and misleading its customers. (In response, Robinhood stated that it had “invested significantly in improving platform stability, enhancing educational resources, and expanding our customer support, legal, and compliance teams.”)