Are Stock Trading Apps a Boon for New Investors, or Are They Too Risky?

In early 2020, shares in the US video game store GameStop cost just $3.25 each. One year later, they exploded in value, soaring at $482 each. This astronomic surge in value was attributed to armchair traders taking to online trading apps in droves. Their entertainment options severely curtailed by the Covid-19 pandemic, this throng of fledgling traders organized themselves via internet forums like Reddit, determined to outwit the multimillion-dollar hedge funds who had bet against the chain and were hoping to profiteer on its decline through short-selling.

The phenomena culminated in billion-dollar losses for some hedge funds, with some prudent (and in many cases, lucky) newbie traders cashing out in the nick of time, just before the stock’s value slumped. These lucky ones reaped some impressive returns.

Of course, not all amateur investors are so fortunate playing these stakes. Investing always has an element of risk. But today, technology is democratizing access to retail investing. Trading apps allow people without much money or know-how to start playing the stock market on their own. However, are these apps providing too much of a good thing?

A Senseless Tragedy

Last year, the death of Alexander Kearns, a University of Nebraska student, made headlines. Alexander had found himself stuck at home through much of spring 2020. He spent his unexpected free time learning as much as he possibly could about investing and buying and selling stocks online.

What no one realized was, trading through the Robinhood app, Kearns concluded that he had lost $730,000 when the app showed him a negative balance of that amount, restricted his account, and sent an automated message demanding a $170,000 payment in a few days’ time. Unsurprisingly, Alexander panicked — he had no idea he had even risked that much. The number later proved to be incorrect, due to the nature of his trades, but he never realized this.

With no customer service line to get direct help, he sent several emails to the Robinhood support desk, begging someone to explain to him exactly what had gone wrong. He received canned “Thank you for reaching out!” messages.

Overwhelmed, confused, and believing he had lost almost a million dollars, he took his own life that day.

Soaring Interest in Trading Apps

Alexander’s story is heartbreaking and tragic, but thankfully uncommon. However, his initial situation was not so different from millions of Americans. So many people have been stuck at home through much of the pandemic, and many have tried their hand at stock investing, lured by the incentive of free trades on apps like Robinhood.

Online brokerages like Fidelity, Charles Schwab, and TD Ameritrade all reported an uptick in new customers throughout 2020. Robinhood saw its client base increase by 30% in early 2020, rising from 10 million to 13 million, an increase far beyond its shareholders’ wildest dreams. With a median user age of 33 and many much younger, the app seems to have major appeal with a younger generation.

Robinhood has done much in terms of making stock trading more accessible, especially to those without much money to invest. New users even receive a free stocks when they sign up. If they cannot afford to buy expensive stocks, like that of Amazon, Tesla, or Apple, the app enables them to buy in fractions.

Proponents also argue that Robinhood and similar apps demystify the world of stock trading, increasing financial inclusivity by opening up Wall Street to all. Other experts advocate for stock trading apps as an educational platform for getting young people interested and involved in investing, making them savvier about money, and encouraging them to learning more about financial products.

Inherent Risks in Trading Apps

The nature of trading apps has many experts wary, however. They worry that Robinhood and similar apps gamify investing too much — and this can be particularly intoxicating to younger, less experienced Millennial and Gen Z investors raised on video games. Losing in a video game may not result in any true consequences, but making a bad bet on a stock can lead to real-world financial disaster, especially for people of less means.

Timothy Welsh is the CEO and President of Nexis Strategy, a company specializing in the wealth management industry. Speaking to NPR, he explained that platforms like Robinhood encourage members to complete trades. Welsh likened it to reaching the next level on a video game, with users experiencing a rush of endorphins as they make trades.

Other critics point out that these apps often barrage users with a stream of push notifications to cajole them into making a move. When a Robinhood user completes their first trade, digital confetti flutters down the screen, for example. In response to criticism of these behavioral nudges, a spokesperson for Robinhood stated that features within the app are intended for informational purposes only, rather than serving as recommendations to buy or sell a security.

In addition, apps like Robinhood also allow users to participate in margin trading — in effect, using borrowed money to carry out trades. For the sophisticated investor, margin trading can make sense. But given that the typical trading app user has less money and less experience, margin trading can be particularly risky and lead to big losses.

For its part, Robinhood has made changes in the wake of Alexander Kearns’ death, such as adding more customer service agents and implementing design changes in the app to clarify certain types of trades.

There is no doubt that stock trading apps like Robinhood are enjoying widespread popularity and that they can be used responsibly, but new traders should still proceed with caution.