Should I Use Robinhood to Buy Individual Stocks
Picking individual stocks is a fun way to learn about investing. Investing apps like Robinhood have grown in popularity and encourage stock trading. But can individual stock picking actually help you achieve your goals and build a reliable strategy? Let’s review the awesome and less awesome aspects of individual stock picking and the Robinhood app.
*Robinhood Update 3.2.2020*
If you plan to be an active trader, a recent event occurred during one of the largest trading days in recent memory that may cause you to avoid Robinhood.
On March 2nd, 2020. The stock market rebounded substantially from the previous week’s significant drop. Unfortunately, Robinhood users were unable to make trades for what is being reported to being the whole day. Many users are furious. You can definitely search for additional articles, but here is a large thread from Tweets of upset users.
Pros of Using Robinhood
Access for Beginners
If you identify as being a beginning investor, then Robinhood may be an interesting option. Robinhood’s target audience has always been beginners and their user experience is pretty intuitive and mobile app friendly.
The world of investments is complex, but the Robinhood app does an unbelievable job of simplifying the information they throw at you. This may not always be a good thing because if you are like me, I have questions and I want to be able to research and analyze in-depth, especially when I don’t have access to a dedicated representative.
Related Strategy Guide: How to Build Wealth
Although Robinhood offers a Gold membership starting at $5, you can access basic features and begin trading for free. How can they offer free trades? Robinhood receives payment from lending out your stocks and cash, kind of like how banks hold your savings and then offers Mortgages for higher interest rates. That doesn’t necessarily cost you, but it’s important to know.
Where there may be a hidden cost is in the price execution, which is just a funny way of saying the price you pay for and sell your shares. Robinhood is paid by others based on who they buy and sell your shares to and from. If you receive worse pricing than you would at another investment company than this would definitely be considered a hidden cost. This information isn’t shared openly by Robinhood or many of the other investment companies, but it’s safe to say that free really isn’t free.
If you decide on Robinhood’s Gold membership and end up using the margin feature then you are essentially borrowing money, which will accrue interest in addition to the monthly $5 charge. Take caution and keep reading to see how this could be a big con.
I don’t know about you, but I am definitely a hands-on learner. Robinhood offers you the ability to have this learning opportunity with a small amount of money and at-least no transparent fees.
I wouldn’t recommend hands-on learning for a significant amount of investment, initially. You are after all taking some degree of risk when you choose to invest, especially with no or very little previous knowledge or expertise.
Robinhood provides educational resources to help you along the way and of course, there is always Google. Don’t just shoot from the hip when it comes to building a strategy. Research and educate yourself along the way and don’t just rely on your experience because it is biased and very limited if you are a beginner.
Cons of Using Robinhood
Lack of a Plan
Investing is fun, but without a plan, there is no predictable process. If you let your investment style become chaotic and irrational it’s only a matter of time before you shoot yourself in the foot.
I view investments, stocks included, as just tools to help my clients achieve their goals. When there is nothing real or important tied to your investments then your emotions can get the best of you during volatile times. If you change the frame to “how does this decision impact my retirement?”, it takes the focus off the investment and on the outcome, you expect and hope to support.
Investors as a group, tend to underperform in the stock market and much of that can be attributed to thinking short-term.
When there is no cost to trade and you are excited about investing, then you may be placing trades more frequently than is healthy. Unless you are a professional, high-frequency trading rarely pays off.
Imagine you pick a tech stock that you heard is going to be amazing, but a news report comes out that scares most investors and the value falls 30%. Your fight or flight instinct kicks in and within 10 seconds you hit the sell button. The next day the CEO addresses the concerns with solutions investors like and it rebounds back to the original price within a few months.
Your Stock Can Lose Value!
Hopefully, that is not a shock to you, but for many that are new to investing it is when they first experience a real price drop. Stock investments can be volatile and you need to take a long-term approach to keep you from making knee jerk reactions that cause you to exhibit signs of poor investment behavior.
Your perfect stock pick can lose value for many reasons:
- The company had a bad quarter.
- The company’s outlook for the future is not as bright as previously expected.
- The economy is retracting.
- Lack of confidence in management.
- Scandals or other breaking news about the company.
Margin Increases Cost and Risk!
If you sign up for Robinhood’s Gold Membership, then you may incur additional fees if you use margin. Margin is when you borrow funds to make investments. This allows you to purchase more shares of stock than you could normally afford.
Your investment would have to do better than the cost of the funds you borrowed in order to come out ahead.
If your investment loses value, those losses are magnified by the margin fees and the amount borrowed that also lost value.
If you are in your late 20’s or even in your 40’s and you are just approaching investing for the first time, think about why you’ve avoided investments so long. Sure, you may have not had surplus income, but many surveys indicate that Millennials were mentally impacted by the last recession.
Before starting Level Up, I also had multiple conversations with baby-boomer pre-retirees who panicked during the last recession and never recovered. When I probe for additional information, they all had similar stories.
They went to cash and were too scared to get back in.
They did the worst thing at the worst time. They sold low.
Should You Use Robinhood?
Investing apps like Robinhood may be a great fit for you if you are just starting out and are trying to get a feel for investing. Try to stay level-headed though because it is very easy to assume that recent successes obviously means you have the golden touch and that your past success is indicative of skills. Sure you may develop skills over time, but early on it’s more likely to be attributed to short-term luck and favorable events that are outside of your control.
Limit your risk by not putting all of your eggs in one basket and have a great understanding of your risk tolerance.
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Lucas Casarez is a Certified Financial Planner™ Professional serving tech professionals virtually out of Fort Collins, CO