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Dealer beware: Learn this earlier than shopping for shares with funding apps like Robinhood

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As social media has piqued interest in a number of stocks that have recently been cut by hedge funds, Robinhood and similar low-cost trading and investment platforms have served as a major tool.

During that saga, even after some of those platforms temporarily banned the buying and selling of stocks like GameStop, Robinhood saw record growth of -0.47%, according to an analysis by JMP JMP..
On Friday, retailers downloaded the Robinhood app more than 600,000 times, well above the record last March.

Robinhood isn’t the only trading or investment platform that has seen customer growth recently, however. Competitors like Webull and SoFi saw similar numbers of app downloads last week, according to JMP.

“Although there is an intense focus today, we believe that companies that provide their customers with the best experience, the most innovative financial management tools and services, and competitive pricing will continue to grow the fastest in the industry over the long term,” he said JMP Securities analyst and business development director, Devin Ryan, and vice president of equity research, Brian McKenna, said on the Research Note.

Here are five considerations that would-be day traders and investors should make before using an app to enter the markets:

Investment apps can be great learning tools when used properly

Some financial experts say that platforms like Robinhood, Acorns or Stash can be great learning tools for beginners.

“Anything that democratizes saving and investing for your future is a good thing,” said Scott Hammel, certified financial planner with Apeiron Planning Partners, a Dallas, Texas-based consultancy. “When a robo-platform lowers traditional old-guard barriers and allows consumers to feel more in control, they are more involved in their financial lives.”

Because of their inexpensive and easy access, people will use these apps as a platform to learn more about investing or trading stocks. And because they’re popular with inexperienced investors, many of these platforms offer their users educational content to help them learn the basics – especially in volatile market phases.

For example, Stash has posted posts explaining the concept of a “short squeeze” in the face of GameStop noise, and the company’s founders hosted a live Instagram discussion to answer customer questions. Additionally, when clients look for volatile stocks like AMC, they will receive in-app pop-up messages showing the risks involved.

“While we believe everyone should have access to investment, we do not advocate day trading and have never promoted it to our clients,” said a Stash spokeswoman. “We warn against speculating stocks and timing the market. That’s why we only worked with four trading windows throughout the day.”

Other digital investment platforms limit the ways customers can control their investments. For example, the enhancement will not allow users to trade individual stocks. Instead, clients are investing in a diversified portfolio of ETFs that are tailored to their needs, a spokeswoman said.

“One of the biggest problems is that newer investors see a ‘hot’ stock but don’t fully understand the implications of investing in it and taking serious risk,” said Dan Egan, vice president of behavioral financing and investing at Betterment.

These apps can lead to more risky behavior if you’re not careful

Many have compared the ease and accessibility of platforms like Robinhood to “Vegas in your palm”. This is especially true in the past few weeks when retailers have made risky bets on companies like GameStop.

“This type of trading is closer to gambling than investing,” said Hammel.

However, studies have shown that investors can inadvertently engage in riskier behaviors when buying and selling investments through mobile apps.

A recent working paper published by the National Bureau of Economic Research found that using a smartphone to invest encourages buying riskier assets. People who traded on their cell phones were 67% more likely to buy “lottery stocks”.

Part of the problem is that trading apps give you instant access, said Joe Sallee, managing partner and financial advisor at Bay Capital Advisors in Virginia Beach, Virginia. “This allows investors to make trading decisions without looking at the full picture of why they are buying or selling a stock,” Sallee said. “Too many people make investment decisions based on their emotions rather than the fundamentals of a company.”

To make matters worse, the riskier behavior of smartphones is transferred to other platforms. The NBER paper found that the investors surveyed – who averaged 45 years old – were also looking for risky investments on more traditional platforms.

A Robinhood spokesperson said Robinhood was designed to be “mobile and intuitive, with the aim of making investing more familiar and less daunting for an entire generation of people previously cut out of the financial system,” added that the company’s focus is on reducing investment barriers.

Remember, $ 0 commissions can be offered at one price

Nobody likes to pay more when they can pay less. So it’s understandable why $ 0 commission fees can be so noticeable at Robinhood – or a host of other trading platforms.

However, proponents of investor protection say the cost may still be there, if not seen.

Broker-dealers owe their clients a “Best Execution Duty”. This means that they have to try to offer their customers and users the best conditions for a trade. Price and speed are two important factors, but not necessarily the only ones.

For retail investors, it boils down to two things, said Tyler Gellasch, executive director of the Healthy Markets Association, a nonprofit association of pension funds committed to investor protection. Best execution is about getting a trade “fast and at the best price,” he said.

In December, the SEC announced a $ 65 million fine on Robinhood for allegedly failing to do this and not clear to customers about how she made her money.

When the fine was announced, Robinhood said the behavior investigated had to do with “historical practices that Robinhood does not reflect today”.

But Gellasch and others say the larger industry-wide problem has not gone away.

The duty of the best possible execution towards the customer can collide with the source of income of a broker from the so-called “payment for the order flow”. Here, the companies that actually do the business pay brokers for the privilege of doing the business – and this could lead to brokers putting their own financial interests before their clients.

“The SEC and FINRA inexplicably allowed payment for the order flow to continue for years,” Gellasch told MarketWatch.

According to Barbara Roper, director of investor protection for the Consumer Federation of America, it could be difficult for the average investor to provide information about the best execution obligations and their specifics. So it might be important for regulators to step in, she said.

They will try to sell you other financial products

In the past few years, most digital trading and investment platforms have adopted bank-like accounts. In most cases, the platforms have partnered with banks to offer the accounts. For example, Stash has partnered with Green Dot Corp to provide FDIC-insured banking services.

These accounts can be naturally engaging. Most have attractive interest rates – when Robinhood revealed its cash accounts (after a criticized initial announcement), the accounts offered an annual percentage return of 2.05%. Today the APY has fallen with interest rates and is now around 0.3%, still well above the average interest rate for savings accounts at major banks.

However, some companies have taken other approaches. Stash’s accounts are non-interest bearing. Instead, the investment platform offers debit rewards with which customers receive a fraction of the shares in individual stocks, depending on where they spend their money. So if you spend money on Amazon AMZN, -2.00%,
For example, you will be rewarded with fractions of Amazon shares.

However, these platforms are not offering these accounts out of the kindness of their hearts. Bank accounts can be a treasure trove of customer data – they provide insight into people’s spending and saving habits, and can help apps improve their investment opportunities.

Also, bank accounts tend to be “sticky,” which means that people are reluctant to open and close bank accounts on a regular basis. So an investment platform that tracks a bank customer could be less worried about moving their money elsewhere.

The catch for consumers is that these bank accounts may not be suitable for their financial needs. From a savings rate perspective, several online banks offer savings accounts with higher returns than these companies say, according to Bankrate.

If you’re not happy with your service, you may have trouble taking an app to court

Many retailers have been in an uproar over Robinhood’s decision to restrict trading in stocks popular on Reddit. And some chose to pursue class actions against the platform. However, it’s not clear if they’ll even have their day in court.

This is because Robinhood includes an arbitration clause as part of their customer agreement. “By signing an arbitration agreement, the parties agree that: (1) All parties to this agreement give up the right to sue each other in court, including the right to a judicial proceeding by a jury, except as provided in the rules of the arbitration agreement Arbitration forum in which a lawsuit is filed, ”the agreement says.

When a case is resolved in arbitration, the documents are not filed publicly and there is no jury to judge. Some have argued that the process benefits businesses, although company officials argue that it is fair and efficient.

In any case, arbitration clauses are extremely common. “I’ve never seen a company that didn’t have one,” said Samuel Edwards, partner at Shepherd Smith Edwards & Kantas in Houston and past president of the Public Investors Advocate Bar Association.

In fact, both Acorns and Stash have arbitration clauses as part of their service contracts.

Customers can try to circumvent arbitration clauses by filing a class action lawsuit. However, you must first convince a judge not to decide to send the case back to arbitration instead.

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