Is the Robinhood App Dangerous?

Could the Robinhood Trading app end up burning the very people it was created to help?

If you haven't heard of Robinhood it is a trading app that allows investors to trade stocks online with no trading fees or account minimums. In just a few short years the apps popularity has resulted in an over 11 billion dollar valuation. So this is a success story right? Super successful app that empowers newbie investors, with no fees, to invest just like the wealthy people.

If we explore history, we see that it is always the little guys who get burned while the big companies make out like bandits. Currently the Robinhood platform is used mostly by inexperienced, younger investors. The average age of a Robinhood investor is 33, and more than half of their users have never invested before. Younger investors are often under the illusion that stocks always go up. They have not yet experienced a downturn. We've covered that fallacy previously on the channel and Ill place a link at the end of the video, but the fact remains that markets can and will drop, and often remain stagnant for many years. Remember 2000 tech bubble, remember 2008, a correction is not something new, and we are due for a big one.

Most experienced investors understand patience is the key to making money. It's been proven the more you trade, the more you are likely to lose. But the fact that trades are free on Robinhood, incents investors to trade often. In Q1 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times more than Charles Schwab customers. They also bought and sold 88 times more risky options contracts as Charles Schwab traders.

Admittedly, some people are making money, its not that hard to make money in a bull market. So everyone is a genius, and making riskier and riskier trades on margin. If you scroll through Reddit you see many traders actually have no idea of even the fundamentals of trading. A sad scenario recently saw a young trader take his own life because he thought he had somehow lost over $700,000. Apparently he likely had not, but he misread the stats on his account.

Once you make money trading stocks it is hard to step away. We push aside any evidence to the contrary and angrily denounce anyone who suggests a drop is imminent. Make mo mistake that stock trading can become an addiction, no different than the dopamine rush from gambling. Robinhoods very platform is designed to more like a game and rewards trading with fun graphics like confetti.

Robinhood is tight lipped on how they make money, but the fact is that the biggest revenue source for them, is payment for order flow, PFOF in other words selling their customer trades to giant firms like Citadel, and they sell these trades for many times the industry norm. You can see here TD Ameritrade, E-Trade and Charles Schwab all sell their trades but only receive a tiny fraction of what is paid for Robinhood trades. Why is that.

Selling customer trades is not illegal,some think it should be, but at minimum it can create conflicts of interest making brokerages betray customers for larger kickbacks. But Robinhood is the good guy, they would never do that, right? (image of lawsuit)

And if they did they would disclose the fact they were doing this right? (Image of 10m fine)

Robinhood initially didnt disclose this and are now potentially being fined for 10 million. They were also fined for the way they were handling trades. But does an 11 billion dollar company even feel a 10 million dollar fine?

It'no secret that many traders, even in this bull market have taken big risks not really understanding what they were doing, and lost a lot of money. Robinhood also seems to go down often leaving traders unable to trade at key times. Not sure if the angry traders and money losers have anything to do with Robinhood head office installing bulletproof glass.

Robinhood also has a referral program, if you tell other bros how much money you have made and invite them, you'll both get free stock! Of course nobody loses money then lies to friends trying to recoup some of the money they were saving for a car.

At the moment, Warren Buffet is sitting on cash, the Tiger 21 poll of high net worth investors show they are increasingly sitting on cash. Robinhood investors are pretty much all-in with record number of trades and new members. Remember holding cash inst forever, its simply there to re-deploy when the market retreats. Newbie investors think that holding cash is a sign of fear, but it takes a lot of courage to pull out of a bull market and wait for the deals. Its almost impossible to exactly time the peak, but it is very possible that we will see the drop in the not too distant future.

Moral of the story, If a service is free, you are the product. Be safe, dont bet more than you have to lose. And no trading systems, courses and subscriptions don't work long term.
Market Crash? https://youtu.be/ykC_nxzPA_o