How Robinhood and Coronavirus created a perfect storm for young new investors

By Hannah Goldman. Published at Oct 16, 2020, in Features

While market volatility has evidently been beneficial for long-term investors, it has also proven to be a luring incentive for new entrants to the trading scene.

Robinhood, a US brokerage service app, has attained 13 million users through its zero-commission offering and attractive simple design, leading the way against app-first competitors such as Dough and Webull.

Founded in 2013 by Vladimir Tenev and Baiju Bhatt in Fintech fuelled Silicon Valley, central to Robinhood’s success is its technological grounding. The tech company has uniquely created an efficient and frictionless interface, essentially ‘gamifying’ this once mystifying industry and encouraging use from the masses.

Offering a large range of investments such as stocks, options and cryptocurrencies, Robinhood primarily earns their revenue from back end payments known as order flow, which they sell to professional traders who profit from being on the other side of the trade.

Much of Robinhood’s popularity arises from its mission to ‘democratise the financial system’, making entering these markets easy, fun and accessible. And it is safe to say their app has done exactly that.

The pandemic has seen a surge in enthusiastic first time share market investors, with Robinhood outperforming competitors by adding over 3 million new customer accounts in 2020 thus far, and in June having a 4.3 million daily average revenue trades.

September saw the fintech giant’s 4th major venture capital investment this year, raising $460M and bringing their valuation to $11.7B.

Perhaps most remarkable is the fact that Robinhood has now become a general term used to describe the movement they have created. A host of other companies have emulated their service offering, essentially normalising zero commission trading and millennial focused marketing.

Who is using it

Users have been drawn to download Robinhood for its simplicity and ability to begin trading almost instantaneously.

Particularly, the app (and those like it) has been most popular with millennial retail traders, essentially welcoming a whole new generation into the market.

Whilst some critique the company’s marketing for encouraging young, inexperienced investors to start trading large amounts, there is no doubt that Robinhood has empowered a new wave of young investors to have a say into how they invest their money.

Why Robinhood trading rose in popularity

But what caused this new wave of young investors to enter the scene? Unmistakably, COVID-19.

The pandemic meant people were spending more time online than usual, and the stock market had fallen so much in value during troughs that it finally felt more attainable for the general public.

Particularly for professional classes who have been forced to work remotely, the absence of leisures such as entertainment and discretionary travel, along with record high stimulus measures, meant that many were left with the combination of excess cash and excess time.

Indeed, this meant that many millennials could turn attention to equities investing for the first time.

Robinhood has a median user age of 31; this age group has only seen upward market movements since 2009, imparting them with an unbridled confidence entering this market, which has long before held a stigma of being risky and not worth amateur attempt.

The pandemic created an environment which practically eliminated all barriers to entry and did so during a time of epic return for the stock market.

Not all smooth sailing

As a fast-growing Fintech company, Robinhood’s success has not come without a host of challenges and disruptions.

Central to the app’s controversy is it’s ‘game’ like design, which is believed to over simplify large and complex trades. Many are arguing it is throwing new investors into precarious, and often detrimental waters.

However, a Robinhood spokesperson responded explaining “we don’t agree that Robinhood gamifies the market. Robinhood is focused on delivering a simple and engaging mobile-first experience that makes investing accessible, easier to understand, and more personal.”

Indeed, the dark side of Robinhood was revealed in June when a 20-year-old user committed suicide after seeing a $730,000 negative balance in his account. This tragedy caused upheaval, and emphasised that allowing uneducated users to trade with complicated derivatives such as margin accounts was not just a legal concern, but also an ethical one.

Robinhood has since updated the platform to ensure less misleading information, limited access to complicated high-volume trading and improved customer service.

Yet, the app is still catching the attention of regulators, who say that Robinhood’s addictive building business model leaves users unprotected and vulnerable.

Robinhood’s future post COVID-19

Despite ample controversy during the pandemic, Robinhood has proved to be a forceful disrupter in this industry.

Their core value of ‘participation is value’ has evidently rung true with their millions of loyal users, and this wave of inclusion is predicted to stay.

Analysts predict a lasting cultural change caused by the technological comfort people now have in trading; one that will persist long post the pandemic.

Robinhood is now extending their offering to other areas of cash management, displaying the intention to build even stronger customer relationships, driving growth and loyalty regardless of emerging competitors.

Nonetheless, if their focus is now on longevity of the customer relationship, we believe it is in their best interest to educate and prepare users for the eventualities of inevitable market corrections.

End note

Robinhood has undoubtedly paved the way in democratising investing in the form of a unique digital experience, one which has certainly proved to be no short-term fad.

Whilst the company announced that it had selected Australia as their first international market launch in 2015, 5 years later it has yet to arrive, allowing leading platforms like CommSec to breathe a sigh of relief.

But regardless, the stock market phenomenon which Robinhood triggered has certainly landed down under. Emerging market disrupter ‘Superhero’ has recently entered the Australian market, undercutting all market fees at $5 and being dubbed ‘Australia’s Robinhood’.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!

X