In the midst of the worst pandemic since 1917, a new trend of investing has risen on Wall Street. Millions of individuals, forced to shelter in place as COVID-19 scourges across the country, have turned their sites on the stock market for a number of reasons, not all of them good.
These young, Robinhood day-traders get their name from a start-up brokerage firm called Robinhood Financial, LLC., founded in 2013. It offers commission-free trading, with no minimum investment account required. Robinhood was the first to offer these benefits, and younger people without a great deal of assets embraced the firm. Today, most discount brokers have followed Robinhood’s lead.
Over the course of the last several years, more and more Millennials and others opened accounts. They were attracted by the no-frills account applications, the firm’s ability to execute swiftly, and the ease of understanding the trading platform. As a result, millions of youngsters began to dip their toe into the waters of investing.
This new breed of trader has little interest in learning the lessons of fundamental analysis and long-term investing. Why should they, when their introduction to investing occurred in the midst of the greatest bull market in modern history. What’s to know? You buy a stock and it goes up–easy, peasy.
At the same time, over the last ten years, we have witnessed the rise of short-term trading, which morphed into computer-driven trading, and blossomed into today’s second-by-second algorithmic trading. These traders have little use for earnings, assets, liabilities, or future prospects. All they need is a story, or a headline to buy or sell.
The trend took on a whole new dimension this year, when the country shut down in order to contend with the COVID-19 pandemic. As millions of workers were shut in with nothing to do but stay at home, many turned to the stock market and Robinhood trading. And as luck would have it, the government’s decision to provide a stimulus relief check of $1,200 to Americans making $75,000 (single) or less and under $150,000 (married), provided a slug of “found money” to put to work by these newly-minted traders.
I can understand their reasoning. Furloughed at home, worrying about how to make ends meet, why not take a chance on the stock market?
What’s more, the $600/week extra tacked on to their unemployment paychecks as part of the stimulus relief program could be used for the same purpose. And thus, was born the Robinhood Raiders.
It does not matter that they may lack a basic understanding of products such as options, leveraged exchange traded funds (ETFs), or margin accounts; they trade and profit anyway. Who can argue with the fantastic performance of Tesla, the FANG stocks, or the parade of penny stocks that continue to double and triple on a weekly basis?
Some on Wall Street are convinced that behind the surge of aggressive trading is an entire army of gamblers who have turned to stocks since their normal outlets of sports betting, horse racing, and other gambling past times have closed down due to the virus.
Robinhood has added more than three million trading accounts this year and now has over 13 million in all. The median age of the customer is 31 years old. In the first three months of the year, according to data published by the New York Times, Robinhood users “traded nine times as many shares as E-Trade customers, and 40 times those of Schwab customers. They also bought and sold 88 times as many risky options contacts as Schwab.”
One might be tempted to say that all these newbie traders will ultimately end up losing money and abandoning the markets to their betters. Many say that will happen. I am not one of them. These youngsters have grown up in an age of financial crisis, Bitcoin debacles and China trade wars. They are used to volatility, both the good and the bad kinds. My hope is that they prosper, make a lot of money, and continue to participate, hopefully, at some point at a less frenetic pace.