On January 29, 2021 – in the midst of the historic Reddit Gamestop small investors vs. hedge fund “short squeeze” frenzy, more than 600,000 people downloaded the Robinhood trading app.
Despite being cast as the bad guy, new investors signed up for Robinhood in droves. The company’s zero balance requirement and low fee structure make it appealing to everyone.
Bloomberg’s headline read “Robinhood Traders Bash the App But Just Can’t Leave It.” The classic hate it, but won’t quit it, scenario. Sounds like a lot of people and their jobs. We push past our reservations, reasoning that a better option just isn’t out there. There is certainly no shortage of options for commission free trading. Options in 2021 include InteractiveBrokers, Sofi, Ally Invest, Webull, TD ameritrade, Merrill Edge, You Invest by J.P. Morgan, Vanguard, Fidelity, and Charles Schwab. And the list goes on.
Robinhood = A Disruptive Innovation
Robinhood, founded in 2013, is a disruptive innovation. Like Uber disrupted the taxi industry, and Netflix disrupted cable, Robinhood brought no account minimums and commission-free trades to everyone. Want to buy one stock of anything? It’s possible, and easy, with Robinhood. Before Robinhood, you needed a broker to buy and sell stock. The process was complicated, certainly not worth going through to buy a single stock of a $3 stock.
When Gamestop exploded, people decided they wanted to ride the stock to the moon, googling “how to buy stock” more than ever before. Robinhood seemed like the way to go – then Robinhood decided to stop the frenzy – halting and/or limiting trading for GameStop, AMC Entertainment, BlackBerry, and Nokia. These stocks were all part of a short squeeze, a term I wasn’t familiar with until last week. Robinhood’s reasoning for their actions? It needed to restrict trading until it could increase its collateral with the Depository Trust & Clearing Corporation – the DTCC.
In a blog post on their website, Robinhood stated the move was a risk-management decision and was not made on the direction of the market makers we route to. Robinhood’s user agreement also states “I understand that Robinhood may, in its discretion, prohibit or restrict the trading of securities, or the substitution of securities, in any of My Accounts.”
Robinhood is the O.G. Uber of Investing
With all this reasoning, does the hatred of Robinhood hold weight? It seems that despite the pending class action, investors are sticking with Robinhood because it’s a simple and easy platform, especially for those looking to invest in Elon Musk’s much talked about crypto Dogecoin which I invest in and have blogged about previously.
When Robinhood came under fire at the end of January, there was a push on the socials to “Come over to Webull.” If we’re calling Robinhood the Uber, maybe Chinese-owned Webull is the Lyft, the next best. Webull was founded by Alibaba Group Holding Ltd. alum Wang Anquan. Nerdwallet likes Webull for its “impressive array of tools for active traders,” but lists its “thin educational support” as one of its cons. Webull does have crypto, but not Dogecoin. Whether or not that will change, only time will tell.
Bloomberg has theorized that reliable investor data and a user-friendly interface seem to be prioritized over concerns about political friction. Perhaps investors were not concerned having already justified the TikTok app. I joined Webull and found it to be much different than Robinhood.
While Robinhood offers a free stock (disclaimer, I get one too, when you sign up), Webull offers two free stocks (subject to change – current February 2021 promotion), plus another two stocks if you open an account with $100. My free stocks were ADT (estimated value $9.60) and Genworth Financial – GNW (estimated value $2.88). Not terrible, when you don’t pay anything. When I signed up for Robinhood in 2019, my free stock was 1 share of BTG, at the time, valued at 3.25, now worth $5.04.
Robinhood – Oversimplification and Gamification?
Robinhood has been criticized for what it does and what it doesn’t do. The “investing for everyone” message and commission-free trading encourages frequently buying and selling. Some financial advisors have cautioned that Robinhood is more like a gambling app to an actual investing app. From emoji-filled notifications about stock positions to digital confetti “exploding” in the app after a user makes their first trade, the company has encouraged frequent trading – and risky behaviors.
According to the New York Times in the first quarter of 2020, Robinhood users traded:
- 9 times as many shares as E-trade customers
- 40 times as many shares as Charles Schwab customers.
Why is it that people are buying and selling so much more with Robinhood? Is it really the push notifications and emojis? Is it really the confetti when you make a trade?
I have a Charles Schwab account, which I got after USAA sold its investment business to Schwab and I got emails and snail mail informing me of the transition (the sale was largely applauded by USAA members) And because I like mutual funds, like my USAA Cornerstone Moderately Conservative Fund UCMCX, and my USAA Cornerstone Moderately Aggressive Fund (USCRX) I kept my account with Schwab.
The Charles Schwab platform has a much different – and more serious – feel than Robinhood. It does feel like you’re logging into a bank website. Whereas Robinhood has “Stocks”, Charles Schwab calls its stocks “Equities.” In keeping with the trends mentioned by the New York Times, I’ve traded exponentially more in my Robinhood account than I have my Charles Schwab account, home of my mutual funds and Starbucks stock. I am not really sure why, but the simplification and ease of use definitely don’t hurt.
What’s Next: Robinhood’s Super Bowl Ad, IPO, and More
The horizon is bright for Robinhood, and for investors in general. Robinhood’s 2021 Super Bowl commercial was the first for the company, sending a message that people do not need to become an investor, because they were “born one.” According to Business Insider, Robinhood purchased the airtime in December.
Discussions were had about pulling the spot in the aftermath of recent media attention, but the company is soldiering on with their mission of investing being for all of us. As an interesting sidenote, Robinhood is planning a Q2 IPO, and rumors are already swirling that revenge from the Reddit army could be coming.
Alternatives to Robinhood
If you want an alternative to Robinhood, consider your investing goals. Are you looking to buy stocks, ETFs, crypto, mutual funds, options? Webull is a good option for stocks – their free stock offer is enticing. Besides Webull, you have many options. Charles Schab, of course. But they don’t have Dogecoin. If you’re looking for Dogecoin and want to stay away from Robinhood, consider exchanges Binance or Kraken.
If you have a preferred alternative to Robinhood, share your thoughts in the comments! I’d love to hear them.