Should You Use Robinhood?
Robinhood has been in the news a lot lately. It is a financial app that allows you to invest your money using your smart phone.
There are several things to like about Robinhood. First, you can buy and sell stocks, ETFs, options, gold, and cryptocurrencies without having to pay a commission.
When I started buying and selling stocks almost thirty years ago, the commission was $28 to buy and $28 to sell. So the ability to trade for free is great. Robinhood is not unique in this though. All the major brokers are commission-free.
Second, you can invest any amount of money when investing. This comes in handy when you want to invest in a company, but can’t afford to buy a share of stock yet. For example, let’s say you wanted to invest in Apple. At the time of this writing, Apple’s stock is selling for $130/share.
If you only had $50 to invest, Robinhood would allow you to buy a fractional share. You would tell Robinhood to buy Apple with your $50, and your account would soon show that you owned .384 shares of Apple.
The best thing about using Robinhood for many people is probably how easy it is to use. Want to see your account balance, check stock prices, or make a trade? Just get your phone out.
It’s easy, quick, and convenient.
Unfortunately, that’s the problem. All of these convenient features are exactly why I would recommend most people to not use Robinhood.
Studies have shown that one of the best ways to build wealth for retirement, which is the main reason many people buy stocks, is to buy and hold for a long time. This is called investing.
If you’re constantly buying and selling stock, you’re not investing- You are trading. People do make money trading, but it is much more difficult to come out ahead.
Buying and selling stock on a regular basis, instead of buying and holding for years, not only results in having to pay more in taxes, it also increases the chance that you will lose money.
See, Robinhood makes it so easy to buy stocks on a whim without serious consideration. Maybe you’re shopping at a sporting goods store and happen to notice that each person in line in front of you is buying a pair of shoes made by Nike. You think, “Well, if everyone is buying Nike’s shoes, the company must be doing well. I should buy a few shares.”
So when you get to your car, you whip out your phone and buy some.
But was that a wise move? Do you know anything about Nike’s current business? Is it actually earning a profit? Are its sales trending up or down? Did COVID-19 impact its sales? Does the stock pay a dividend? What is its P/E ratio?
Those are just a few questions you would want to ask before buying Nike’s stock. Buying stock without doing proper research is not a good idea.
If you’ve never invested in stocks before, I recommend you do not use Robinhood. Its app makes it just a little too quick and easy to buy and sell stocks.
To be fair, the large online brokers also have mobile apps. If you have an account with one of them, you may still be tempted to trade instead of invest. But these companies- TD Ameritrade, Charles Schwab, and Fidelity, for example- don’t push the mobile app like Robinhood does.
So if you want to dip your toes into the stock market, don’t do it with Robinhood. Instead, spend several weeks or months researching the stock market and how it works. Read a book or two and talk to a licensed financial advisor.
Then if you feel ready to buy some stocks, open an account with an advisor or one of the major online brokers mentioned above. You’ll still get commission-free trades, plus you’ll have access to better research tools.
And don’t use their mobile app. Access your accounts on your desktop only. That will help prevent you from trading too often.
It might not be as easy as using Robinhood’s app, but that’s okay. When you’re dealing with your own money, sometimes easy isn’t always best.