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Robinhood has made stock trading fun, cheap and attractive for young people who aren’t rich – not the crowds that the financial industry usually caters to.
But the app also has a track record of making serious mistakes, and it might not be good for everyone’s wallet if investing feels like a game.
Ahead of Robinhood’s (very unusual) initial public offering this week, my colleague, Erin Griffith, talked to me about the app’s ups and downs and how the company is fitting into the revolution. financial technology.
Shira: Let’s start with you explaining to us why Robinhood is getting so much attention.
Erin: Robinhood has taken the Silicon Valley strategy of disrupting what came before it. Many startups aim for this goal, but few actually succeed. The company has made stock trading as easy as playing Candy Crush. It makes transactions free and has attracted a lot of young people to invest in stocks. It forced other online brokers such as Charles Schwab, Fidelity and E-Trade to change more than they had in years.
But in the same way that people are discussing the trade-offs of companies like Google and Facebook, people are also pointing out that Robinhood has created dangerous upsides.
What are those downsides?
Robinhood can make users feel more like a video game or casino than an investment account and that can sometimes force inexperienced investors to take great risks, especially when performing a type of transaction related to borrowing money. Investment managers Warren Buffett and Charlie Munger recently discussed Robinhood, with Munger calling it “under contempt” and “a bad, reprehensible operation.”
Robinhood also makes more money when users trade more, but many studies have found that such behavior does not produce the best return on investment. (The company’s financial documents state that “the majority” of its clients don’t fit the definition of “day traders” who execute lots of trades quickly.)
Professional investors can also be reckless and what they do is sometimes indistinguishable from gambling. The criticisms of Robinhood are just an elite attitude that most people cannot be trusted to invest their own money?
That’s what Robinhood believes, as evidenced by a challenge letter the company’s founder wrote to potential IPO investors. But company watchers have also asked if Robinhood’s development enthusiasm and system shake-up resulted in a fatal error pattern.
What kind of errors?
The application crashed at several critical times. It recently paid a record amount of money to the securities industry’s self-regulatory body for that and other missteps including not doing enough to screen clients who didn’t fit the trading type. higher risk translation.
Last year, a young man committed suicide after a misunderstanding led him to believe he was losing more than $700,000 from Robinhood trades and that he was unable to contact the company to resolve it. A traditional broker might not have allowed that type of investment without guidance, or help could have been easier for the client to find.
You wrote that we are in golden age for new types of financial companies including Robinhood, payments startup Stripe, and a semi-automated financial advisor. What’s happening?
Many people wanted something other than large, traditional financial institutions, but they didn’t have many good or reliable alternatives. When Simple, one of the first mobile banking companies, kept crashing, the attitude almost a decade ago was: This is what happens when your bank is just an app.
After several years and now, the technological building blocks for newer financial firms have become more solid and trust in them is being built between the public and regulators. It’s great that people have more options for banking and finance, but again there are trade-offs.
Some of these companies have struggled with intermittent power outages, frozen accounts, hacks, and other major issues. Conventional financial institutions have many problems, but they also don’t have the ability to lock your money without recourse.
Before we go…
Words cannot capture how rich these companies are. Total profit of Apple, Microsoft and Google in three months quadrupled Walmart’s profits for the whole year. Yes, they are rich.
Children use the Internet. How do we keep them safe? Facebook’s Instagram has outlined new measures to prevent teens from unwanted interactions with adults in the app, and it won’t allow ads targeting children’s interests or online activity, and my career, Erin Woo said. But as the company was advertising its new protections, The Wall Street Journal found automated suggestions on Instagram of hashtags and horrifying sexual comments about children.
Look, we NEED mindless TV: The HBO Max streaming video app has been plagued with problems, especially on the Roku TV streaming add-on. Bloomberg News spoke to frustrated customers, some of whom left 37 pages of HBO apps or workarounds on Roku’s website. (The root cause of all this is an online TV business model that has copied all the old TV habits.)
You have to watch TikTok star James “Bear” Bailey mesmerize people at a convenience store by singing the R&B song “All My Life.” (Bailey regularly posts videos of herself singing in a nearby gas station.)
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