Millennial investors are flooding into the market amidst the pandemic, thanks to the Robinhood app.
By Bernie Yeo
While the pandemic roiled financial markets, tanked global economies and caused trillions of dollars to flee risky assets, millennial investors have rushed toward the opposite direction.
They buy beaten-down stocks using mobile apps that have made it easier for young investors to trade stocks, options and ETFs for free.
One such trading app that has become all the rage among American millennial investors is Robinhood which since its launch in 2015, has gained 10 million users, while as many as three million new accounts were added in the first quarter of 2020 alone.
Robinhood users have picked up stocks from companies hit hard by the pandemic, with most feverish interest coming from the likes of American Airlines, Boeing, Hertz, and Disney.
While they might not make sense to the more experienced hands at Wall Street, these stocks have given returns in a few weeks that are many times more than the average S&P 500 performance.
What’s worrying analysts, however, is that few companies such as Hertz, Whiting Petroleum and JC Penny have filed for bankruptcy, but yet, Robinhood users have continued buying their stock in droves – the opposite of how experienced traders have dumped shares in these failing firms.
Investment guru Warren Buffett sold Berkshire Hathaway’s entire holdings in the four major US airlines, warning the world has changed for the aviation industry because of the coronavirus crisis, while tycoon Carl Icahn sold his stake in Hertz, having incurred an estimated loss of US$1.8 bil.
Old hands at Wall Street, too, have advised caution, warning that the Robinhood hype could set up homebound novices for disaster. In this case, the dot-com crash of 1999 comes to mind, where, following the bursting of the internet bubble, most dot-com stocks had gone bust.
This therefore begs the question: should you go ahead with Robinhood (or any similar apps), or steer clear? After all, while the app certainly boasts the benefits of commission-free trading for a younger generation, it is not without its dangers.
Financial planner, analyst and founder of financial education company ReisUP Tara Falcone recommends asking yourself some key questions when determining if Robinhood is the right investment app to get started with.‘What are you trying to accomplish? How much money are you willing to put at risk? Do you have an emergency fund? Do you have your retirement plan on track?’
These are some of the questions that Falcone suggests asking.