It’s known as the ‘Robinhood rebound’.
And yet it has nothing to do with taking from the rich to give to the poor. Nothing to do with a fox in green tights, or Kevin Costner.
Nope, this Robinhood is a stock trading app hugely popular in the US. It’s now also expanding around the world. It’s popular because the premise is you can buy and trade stocks for ‘free’.
There’s a little more to these apps than fee-free broking. While that is a function, they also offer things like fractional shares, ETF investing, and more premium real-time functionality.
They are good, they are very disruptive to an industry full of friction and cost. And they’re going to replace and upend all the incumbent brokers that have been resting on their cash-filled hands for years.
And thanks to a lot of people being bored and stuck at home with not much to do this year, the explosion in their user numbers has been astronomical.
It’s not just Robinhood though.
Freetrade is another ‘free’ trading app. They’re based in the UK here. Same premise as Robinhood, competition in an increasingly competitive market.
Freetrade is seeing a similar explosion in user numbers. Last year Freetrade did a crowd funding investment round. They did another one this year because of the explosion in user numbers and the need to accelerate growth.
User numbers have more than doubled since the start of the year and their current crowd-sourced fundraising was at a three-times multiple compared to last year. That gave Freetrade a market valuation of around £140 million.
Still about a 10th the value of the big players, but on track to disrupt the game over here in Europe and the UK. Revolut, is another of them offering fee-free trading. And there’s a number of them in Australia too.
They’re all very good, and provide the tools to tech-savvy, knowledgeable younger generations.
But the existence of these apps isn’t the point. The point is that they’re seeing a massive spike in users and ‘day traders’. And according to the ‘market experts’ these millennials using the likes of Robinhood, Freetrade, Revolut, and others are speculatively buying stocks with no rhyme or reason and artificially pushing up the prices of stocks to silly levels.
It is reminiscent of the crypto boom in 2017 where gym instructors, taxi drivers, butchers, and random strangers at weddings (all true stories) had a ‘hot crypto tip’.
Today everyone has a ‘hot stock tip’ in the US markets.
You got a taste of this in yesterday’s Money Morning, as Ryan Clarkson-Ledward wrote about bankruptcy stocks.
The fact that Hertz, whose stock is effectively worth US$0, could go up 10-times in a week is a fair sign there’s some funny business going on in the market. But, money has and is being made. And the general consensus amongst the old rich guys on Wall Street is this idea of a Robinhood rally.
Well, so what?
Apps like Robinhood or Freetrade give users the tools and resources to invest in stocks. It’s easy, cheap, and accessible.
That’s exactly how investing should be. It shouldn’t be a domain for the experts only. It shouldn’t be hard, onerous, and expensive to get investing and working on your long-term wealth.
And so what if these young people are taking risks in the market? When you’ve got a 40, 50-year time horizon, you can be bloody extreme with your risk tolerances.
Now that comes with a big caveat. You wouldn’t want to see any of them using leverage, debt, or credit cards to be making some of these risky plays. Maybe it pays off today but creates a false narrative it’ll work tomorrow.
It doesn’t and markets will bite. Much like the way Hertz and Chesapeake were both down over 30% today. I bet a few margin calls were triggered today.
And you would hope these new users aren’t getting into risky, complex derivatives they don’t understand.
But investing long term in stocks they think are dirt cheap? Why not. Money to risk, long-term time horizon…have at it folks. Get out there and have a crack.
At least if it doesn’t pay off, you’ve got a lifetime ahead to learn from the mistakes you make and become a better investor for it.
Some of the best investing lessons I ever learnt was when I did it for myself, made some ridiculous errors, bought stocks while trying to catch a falling knife, and tried to day-trade the market with derivates that at the time I didn’t fully understand.
But when you’re young that’s the time to have a crack to learn, to make mistakes, to make and lose some money. You don’t want to lose the shirt off your back. But if your risk tolerance is high and you can do some fundamental analysis of a company, geez who are we to say, ‘Whoa, whoa, slow down junior!’
If it’s good enough for me to invest for my son with a 30, 40, 50, 60-year horizon for him, then what right do any of us have to say to an 18-year-old, just take it easy.
The best thing to come out of this market rout has been the influx of new investors to the market. Some will get cocky and burn flying too close to the sun. Shrewd ones will know when they’ve been on a good thing and to take profits off the table.
Either way, anyone that decries the ‘Robinhood rally’ is either annoyed because they didn’t see it coming, or they’re just old and cranky that these youngsters are outperforming them.
But if you’re new to the market, you’ve made a bit of quick cash in the Robinhood rebound, good on you. I’m proud of you. Keep it up — but for god’s sake, please do stop buying bankrupt stocks.
Editor, Money Morning
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