How Robinhood Ushered In Stock Trading For The New Generation

One of the most surprising consequences of the COVID-19 pandemic has been the flood of younger retail investors buying stocks, and Robinhood Markets Inc HOOD has been at the epicenter of the boom.

Robinhood Generation: In its recent IPO filings, Robinhood disclosed that its number of monthly active users exploded from around 5 million at the beginning of 2020 to a peak of above 20 million in the first quarter of 2021. Incredibly, Robinhood also estimates that nearly 50% of all new retail-funded trading accounts opened in the U.S. since 2016 have been Robinhood accounts.

Robinhood’s easy-to-use app and zero-commission trades are especially appealing to a younger generation. When the economy was shut down in 2020, many of these younger Americans had excess spending money, limited entertainment options and multiple stimulus payments to pour into stocks, as well as cryptocurrencies like Bitcoin BTC/USD.

When Reddit’s WallStreetBets sent GameStop Corp. GME stock soaring to the moon (or at least to $480) in early 2021, stock trading became one of the biggest trends on social media as well, making it cool to post memes about the market.

Incredibly, Robinhood has said the median age of its users is just 31, and the median account balance of its users is just $240. The average Charles Schwab Corporation SCHW user is reportedly 49, while the average Vanguard retail client is 54 years old.

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Pros Of The Robinhood Boom: Robinhood’s mission from the start was to make the stock market accessible to the average person. While the company has made some missteps along the way, the numbers clearly show it has been a success in opening up Wall Street to the ordinary American.

During Congressional testimony earlier this year, CEO Vlad Tenev said Robinhood users’ assets have collectively grown by more than $35 billion. That's a massive amount of wealth creation, much of which presumably went to investors outside of the wealthiest 1% of Americans.

Robinhood has also started granting its retail traders access to IPO stocks at the IPO price, another area of the market that has historically been restricted to institutions and wealthy individuals. Robinhood said 301,500 users purchased Robinhood IPO shares, and the stock is already up about 30% from its $38 IPO price in about two weeks.

Buyers Beware: Benzinga PreMarket Prep co-host Dennis Dick recently discussed some of the risks that the new generation of Robinhood traders are now exposed to in the market.

“We have so many new traders, traders who have just started in the last six months to a year, and a lot of these traders don’t have any formal trading education,” Dick said.

Dick is a proprietary trader and market structure consultant with Bright Trading LLC and has nearly 20 years of professional trading experience. In addition to his Chartered Financial Analyst (CFA) certification, Dick said he was taught and mentored by a number of experienced professionals throughout the years.

Dick said many of these new traders are making very basic investing mistakes that could prove to be very costly lessons, such as lack of portfolio diversification. Stock promotion is also rampant on social media these days, and some traders seem to be falling into the trap.

“The way these pump-and-dumps work, and I think they’re just pure evil, is they’ll load up a stock and then they pump it out to all their followers and then they sell into that,” Dick said. “This is actually illegal. This is stuff that regulators look for.

"You’ve got to do your due diligence, you’ve got to do your homework and you just can’t blindly follow people into trades.”

Benzinga's Take: Even if many of Robinhood's newest traders are making mistakes, they're learning about the power of the stock market at a young age. And while many of their favorite meme stocks are incredibly risky speculative investments, it's definitely better to take more risks in the market when you're younger than when you are older.