The Indicator from Planet Money - Your Brain On Retail Trading

Stock-picking retail traders have been jumping into the market this year. They may not understand the risks.

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NPR

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heroin station card if this is indicator from Planet Money buying and selling stocks on the smartphone app Robinhood has become incredibly popular this year, especially since the Cove in pandemic started and there are a few possible reasons. Why first of all everybody's home and has lots of spare times. It's got to be part of it had a little extra money to invest because so many restaurants and shops were closed. Also, maybe people sense an opportunity to buy stocks cheap when the stock market collapsed in the first month of the pandemic whatever the reason Robinhood announced recently that the amount of money it makes some people trading on its app doubled in the second quarter of the year to a hundred and eighty million dollars to trades Robinhood is also become kind of Fame is for the clever ways. Did it entices people to use its app to buy and sell stocks? So digital confetti or some other animation might fall across the screen.

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When you first deposit money into the app, we are simple creatures.

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And Robert it also offers free stock to people who sign up for a trial run into people who convince others to sign up is 25 lives in Long Island, New York. He is a big Robinhood users and there are several things. He likes about Robin Hood's design and how simple and seamless it is to keep track of what's happening for any company. He is interested in a great app for easy information almost like a Newsfeed but for stocks of the most popular stocks that other Robinhood Traders have been buying what you know might convince new traders to join the party James himself invested money in Uber stock partly because it was number one on Robin Hood's popularity ranking kind of get a little bit of a sense of confidence like okay people believe in this company because it's literally number one on the list currently has a retail Trader.

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Anyone who buys and sell stocks for their own personal account not a professional investor who manages other people's money and this year. It is retail Traders like James really throwing themselves into the stock market because the US Stock Market has gone up in recent months even hitting a new record high last week. A lot of these retail Traders have made quite a bit of money lately, but are there reasons to worry that so many retail Traders have started buying and selling stocks using apps like Robinhood. I would say he's a behavioral Economist at Caltech and he is study the ways that people invest in the stock market has one good thing about Robin Hood. Is it by making it so easy to start buying stocks? It might get people invested in the stock market who otherwise might never have bothered at all. And this can also help people learn more about how specific companies operate and to better understand how the economy Works especially these days the digital age when it's so

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Easy to find useful information. It was a lot of stuff under the hood in the economy. That would be good. If people knew more about that and they may learn some by just buying and selling some shares of a particular stock and learning about what Boards of directors. Do. You know how companies actually operate said he was only one part happy and two parts worried about Robinhood popularity with retail Traders. So here's why he's worried. If there is one conclusion that the research about financial Market keeps arriving at again. And again, it's thick individual traders who actively try to pick specific stocks buying the Stock's they think we'll go up selling the stocks. I think we'll go down are very likely to underperform the overall stock market. This is not just apply to retail Traders. It also applies to professional money managers Over The Last 5 Years 82% of mutual funds that tried to pick stocks underperformed the overall stock market, which means that most people are just better off investing in what they call an index fund.

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Just tracks the performance of the stock market goes up and down with it over time and tell him says retail Traders are also vulnerable to psychological biases that lead them to make bad decisions when they invest especially if they don't understand the risks that they're taking if you're selling and you have to be confident that you're buying from someone who knows less than you about the future of the stock. So one of the elements in in reach of printing is overconfidence, everybody thinks they're above average also confetti right in this position effect, which makes people sell stocks that have gone up a little too soon missing out on making even more money people have a tendency to sell the stocks that went out and we think it's cuz there's a special kind of value call realization utility from Ashley locking in your game and clicking and like seeing it in your bank account fear from your portfolio numbers on the screen into your bank account or something liquid.

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So people sell winners too soon and simile they tend to hang onto losers typically in a kind of blind faith that it's going to bounce back. It's me that happens when people are actively and frequently buying and selling stocks Robinhood app is designed to get people to do just that and Robinhood business model actually depends on Oneness after a quick break.

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Support for NPR and the following message come from you Studio you Studio securely distributes corporate audio and video content to employees use you Studio to manage your company's public or private podcast remotely share meetings in town halls and improve employee communication start your free 30-day trial at the letter U studio.com. Okay. So here is how Robinhood makes money say, I have 10 shares of like Jamba Juice and I want to sell them. I would place an order in the Robinhood app Robinhood would then send that order to another company company called a market maker that market maker would buy those 10 shares of Jamba Juice stock that I'm selling and then it would try to sell those shares to someone else for more money than they paid me and that it would keep the difference kind of like a bookie. It just tries to match people who are buying with people who are selling and it keeps the difference and in exchange for the privilege of receiving those orders the market make

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He's Robin Hood Daffy and the more orders that receives the more it pays to Robinhood. You can see my Robinhood has a big Financial incentive to get people to buy and sell stocks frequently and why it's designed. It's app to encourage that outcome confetti at all. Even though that is probably not the best strategy for people to make money over time. And this is why behavioral Economist calling camera says that people should not have more than about 10% of their overall money devoted to picking stocks on Robinhood and other apps like it. It's a bit like gambling casinos know that they're people who have a problem with pathological gambling and every Casino should go to Las Vegas and you sit and have a free drink or you sit at the bar will have a matchbook that says have a problem gambling call his hotline, but they're not really in the business of keeping people from losing the money in the opposite of the lights and sirens and sound effects and free drink and real real life confetti.

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That's that's true. James Whitcomb are Robinhood are from Long Island says that he totally gets this we first started trading on Robinhood four years ago. He lost 80% of the money that he had invested in just a few months over the past year though. He says he is almost made all of it back now. He is just down 3% but it's still a lot and he says he's cool with that. But you know what over the same for years the overall stock market actually went up more than 60% so he would have made more money if he had just invested in an index fund. Yeah a lot more money. And in fact James actually says that he is much more careful with the money that he puts towards retirement invest that money in safer. Diversified funds haven't ever withdraw any money from Robinhood. So I don't actually know what the end goal for that money is it's just something that I keep in there and I you know, maybe it'll end up being a bonus to my retirement but

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I just don't I don't see it as a slime not like relying on that for my future.

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I don't.

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I can take it by confetti by real life before buying a little moment of joy.

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Robinhood spokesperson sent it to comment saying that Robin Hood has invested in resources to help customers learn about the markets and make informed decisions and that the app is designed for customers to learn and to invest responsibly.

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This episode of the indicator was produced by Jamila Huxtable and Nick Fountain. It was fact-checked by Brittany Cronin indicator is edited by Patty Hearst and it is a production of NPR.

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Horizon on NPR's how I built this that was simple splash of color accidentally launched Sandy chilewich into a 40-year career as a designer entrepreneur and creator of the now-famous chilewich placemat subscriber. Listen now.
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