Should You Uninstall Your Stock Trading App?
As the pandemic engulfs the nation, millions of homeless Americans have embarked on a new hobby: stock trading. Attracted by the opportunity to make transactions without commission, online brokers such as Charles Schwab, Fidelity and TD Ameritrade, in this year saw a rise in the number of users. One popular trading app, Robinhood, has reached a staggering 13 million customers . The company raked in $ 180 million in second-quarter earnings – double that it earned during quarter one – according to a recent filing with the Securities and Exchange Commission.The increased Robinhood demand is not without control, though, including blackouts complaints – and a letter from some members of Congress asking for enhanced investor protection. Robinhood made headlines in June when 20-year-old user Alex Kearns tragically committed suicide after thinking he had lost $ 730,000 trading stock options on the platform. Options contracts give you the right – not the obligation – to buy or sell shares at a specific price on a specific date or earlier. So when Kearns saw a negative six-digit “purchasing power” number on the app, it didn’t mean he had lost that money.
Robinhood immediately promised to make changes to the blog post . The company said it will consider stricter requirements for those who can trade options, increase educational resources, and update in-app messaging to make it easier to understand options trading.
The media storm has sparked renewed fears about the dangers of easy access to stocks and options, especially with a renewed heightened American appetite for investment risk . Here are a few things to consider before channeling your free money into a trading app.
Think about your financial goals first
Before trying a stock trading app, Leona Edwards, a Certified Financial Planner and Mariner Wealth Advisors , advises you to look into your overall situation, including your other financial priorities. She suggests replenishing your emergency fund for up to three to six months of living expenses and saving at least enough to keep your employer eligible for your company’s 401 (k) or 403 (b) plan. Self-employed people should also prioritize retirement savings before investing in a trading app. However, once you get the hang of the basics, you may want to consider getting into trading apps – assuming you can afford to lose what you put in. bad when used responsibly, ”says Edwards. “But how much can you afford to lose?” Before you start, make sure you can still pay for basic expenses, including living expenses and other savings goals.
She advises limiting this to a small percentage of your total portfolio so that if you make a mistake it doesn’t undermine your entire financial plan. You should also consider tax implications such as short-term capital gains if you plan to trade frequently throughout the year.
Investing risks with a stock trading app
Before you start trading with an app, you should also know that it can captivate you like any other social media platform or mobile game. “The addiction of social media apps can be dangerous for investors,” says Edwards.
Robinhood uses gimmicks to stimulate user interaction such as dropping confetti after a transaction and a colorful interface. These nudges can motivate you to trade more often, and research has shown that the more you trade, the lower the return on your portfolio can be. “Can you use the app responsibly or can you fall into the trap of over-trading?” Edwards asks.
Another thing to watch out for is that trading through the app may have some limitations. “Your trading ability depends on the application itself,” says Edwards. So if the app crashes – which happened to Robinhood three times in March – or you have a slow internet connection, you won’t be able to lock in your desired stock value.
Nonetheless, according to Edwards, trading apps can be a unique learning opportunity. As long as you don’t invest more than you can afford to lose, this is a chance to experience the ups and downs of the stock market and learn from your mistakes.
Robinhood is committed to “democratizing finance for all,” the company said , and they’ve opened up millions of new investors who may have felt they couldn’t afford to invest. “People see this as a way to start investing, which is good,” Edwards adds.