Robin Hood
Stock trading startup recently announced
that they plan on bringing their free stock trading app around the world, and
has chosen China as their first country to launch, as reported by TechCrunch.
So for those who never heard of Robinhood let us take a look back on what makes
this startup so disruptive to the financial markets.
A Brief History
Robinhood was founded by Vladimir Tenev and
Baiju Bhatt, two Stanford alumnus who spend most of their career building
high-frequency trading platforms for various financial institutions in New York
City, that is where they realized that electronic trading firms pay essentially
nothing to place trades on the market, which inspired them to start Robinhood
and instead of charging $7-$10 per trade like most online brokers do, you can
place trades for free.
With $66
million in funding at an undisclosed valuation, led by brand name investors
such as Google Ventures, Andressen Horowitz, Index Ventures, as well as
celebrities like Snoop Dogg, Nas, and Jared Leto, Robinhood is in an amazing
position to overhaul the financial markets and change how we trade.
Is This A Good
Idea?
While many applaud
the idea (over $1 billion in transaction and over 1 million traders on the
platform), and the stylish, simple design (won an Apple Design Award), there
are going to be many problems as the app continues to gain a following and grow
in popularity.
One of the main
concerns many financial experts have is the fact that free trading is not
always going to be good idea, because free trading encourages continuous
trading and as many financial experts know, consistent trading is often not
good for the investor. There are many studies that show the buy and hold method
usually brings in a better rate of return than continuous trading, as shown in
a study by Brad M. Barber (a finance professor at the UC Davis) named “Trading
is Hazardous to Your Wealth. In the report Dr. Barber found that
“Individual
investors who hold common stocks directly pay a tremendous performance penalty
for active trading. Of 66,465 households with accounts at a large discount
broker during 1991 to 1996, those that trade most earn an annual return of 11.4
percent, while the market returns 17.9 percent. The average household earns an
annual return of 16.4 percent, tilts its common stock investment toward
high-beta, small, value stocks, and turns over 75 percent of its portfolio
annually. Overconfidence can explain high trading levels and the resulting poor
performance of individual investors. Our central message is that trading is
hazardous to your wealth”
With an app
that makes trading look and act like a game, Robinhood might not be stealing
from the rich and giving to the poor, but instead stealing from the novice and
giving to the market, and now they are moving to a country with the largest amount of mom and pop traders. As renowned value investor, and teacher of Warren Buffet, so eloquently stated
"The investor’s chief problem—and even his worst enemy—is likely to be himself"
"The investor’s chief problem—and even his worst enemy—is likely to be himself"
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