The Robinhood Effect

What was once an industry exclusive to only the “A-list” of Corporate America, is now accessible to the average person. The financial trading industry has a scope like no other. It measures and regulates the economy worldwide and its impact goes even deeper. In the rise of online trading, we have seen the inclusivity of the investment world erupt. The expansion has made investing more popular, but has also made it more vulnerable to ignorance and sometimes being left at the mercy of the inexperienced.

The stock market began in 1602 with the Dutch East India Company becoming the first publicly traded company after issuing shares of stock in the Amsterdam Stock Exchange (Hur, 2018). After that, it was still long before the stock market reached Wall Street. Investors would gather at local coffee shops to trade stocks with each other until it eventually caught on that this was much bigger than a café. Back then, regulations were non-existent as well, making it more difficult to decipher between legitimate and illegitimate companies. This eventually led to a breach in the system and companies stopped paying dividends ultimately leading to the prohibition of the stock exchange in London until 1825 (Hur, 2018). The banning of the London Stock Exchange allowed the New York Stock Exchange to catalyze at a much faster rate (Hur, 2018). Once the New York Stock Exchange, and eventually the London Stock Exchange, took off, the popularity of trading spread worldwide. The New York Stock Exchange faced its first major threat in 1971 when the NASDAQ emerged. NASDAQ threw out the need of a physical location and created an entirely electronic trading network (Hur, 2018). This created more accessibility and reduced the bid-ask spread as well. With this technology and expansion, NASDAQ broadened the horizons of the financial industry.

The emergence of online trading sites has opened investment opportunities up to pretty much everyone with access to the sites. The main significance of online trading is that it has lowered the barriers of entry for investors. There is no longer the necessity for a third-party broker. In addition, spread betting increased in popularity alongside online trading. This allows investors to participate in more volatile markets (Thorpe, 2017). The introduction of online trading sites has leveled the playing field for investors of all experiences and turned a once niche practice into a common one.

One of the most significant and “game-changing” online trading sites is Robinhood. Robinhood was founded by Vlad Tenev and Baiju Bhatt, two sons of immigrants and its claim to fame is no trading fees and no minimum (Popper, 2020). With inspiration from the Occupy Wall Street Movement, their goal is to make investing more accessible. Co-founder Vlad Tenev says that the lack of investment opportunities contributes to the inequalities that are seen in society (Popper, 2020). Since its establishment in 2013, Robinhood has been instrumental to the large amounts of growth in the tech industry. Robinhood makes more than their Wall Street competitors and they do this with their average age of an investor being 31 (Popper, 2020). This can be compared to traditional investment bankers, who have an average age of 40 plus years old (Investment Banker Demographics, 2021). With young demographics, Robinhood’s investors trade the riskiest and fastest. Although, this reputation accompanies consequences. From a study of the first three months of 2020, Robinhood investors bought and sold shares that were 88 times as risky as Charles Schwab customers (Popper, 2020). The inexperience can eventually catch up to the beginners and they can find themselves in a hole too deep to get out of. Recently, Robinhood has taken initiatives to educate their users through platforms such as podcasts. This enterprise aims to elevate users towards success from online trading.

As we have entered the  new economic world, there have been many benefits introduced. There is a reason why it is much easier for the wealthy to get richer than the poor. This is largely due to investing. The wealthy have the opportunity to make smarter and much larger investments, many having their own brokers (Frank, 2014). With online trading sites coming into the picture, brokerage firms have lost their dominance and control over the market (Cotton, 2018). Millennials and Gen Z’s have taken a curious interest in the practice of investment. They are not only continuing to educate themselves but are also exploring the market in unorthodox ways. Investing has become a hobby and the strength of this hobby has prevailed in recent months. 

Robinhood’s strength took evidential form in January 2021 when it was able to divert the direction of stock for struggling companies such as GameStop and AMC Theaters. Through the work of young investors, and with help from social media, they were able to defy Wall Street, who had bet against Gamestop, and increased the stock from $18 all the way up to $380 (Chapman and Choe, 2021). The trend caught on and the population of small investors began to test the waters with other companies. This phenomenon was trademarked on social media platforms as “to the moon”, and has delivered an added confidence to ordinary investors ever since.

The evolution of stock exchange has impressively transformed the economy. The power has transferred from men in suits to millennials in their basements. Presently, investment appears to be in the hands of democracy as novice investors continue to explore their power and exploit the flaws of the current stock market. 

Works Cited

Choe, Stan, and Michelle Chapman. “Here's What Happened to GameStop Stock: Small Investors on Reddit Overwhelmed the Investing Pros. AMC May Be the next Battleground.” Chicagotribune.com, Chicago Tribune, 2 Feb. 2021, www.chicagotribune.com/business/ct-biz-gamestop-stock-shorts-reddit-20210127-eyg5vzlcz5g5hdifjbu64tvjpa-story.html. 

Cotton, Carl. “​​The Rise of Online Trading Among Youngsters: What Are Its Major Reasons?” Equities News, 27 Aug. 2018, 14:05, www.equities.com/news/the-rise-of-online-trading-among-youngsters-what-are-its-major-reasons.

Frank, Robert. “It's True, the Rich Do Get Richer-Here's Why...” CNBC, CNBC, 18 Nov. 2014, www.cnbc.com/2014/11/18/heres-why-the-rich-do-get-richer.html.

Hur, Johnson. “History of The Stock Market.” From The Beginning To Present Time, 4 Dec. 2018, bebusinessed.com/history/history-of-the-stock-market/#:~:text=In%201602%2C%20the%20Dutch%20East,of%20East%20India%20Company%27s%20profits.

“Investment Banker Demographics.” Zippia, Zippia, Inc., 30 Apr. 2021, www.zippia.com/investment-banker-jobs/demographics/. 

Popper, Nathaniel. “Robinhood Has Lured Young Traders, Sometimes With Devastating Results.” The New York Times, The New York Times, 8 July 2020, www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html.

Thorpe, David. “The Rise of Online Trading and Spreadbetting.” What Investment, 24 Oct. 2017, www.whatinvestment.co.uk/marking-financial-evolution-rise-online-trading-spreadbetting-2552837/.