Should You Start Trading Stocks on Your Phone? Probably Not, Experts Say
Apps like Robinhood make investing simple, accessible and fun. They can also be addictive and extremely risky.by James Napoli
The mobile trading app Robinhood is increasingly popular with young adults, many of whom are lured by the prospect of commission-free trades on cryptocurrencies and thousands of companies like Apple, Facebook and Tesla.
"Our mission at Robinhood has always been to bring in those who've been left out of the system by making investing more approachable," a spokesperson said in an email to me.
"We fundamentally believe participation is power, and that the stock market can be an important wealth creation engine. Robinhood enables a range of investing strategies that reflect thoughtful participation in the market."
Tired of being left out of the system, I decided it was time to rev up my wealth creation engine by downloading Robinhood and making the first stock trades of my life.
Within minutes, my account was set up, and I was rewarded with a free stock. I transferred in $50, the highest sum I was willing to lose for a Rewire story.
And I actually did expect to lose most of that money. If nothing else, it'd make for a great cautionary tale — the perfect illustration of exactly what not to do with your cash.
Instead, at the end of my first week of trading, I was up. Way up. More than 350 percent up. I had somehow managed to turn my initial investment of $50 into nearly $230.
I credit a small part of that windfall to my highly sophisticated strategy of "buy low, sell high." Mostly, though, it was just dumb luck.
The greasy thrill of easy money wore off fast.
It was an extremely stressful week. I couldn't stop checking the app, with its bright neon charts and flickering prices.
Eventually, I had to delete Robinhood from my phone. Now I can return to my former time-sucking (but less anxiety-inducing) mobile distraction: sharing photos of farm animals on Instagram.
In the end, my experience with Robinhood can still be read as a cautionary tale, not of financial loss, but of the dangerously addictive nature of gamified investing.
I decided that I needed to speak with a few professional financial experts for their opinions on the risks and opportunities of mobile trading apps.
Understand the risks
Just because you can download an app and start trading almost immediately, doesn't mean that you should.
"Trading stocks through applications like Robinhood is dangerous when you go into them without knowledge," said Douglas Boneparth, a New York-based certified financial planner and president of Bone Fide Wealth.
"If you don't know what you're doing, you can really set yourself up for failure. It's like getting into a car and going on the highway without ever having driven before."
One potential danger is that mobile trading apps can feel more like playing an addictive game than putting actual money on the line.
"Though you're not paying a commission on those trades, it's still real money that you are putting into the market," said Tara Falcone, a Rhode Island-based certified financial planner and founder of the financial literacy company ReisUP.
"You could potentially go to zero or even lose more than your upfront capital if you're engaging in riskier investments, like trading on margin or options, which Robinhood allows."
In the wake of the COVID-19 pandemic and the lack of sports betting opportunities, many new users have turned to apps like Robinhood, making risky day trades after following the advice of Twitter personalities and dubious tips from subreddits.
"Don't treat the stock market like it's a casino."
But for some young investors, the risks of trading apps far outweigh any potential benefits.
"No one can truly day trade. You can't compete against algorithms and high-frequency traders. You just get burned," said Drew Cheneler, 22-year-old founder and managing editor of the personal finance website Simple Money Lyfe.
Cheneler believes trading apps like Robinhood make it too easy to fund an account and buy stocks without providing adequate consumer education or built-in safety features.
Reached for comment on the issue of financial education, a Robinhood spokesperson supplied a growing list of resources that the company provides its users, including a collection of articles on basic financial terms and concepts, a daily newsletter and podcast, a newsfeed with business analysis and reporting, and new in-app messaging.
Many of these educational resources have recently ramped up as Robinhood came under increased scrutiny for enabling inexperienced users to engage in risky behavior. In one particularly devastating incident, a 20-year-old trader died by suicide after seeing a balance of negative $730,000 in his Robinhood account.
Identify your financial goals
Despite all the potential risks, you may still be tempted to try your luck with trading on your phone. Falcone recommends taking some time to reflect on your financial situation first.
"Before you even download an app, ask yourself: What are my intentions for doing this? How does this fit into my financial life? What goal am I trying to accomplish by putting some of my money to work in this way?" she said.
You may have several goals, like creating a rainy day fund for emergencies, taking a vacation, buying a house or saving for an early retirement. Once you identify your specific goals, the next step is prioritizing.
"Goal priority means being honest with yourself and knowing which of your financial goals is most important to you," Boneparth said.
"For short-term goals, which are four years or less, my advice is to save cash. There's no reward appealing enough to overcome the risk that you'll take with investing. Can you afford to watch your savings go down 30 percent at the goal line and not be able to close on that first home?"
It's OK if your priorities change; the important thing is knowing what your financial goals are so you can readjust your strategy for saving and investing.
Start with these safe bets
Once you've determined your financial goals, you'll want to consider several options for saving and investing before you even think about trading stocks on an app like Robinhood.
Your first order of business: build an emergency fund.
"If you lost your job tomorrow, how long could you survive? Statistics show that most people probably can't live beyond a month," said Dominique Henderson, a Dallas-based certified financial planner and founder of DJH Capital Management.
"Why do you need to be putting money in an app before you start building up your war chest, especially in times like this?"
Henderson suggests you may also get more bang for your buck if you pay off any outstanding debt before investing.
"If you've got a credit card where you're paying 14 percent interest a month, well, 14 percent is a pretty good return just for paying down your balance," he said.
The next step is to start thinking about your financial long game: IRAs, 401(k) plans and other employer-sponsored retirement plans that can offer significant tax advantages, as well as long-term brokerage accounts.
Typically, the earlier you start saving and investing, the better.
"My mom always told me that a Roth IRA is the most powerful investment vehicle you can ever invest in," Cheneler said.
"You only have it for a certain amount of time, depending on your earning potential. So you might as well front-load it as much as you can while you're young."
Overwhelmed by all these options? If you're unsure where to start or what your best tax strategy might be, you'll want to speak with an expert.
"My opinion is that one percent of the population is actually able to manage their own money without any bias. Otherwise, you probably need some help," Henderson said.
"If you can afford it, it's good to pay for a certified financial planner to just lay it all out on the table for you. That's going to be money well spent."
Do your homework and trade responsibly
Let's say you've determined your financial goals, put money into relatively safe long-term investments, created a rainy day fund, paid off credit card debt, and still have a little extra cash to invest in a mobile trading app. What's a responsible way to start?
"First, only put in money that you are OK with potentially losing," Falcone said.
"Second, do your research. Don't jump on a bandwagon because you see somebody recommending a stock on Twitter, Reddit or YouTube."
Boneparth recommends limiting your potential losses by trading no more than 5 to 10 percent of your total investable assets. He also encourages investors to do their due diligence before they start trading.
"Don't treat the stock market like it's a casino. When you buy a stock, you're investing in a specific company. Use it as an opportunity to learn," he said.
"There's so much information readily available with the smartphone in your hand. You can pull up earnings reports, look into executives and leadership, look at a company's product, look at their research."
Once you've done your homework, build a diversified portfolio of at least 15 to 20 different companies.
"Don't put all your eggs in one basket, hoping for a get-rich-quick scheme. Diversify across industries, size of companies and market cap," Falcone said.
Even with the best planning, there's still a chance that you'll lose money trading stocks — and that's not always such a bad thing.
"Being good at trading is knowing how to deal with losses," Boneparth said.
"When you're trading on your own, you're going to learn a lot of things the hard way. The best lessons come from loss. You're also going to understand the risk it takes to get a reward."