What is this ‘Robinhood’ thing?

Center for Personal Financial Management Peer Coaches are not professionally trained advisors or accountants; we cannot provide specific financial advice or certify tax returns.  All counsel given is only educated advice.

We’ve all heard of the parable of the talents.  You know, the one with the servants who are given funds by their master and 2 out of 3 invest them wisely? (Matthew 25:14-30).  The moral is pretty clear; invest what God has given you!  Unfortunately, most students do not have much in the way of funds to invest; a lot of investments require huge sums to even begin the process.  Even if we had that kind of money, a lot of us wouldn’t know where to start.  A lot of people found the answer to their problems in Robinhood, a free stock trading app that entered the marketplace a few years ago.  Here is a little bit of information about Robinhood for those who want to know what all the hype is about!

Today’s blog is specifically targeted for non-investors Robinhood or other short time investing firms, but, even if you aren’t in that category, this is still valuable information!

Preface:

We at BUCSENSE cannot recommend buying into short time trading apps like Robinhood.  Investing is about patience, not luck, and apps like Robinhood make their money by dissuading investors from being patient.

It doesn’t take too much research to find horror stories from those who invested too much too quickly, and I can second them with my own experiences on the app.

It may seem like a great way to make money quickly, and for some people, it may well be successful; just remember, if you play the markets, you are playing against people with a lot more time, money, and experience, and, as they say, the house always wins.

Investment firms are much better targets for people our age; Roth IRAs, CD’s, Treasury Bonds, and Index funds are all much safer places to place our talents.

(If you don’t care about the history of the app, skip down!)

History of Robinhood

Perhaps you’ve been watching the news over the past few months and noticed the popularity of Robinhood.  No, not the medieval outlaw from Sherwood Forest; Robinhood is an American app that allows small time investors (like college students!) to invest in individual stocks, bonds, options, and cryptocurrency. 

It burst onto the financial scene in 2015, shattering the hold of Wall Street investment firms on the global market.  It did this through charging no trade commissions. Trades were free to the investors; you only spend the value of the stock you buy.  This was a major change in the financial industry; in only a few years, most of the major investing firms had erased their trade commissions.  It led to the creation of a huge new small-time investor (ST) market that was joined by firms like Webull and Moomoo while major firms like Schwab and TD Ameritrade shifted their focus from major investment groups to the ST’s.

This worked out pretty well for people like us.  We could double our money pretty easily in day trades, and, as long as you didn’t invest too unwisely, the ST’s could actually have a say in the stock market.

This started changing, however; Robinhood began allowing investment on credit (essentially taking a loan to invest); this began dragging the ST’s into debt as Wall Street adjusted to the new normal; the big time investment bankers do this 24/7, after all, while people like us may look at the app once or twice a day.

That brings us to 2021.  The COVID-19 epidemic increased the firm’s revenue by 500% and its customer base by nearly 70%.  In February, a reddit page began a massive movement to buy stocks like Gamestop and Blackberry, causing their prices to shoot up dramatically.  People made millions; some lost billions.  A lot of the world didn’t really care.  Altogether, it was just another part of an utterly chaotic start to the new ‘20s.  (As of this writing, Gamestop’s (GME) stock price just doubled again overnight).

A lot of people did see the popularity of the app, however, and bought in; no real numbers have been released by the firm, but it doesn’t take too much imagination to see that the user base is probably much larger than it was in January!

If you are one of those people who traded on Robinhood in 2020 or just began in 2021, here is a quick rundown of what you should expect with tax season approaching.

We hope this has shed some light on the Robinhood phenomenon!  It is a market-changing force, though it may not be as good as it sounds to people like you and me.

If you need help, please feel free to contact the Center for Personal Financial Management! We are a free Peer Financial Counseling service provided for CSU students; we are trained to deal with a number of financial issues, including tax problems, and we can help you figure out your returns!

Ben Moeller, Peer Coach, Center for Personal Financial Management

Sources:
money.usnews.com/investing/investing-101/articles/what-to-know-about-your-investment-tax-forms
benzinga.com/money/how-do-you-pay-taxes-on-robinhood-stocks/
businessofapps.com/data/robinhood-statistics/
benzinga.com/money/robinhood-alternatives/
cpapracticeadvisor.com/tax-compliance/news/12274527/irs-told-to-crack-down-on-nonfilers

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