Your Brain On Retail Trading
N. P., R.. Everyone? Card? Your this is indicated from planet money. Buying and selling stocks on the smartphone. App Robin Hood has become incredibly popular this year especially since the covert pandemic started and there are a few possible reasons why I of everybody's home and has lots of spare time that's got to be part of it maybe. Also, of course, you know, maybe people had a little extra money to invest because so many restaurants and shops were closed also, maybe people sense an opportunity to buy stocks cheap when the stock market collapsed in the first month of the pandemic, whatever the reason Robin Hood announced recently that the amount of money, it makes people trading on its APP doubled in the second quarter of the year two, one, hundred, eighty, million dollars. It's a lot of traits. In the hood is also become kind of famous for the clever ways that it entices people to use. It's apt to and sell stocks. So Digital Confetti or some other animation might fall across the screen when you first deposit money into the APP, we are simple. Take away from that hard to get us in here. Yeah. And Robert also offers free stocks to people who sign up for a trial run into people who convince others to sign up. James. mccomb is twenty five lives in Long Island. New York he is a big robinhood user and there are several things he likes about Robin, Hood's design and how simple and seamless it is to keep track of what's happening for any company. He is interested in it's a great APP for easy information almost like a news feed but for stocks plus the Robin Hood. Shows a ranking the most popular stocks that other robinhood traders have been buying which. You know my convince new traders to join the party James. HIMSELF INVESTED MONEY IN UBER stock partly because it was number one on Robin Hoods popularity ranking I can kind of get a little bit of a sense of confidence like okay. People believe in this company because it's literally number one on the list currently James is what is known as a retail trader, which is basically anyone who buys and sells stocks for their own personal account not a professional investor who manages other people's money. In this year, it is retail traders like James who've really thrown themselves into the stock. Market. Because the US stock market has gone up in recent months, even hitting a new record high last week a lot of these retail traders have made quite a bit of money lately but other, maybe some reasons to worry that. So many retail traders have started buying and selling stocks using APPs like Robin Hood I would say two parts worried one part. Happy. This is Colin camerer. He's a behavioral economist at Caltech and he has studied the ways that people invest in the stock market collinses. One good thing about Robin Hood is it by making it so? Easy to start buying stocks. It might get people invested in the stock market who otherwise might never have bothered at all, and this can also help people learn more about how specific companies operate into to better understand how the economy works. Especially these days the digital age when it's so easy to find useful information. You know there's a lot of stuff under the hood, the economy, and it'd be good if people knew more about that and they may learn some by just buying selling shares of a particular stock and learning about what boards of directors do. You know how companies actually operate conn said, he was only one part happy and two parts worried about Robin Hoods popularity with retail traders. So here's why he's worried if there is one conclusion that the research about financial markets keeps arriving at again and again it's the individual traders who actively try to pick specific stocks buying stocks. They think we'll go up selling the stocks I think we'll go down are very likely to underperform the overall stock market and this does not just apply to retail traders it also applies. To professional money managers over the last five years eighty, two percent of mutual funds that tried to pick stocks underperformed the overall stock market, which means that most people are just better off investing in what they call an index fund that just tracks the performance at the stock market goes up and down with it over time and Collins says, retail traders are also vulnerable to psychological by sees lead them to make bad decisions when they invest especially, if they don't understand the risks that they're taking if you're buying somebody's selling. And you have to be confident that you're buying from someone who knows less than you about the future of the. So one of the elements in in retail trading is overconfidence. Everybody thinks they're above average also confetti. And? Just. Sucks right in. plus people fall victim to what's known as the disposition effect which makes people sell stocks that have gone up a little too soon missing out on making even more money people have a tendency to sell toxin went up and we think it's because there's a special kind of. Realization utility from actually locking gain and clicking and like seeing in your bank account. From your portfolio numbers on the screen into your bank account or something like would. So people so winners too soon and similarly they tend to hang onto losers typically in a kind of blind faith that it's GonNa Bounce back making these kinds of trading mistakes something that happens when people are actively and frequently buying and selling stocks, and of course, the ROBINHOOD APP is designed to get people to do just that and Robin Hood's business model actually depends on it. On this after a quick break. Support for NPR and the following message come from you studio you studio. So distributes corporate audio and video content to employees use use studio to manage your company's public or private podcast tring remotely share meetings and town halls and improved employee communication. Start Your Free Thirty Day trial at the letter you studio dot Com. Okay. So here is how Robin Hood makes money. Let's see I have ten shares of like John Jews. And I, want to sell them I would place an order in the Robin Hood App Robin Hood would then send that order to another company company called a market maker that market maker would buy those ten shares of Jamba juice stock that I'm selling and then it would try to sell those shares to someone else for more money than they paid me and then it would keep the difference. Yeah. The marketmakers kind. Of like a bookie tries to match people who were buying with people who are selling, it keeps the difference and in exchange for the privilege of receiving those orders, the market maker pays robinhood Afi and the more orders it receives the more it pays to Robin. Hood. So you can see why Robin Hood has a big financial incentive to get people to buy and sell stocks frequently and why it's designed it's apt. To encourage that outcome confetti at all, even though that is probably not the best strategy for people to make money over time, and this is why Behavioral Economists Colin Camera says that people should not have more than about ten percent of their overall money devoted to picking stocks on Robin Hood and other APPs like it gets a bit like gambling. So casinos know that there are people who have a problem with pathological gambling. And Every Casino Las Vegas and you sit and have a free drink or you sit at the bar we'll have a matchbook that says hover problem gambling called his hotline. But they're not really in the business of keeping people from losing money during the opposite business that's mentioned all of the lights and sirens and sound effects and free drinks. Real real life confetti realize confetti. That's that's true. James. mccomb are Robin Hood Her from Long Island says that he totally gets this when he first started trading on Robin Hood for years ago he lost eighty percent of the money that he had invested in just a few months over the past year though he says, he is almost made all of it back now he is just down three percent but still loss. Yes. Small loss and he says he's cool with that. But you know what? Over the same for years the overall stock market actually went up more than sixty percent. So he would have made more money if he had just invested in an index fund. Yeah, a lot more money, and in fact, James Actually says that he is much more careful with the money that he puts towards retirement. He invested that money in safer diversified funds I haven't ever withdrawal any money from Robin Hood. So I don't actually know what the end goal for that money is. It's just something that I keep in there and I. You know, maybe it'll end up being a bonus semi-retirement but I I just don't I, don't see it as that. So I'm not like relying on that for my future. I know exactly what the goal of that money is. What's that? It's Confetti. I can get. Buying. Hardy dying a little moment of joy. Robin. Hood spokesperson sentenced to comment saying Robin Hood is invested in resources to help customers learn about the markets and make informed decisions and that the APP is designed for customers to learn to invest responsible. This episode of the indicator was produced by Jamila huxtable and Nick Fountain it was fact checked by Brittany Cronin indicator is edited by Paddy Hirsch and production of NPR. Guy Rise NPR's how I built this how a simple splash of colour accidentally launched Sandy Chila which into a forty year career as a designer entrepreneur and creator of the now famous Chile place placement subscriber listen now.