The Curious Case of Robinhood Investors

I heard about the term - 'Robinhood Investor' a few weeks ago and it caught my attention. I have been reading about it on and off through various articles, tweets and blog posts. This post is all about my understanding of this new breed of investors and what it holds for the startups in relevant space.

Who are Robinhood investors?

They are new breed of first time millennial retail investors who typically use discount brokerage platforms for trading in stocks, futures and options. The term came from US where a record 3 million new users joined Robinhood in Q1 2020-21 and started trading and investing in US stocks. Robinhood is a commission free trading app that also lets its users buy fractional shares, futures & options and other investment classes like gold and crypto

Why am I discussing about them?

There is a growing narrative that these investors have been driving the stock market rebounds across the geographies giving a surprising short timed and relatively unexplained 'V-shaped recovery'. However some of global brokerage houses and investment banks aren't convinced with this narrative and opinions are divided. Most of the stock markets have witnessed surge in retail investors participation with few seeing a record spike not seen in previous years

India too has witnesses a sharp uptick in account openings at various discount brokerage platforms like Zerodha

Most of the discount brokerage players have seen a sharp uptick in all key app metrics post covid lockdown

Why are these investors trading now especially in such a recessionary environment?

There are multiple hypotheses - Stay at home, lack of betting avenues (eg: Casinos, Sports Betting), no sporting events and stimulus checks (in US) prompted many first time investors to really think about investment in general as well as investing / trading in stock markets. Below table shows the growing interest among US millennials to allocate certain % of their income for investing in stock markets

So what is the news all about them?

Many of these first time investors have started taking risky bets without doing any due diligence as well as not realizing the potential severe financial impact of it on their lives. As per some of the news many of these first time investors have started invested heavily in penny stocks and stocks of bankrupt companies. They have also taken contrarian bets on stocks that are massively impacted by the covid-19 (viz. Airlines, Casinos etc.) and experts here again opine that these are not calculated bets but just bottom fishing without much thought on underlying business and sector fundamentals

While there is nothing wrong in betting on stocks if there is some fundamental analysis behind the same, most first timers seem to be in short term betting mood rather than long term value investing. This quick gains in short time is fraught with huge risks as these investors are ending up trading in futures and options which is one of the riskiest investment classes. The recent news about Alexander Kearns suicide when he discovered that his Robinhood account showed a negative balance of more than $700,000 is an example of how stock market bets could lead to extreme steps by these new investors.

Why bother about this?

Startups especially in equity markets / financial investments space should grab this opportunity and build a credible long term relation with these new breed of investors. This is important because these new investors will be off once they hit a rough patch and by empowering them to trade with balanced understanding, startups can aim for a long term retention of these users to their platforms. I feel couple of the below themes are worthwhile to explore -

User Onboarding - The new user onboarding experience for first time users to investments in equity and other asset classes should be quite different that others. The focus should be more on contextual explanation that is interactive, educational and fun. It MUST NOT BE A one-sided lecture! Zerodha has a nice learning portal - Zerodha Varsity and I love the way content is organised there but I feel it is one-sided and lacks the interaction element to it. There are couple of ideas that came to my mind -

• Nudge them to schedule their first SIP with a targeted / contextual goal - next holiday, your favourite bike, next smartphone. Gamify this experience! Show the goal getting achieve in some sort of progress bar and perhaps provide some exclusive deals from relevant vendors (car agencies, holiday planners, online portals etc.)
• Teach them about portfolio diversification (again contextually!). Nudge them to invest small amounts in different assets - digi-gold / gold bonds, FDs, PPF, mutual funds, stocks etc.
• Can you teach them about various behavioral biases (contextually!) that investor succumb to? Can you inform the user if he is undergoing a certain bias while buying that asset class. For instance if user is buying a company's shares based on recent rally, then, explain how he/she is influenced by recency bias. If a user is buying a company's shares to minimize the losses through averaging, he/she could be falling a prey to loss aversion / sunk cost fallacy

• Hold their hands when they apply for their first IPO. Can you make the IPO prospectus easy to read and comprehend for them? IMO this is quite important especially for first time investors as most of the retail investor participation in IPO is to apply and sell on listing date. They may not have patience to hold it for longer duration
• Educate them to buy their first share preferably blue chip ones (tell them what blue chip means!). If they seem to be tending towards buying a penny stock, perhaps a warning around why this is a risky bet? Couple of friends who invested first time during this lock down ended up buying such penny stocks with low trade volumes. Thankfully most of them invested limited amounts to test waters
• How do you make them get the aha moment - The first investment? - The first trade profit? How can you delight new users for such specific instances? Can you be a partner in this with them?

Downside Protection - How can you help them protect the downsides to their investment? Can you suggest them counter investment products to offset potential downside to the said one? Can you do this contextually? These users will be new to the alphas and betas of stock markets so may be make them learn it to appreciate it. Can you build products that insure users' against heavy losses from their trades?

Financial Planning - These new users should also be encourage to have a sound financial plan for their lives. I believe this aspect needs to be more humane than robo based as we are now dealing with a user's personal savings. If email client superhuman can have a 1-1 user onboarding experience, why can't a personal finance app have one? Can we make loyal users also the ambassadors of the product? Many of my friends have helped their friends open their first brokerage account on zerodha. Additionally they helped them execute the first trade. This is the most powerful way to onboard (and RETAIN!) a user.

How can we make financial planning lot easier for them to understand. Can we gamify the experience here? Instead of the cookie-cutter approach of goal based saving, may be, make users participate in a sort of pseudo game where multiple users are saving for their same individual goals. You can let users visualize the aha moment of the car purchase gradually by simulating that experience online (say part of a car getting unlocked on every milestone?)

Stock Market Simulation Game - Perhaps this is one of the best ways to make user enjoy the thrills of stock trading without any monetary repercussions and also enable them to learn specific aspects of stock trading. The game should not be just about trading but more around the objective of teaching a beginner about various aspects involved in it (Key metrics, reports, tools etc.). Run competitions, events and perhaps reward them with actual shares!

I am myself amateur in stock investing and financial planning. The above are some thoughts I came across when I was going through this journey from a new investor to beginner to amateur now. Thoughts, suggestions, comments are all welcome!

References -

https://seekingalpha.com/article/4354679-rise-of-robinhood-traders-and-implications

https://www.forbes.com/sites/sergeiklebnikov/2020/06/12/no-the-market-is-not-rallying-because-of-robinhood-traders-barclays-says/#67171213fbb0

https://www.cnbctv18.com/market/who-are-robinhood-investors-and-are-they-powering-the-recent-wall-street-rally-6151661.htm

https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html?