Whether it’s merely out of boredom from so much social isolation, or it’s a desperate move to earn a bit of income, 2020 was marked with a sudden increase in novice investors. This sudden spike in both interest and in investors can be attributed to the advent of free stock trading apps such as Robinhood.
What Is a Free Stock-Trading App?
A free stock-trading app, such as Robinhood, is a platform that allows investors to trade stocks for free by waiving their brokerage commissions. Robinhood was a particularly popular stock-trading app not just because of the free trades it offers its investors, but also because of the simplicity of both the workflow and the interface. This made it possible, if not easy, for people to start trading even if they do not have any trading experience.
Day Trading, Defined
Due to the ease at which investors are able to place their trades, and because trading platforms such as Robinhood offer unlimited free trades, many novice investors have begun to use free stock-trading apps as day-trading tools.
Day-trading refers to the practice of buying and selling a security within a single day. Sometimes, this practice is done several times a day in order to make small profits.
While enabling anyone and everyone to trade is an admirable goal, the danger is that free stock trading platforms also expose traders to high risk of losing their investments.
Stock Trading Apps Really Work, But…
As far as functionality and goals are concerned, free stock-trading platforms really do work. There isn’t a scam here, nor are there any hidden agendas. Users are able to trade for free. Even when these trading platforms waive their commission-related proceeds in order to allow users to trade for free, these platforms still earn a significant amount of money because of the sheer number of account sign ups. In fact, there were more than three million account sign-ups during the first four months of 2020.
The only problem is that the vast majority of users are not day traders, and they may be prone to making bad decisions. Even when you have the best free stock screener, you aren’t guaranteed to gain significant profits without first investing time and effort into understanding how stock trading works. This is especially important when you consider that the Robinhood platform also grants its users access to risky investment options.
In options trading, a trader enters into an options contract to have the broker withhold from selling the security until a determined period. In exchange for withholding from selling the securities, the trader [buyer] gives the seller an options payment. A contract to sell cannot be made in this instance because the buyer has not expressed consent to the purchase, even when the buyer is clearly interested in the security.
An options contract differs from a contract to sell in that it grants the buyer merely the option [and not the obligation] to purchase the determinate security. The buyer is not obliged to purchase the security, and is therefore free from any liability for not following through with the purchase. In contrast, if a buyer fails to purchase a determinate thing in a contract to sell, the seller may sue the buyer for a breach of contract.
The tragedy here is that not many novices will understand how options trading works, as is the case when a 20-year old trader committed suicide after trading options and finding that his Robinhood account showed a balance of negative $730,165. The trader was not obliged to buy the security at that price.