Robinhood Is Easy to Use; Does That Make It More Risky?
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Here's your Money Briefing for Friday, August 21st. I'm Charlie Turner for The Wall Street Journal. Online trading has never been easier thanks to a new generation of trading apps. But what are the risks, especially for inexperienced traders?
If traders are just trading because it's fun, it's a neat experience, and it's easy to do, there's a lot of research that has shown for decades now that the more frequently a person trades, the more likely they're going to lose money in the longer term.
talk with our reporter Mike Worsthorn all about it after the break.
Some new stock trading apps like Robinhood are making it easier than ever for people to trade. But it's exactly because they're so easy to use that some observers are worried. Our reporter Mike Worsthorn has been looking at some of these apps and he's with us now. Mike, thanks for joining us. Thanks for having me. So Mike, a few weeks ago you were on the show and we talked about the rise of day trading during the pandemic. And since then you've been looking into some other reasons these trading apps like Robinhood are attracting users. What are these apps doing that traditional trading platforms aren't?
So really, Robinhood led the charge in this, but it made trading free. Before Robinhood came along, people were spending at some points as much as $10, $20, $30 a trade on commissions. And that just kept getting knocked down once Robinhood came onto the scene. The other thing that they really also did, too, is just made trading from a smartphone hugely popular. Before that, people were obviously still using computers. They were relying on just other big infrastructure if they wanted to make trades. Robinhood made trading from a phone possible, easy, and mainstream, really.
Tell us more about how Robinhood works. What's the typical experience like if, say, I execute a stock trade?
On an app like Robinhood, the interface for trading is very colorful. You see bright red or bright green for the stock tickers, depending on whether those shares are up or down. You're getting notifications. You're getting alerts, depending on if the moves are big enough in the app as well. Typically, people's first experience with the app is they get a referral from a friend of theirs. And usually that referral will then lead them through the signup process and they'll get a free share of a stock from Robinhood in this case, but some of the other ones like Webull do the same thing. What that does though, it's basically a free trial for users. So they have their first taste of stock ownership, their first taste of investing experience through what seems to be a pretty harmless toe in the water.
So one person I spoke with, she got a free share of Macy's. She sold it soon after. But that was one of her first trades. It really gave her some experience to understand how this works. And really, when you're trading on the app, it's a pretty seamless function. So you go from starting the account, getting the free share, to putting a deposit in, to making that first trade. It's all glided through very easily. And to execute, you just swipe up on the screen, a simple swipe up, and your trade's executed. You'll see a little bit of confetti shoot across the screen celebrating the milestone. And the user starts their journey as an investor.
But what if a user changes his or her mind? How does canceling a trade work?
That's where some of the behavioral experts that we spoke with, especially people that specialize in computer to human interaction, clarified that that's what seems to be a dark pattern. And what that basically means is that there are options put in front of the user that guides them toward That's good for the company, but maybe not so good for the user in every instance. In Robinhood's case, and this is also mostly true on Webull as well, which is another popular trading app that came after Robinhood, a user, they'll go to confirm the trade. You'll see a swipe up or you'll see an edit it link. you hit that edit link and then you have a small X that you can hit to cancel the trade.
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