More people are investing using trading apps. There are reasons to worry. : The Indicator from Planet Money Stock-picking retail traders have been jumping into the market this year. They may not understand the risks.
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Your Brain On Retail Trading

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Your Brain On Retail Trading

Your Brain On Retail Trading

Your Brain On Retail Trading

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Jim Watson/AFP via Getty Images
The Robinhood vestment app is see on a smartphone in this photo illustration on June 24, 2020 in Washington,DC. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Jim Watson/AFP via Getty Images

Individual trading apps like Robinhood have become increasingly popular during the pandemic. The company that owns the Robinhood app, for example, says that so many more people made stock and options trades using its technology that it doubled the amount of revenues it made from such trading in the second quarter, to $180 million.

Many people say Robinhood is a source for good: it doesn't charge fees and has lowered the bar for entry to people who want to trade. That has introduced a lot of people to stock trading and to the stock market. It might also help educate people about how companies function, and how the economy works overall. All good.

But there are some downsides, too. Retail traders are particularly vulnerable to overconfidence, under-diversification, and to psychological biases like the disposition effect. And active stock-picking, according to decades of research, will likely be an underperforming strategy for most people, who would be better off with a passive investing strategy. Do all these new retail traders understand the risks they are taking?

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