ARUN RATH, HOST:
Here's an attractive-sounding pitch for a fast-growing app called Robinhood.
(SOUNDBITE OF ROBINHOOD AD)
UNIDENTIFIED ACTOR: You ever think about trading stocks? I mean, you can now, of course. There's always been a cost, usually up to 10 bucks for every single trade. That adds up. No way around it for like people like you and me until now.
RATH: This app, Robinhood, is making news because it's a $0 commission stock trading app. Anthony Effinger from Bloomberg Markets has written about Robinhood. He says the app is aimed at millennials.
ANTHONY EFFINGER: This a generation that saw the 2008 crisis and the 2009 collapse in stocks and said, you know, no, I'm knowing there. And the two founders of Robinhood were like, well, let's try to get people back into the market.
RATH: Now, if they're not charging for trades, how does Robinhood make money?
EFFINGER: They're going to charge people to have what's called a margin account where you can borrow from them to buy stock, which is for anybody - anybody, even a big investor - is very dangerous. The second way is they're going to sweep interest off of your cash balances and keep it for themselves.
RATH: According to Robinhood, as of last month, users have transacted over $1 billion through its platform. But is it smart to make stock trading as easy as posting a selfie on Instagram?
EFFINGER: Portfolios that do best are the ones that people - they buy a bunch of stuff, and they forget about it. They buy bunch of stuff for their 401(k), and they never look at it again, and I've read that story a thousand times in personal finance magazines. This is about trading. The danger is you got this thing in your pocket. You've got a bunch of stocks on there. There's no penalty to buy or sell 'cause there's no commission, so you get a little scared. The market starts going down. What do you do? You bail out, and then it's often hard to get back in. You never want to be a trader. You want to be an investor. And when - the experts I talked to - they were concerned this could create traders, not investors.
RATH: But what if you're a market whiz - you know, somebody who really knows things in and out - you know, when to sit - could you make some money with this?
EFFINGER: There are so few people who beat the S and P. It's just very, very hard to beat the market. I mean, there's high paid hedge fund managers who make billions who don't beat the market. Look, if you're - if - say, here's an ideal situation. You're a person at a tech company in San Francisco. You're young. You're working there. You've got all your money tied up in stock of this company. You want to diversify. You get the Robinhood app. You can buy some other stocks. And you hold it, and you did that commission-free. That's a victory. If they can convince other people to buy and hold and not trade when they get scared, they might have a winner, but that's a big if, right?
EFFINGER: I mean, it's so tempting to trade if that's in your pocket, and the market's going down 600 points.
RATH: It's an app on your phone. I'm not saying that it's like Candy Crush, but you kind of like playing around with these things, right?
EFFINGER: Yeah, and I actually think that's a great point because this is - it's real money. Silicon Valley really wants to take the friction out of everything, right? But investing - it turns out a little friction's not a bad thing - something to slow you down and make you take the time to do your research, do your homework and stick with your plan. Speed's not always a great thing. I mean, look at this last two weeks. I mean, the market - you wake up. The market's down a thousand points. You look at your phone. You freak out. You can sell with no cost. But what happened the next day? The market bounced back. You know, most often, these big drops are followed by recoveries. Now, someday, maybe that's not going to be true, but, you know, so far, the track record is otherwise.
RATH: That's Anthony Effinger, writer for Bloomberg Markets.
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