Over the past two years, and especially over the past few months, a mobile app called Robinhood, created by a young startup company, has caused a minor storm in the investing world.
What makes Robinhood different is that it offers no trading fees whatsoever for domestic trades. The company is able to do this because it has no brick-and-mortar stores and because it charges higher prices for international trades.
There's no question that the service works incredibly well. It's a terrific company started by a terrific team. And the service works and I use it.
What this post is about is the psychology of Robinhood.
For smaller investors like myself, the prevailing doctrine is to trade as little as possible. The more you trade, the more you pay out in trading fees, which erodes your profits. This also accomplishes another, more important goal: you learn to stick with a stock and focus on long-term profits instead of frantically switching between stocks.
Robinhood, however, completely eliminates this psychological aspect of investing. So, it's up to the investor to deal with the issue in his own mind.
My own friends have fallen into the trap of constantly switching between stocks while using the app, while touting the service's profit-saving payment structure.
On the whole, it's important to keep the possible trap in using Robinhood in mind. It's a terrific program, but any investor without independent discipline should beware.