In January, a surge of investing coordinated by the Reddit channel r/WallStreetBets (WSB) caused many hedge funds to lose billions of dollars, The Daily Targum previously reported. Many people from WSB used Robinhood, a commission-free investing application, to process their transactions.
The ease with which people can now invest in the stock market raises questions about the differences between gambling and investing as it relates to platforms like Robinhood and the future of these platforms.
“When you're investing, you're making educated decisions about future earning potential on a stock over the long-term,” said Lia Nower, professor and director of the Center for Gambling Studies and the Addiction Counselor Training Program in the School of Social Work. “Gambling is when you are … staking (money) on an outcome of random chance.”
She said that although both actions involve the element of risk, investing revolves more around making informed choices, whereas with gambling, people are making bets more for the action than for the long-term earning potential.
“For the average individual, investing in stocks might be riskier than for a financial advisor or wealth manager. After all, the financial advisor has been trained and has years of experience looking over balance sheets and other facts,” said Devin J. Mills, assistant professor in the Department of Community, Family and Addiction Sciences at Texas Tech University.
Mills said that while stock trading is a form of gambling, since one hopes their investment is going to increase in value, the definition of gambling itself should not be conflated with the extent of the risk. Stock investing does not have to be as risky or riskier than other forms of gambling, he said.
People gamble for a variety of reasons including social and financial circumstances or for the high they may get from the act itself, Mills said.
“It is also possible that (the coronavirus disease) COVID-19 increased interest with additional discretionary funds and no sports or casinos or traveling … People might have been looking for something to do,” he said. “It will be interesting to see if this trend persists after COVID-19 becomes less of an issue.”
Since the beginning of the COVID-19 pandemic in March 2020, retail accounts on trading platforms have greatly increased, with Robinhood recording three million new accounts in its first quarter, according to The Wall Street Journal.
From an analysis done by JMP Securities, more than 600,000 people downloaded Robinhood on Jan. 29 amid the rising of the GameStop stock, whereas its previous best day in March was 140,000 downloads, according to CNBC.
Nower said that the popularity of day-trading itself is not new but that it is now experiencing a resurgence due to WSB and Robinhood.
In the past, she said the infrastructure for investing greatly slowed down the speed at which someone can take risks, but now, people can take risks 24 hours a day right from an application on their phones.
With the ease of stock trading on these platforms, Nower said this likely means that more people are not fully researching the product or understanding it to invest for the long-term, but instead are conducting a flash mob, pushing the needle on a particular stock.
She said that although this method may work at times, there are people that spend years learning how to properly buy and sell stocks.
“I would like to caution anyone to learn about options trading and the platforms before they start,” Mills said. “Trading options spreads is not risk-free. There is no financial security or trading strategy that is risk-free.”
Robinhood’s success and longevity depend on a number of factors, including future government regulation and recent high-profile negative press, Nower said.
Following the surge of the GameStop stock, Robinhood placed temporary restrictions on the trading of certain stocks by retail investors, or everyday users, but continued to allow insiders to trade as per usual, according to the Targum.
The app is now facing dozens of lawsuits from several states, and its CEO, Vlad Tenev, is expected to testify on Thursday in front of the U.S. House Committee on Financial Services, according to The Verge.
There is also a court case brought by the parents of Alex Kearns, a 20 year old who died by suicide when he saw his Robinhood account balance was at negative $730,000 and was not able to get into contact with Robinhood employees about what he actually owed, according to CNN.
Nower said she anticipates more regulations for Robinhood and similar platforms coming in the future.
“This type of behavior can really destabilize the financial markets for the country. So it's not like there's not a risk in general to a lot of people's 401(k) (plans) and a lot of things that could get wiped out, depending on how unstable the market becomes,” she said.