Reinventing Financial Democratization: Closing the Gaps Robinhood Failed

UUltimately, Uber journeys are filled with silence or periodic conversations followed by silence. No wonder each journey gradually blurs. This was not the case this time.

Sitting in the back seat as our car headed towards Mount Sinai Hospital, I was surprised by what my Uber driver was talking about on the phone: Gamestop. Although I don’t know who he was talking to, he did explain how the price of the sharply short stocks had gone up. As he elucidated the short squeeze orchestrated by Reddit traders and what it meant, what stood out to me the most was that he shared that he had successfully taken advantage of options contracts for Gamestop the day before.

To quickly clarify how option contracts work: Essentially, they allow a buyer to buy 100 shares of a stock (per contract) at a fraction of the cost you would otherwise have to pay. Contracts also have a set period during which they must move in the direction you have planned. This differs from traditional trading, which is fundamentally based on the ability for the buyer to make money as a stock’s value increases. With options, you can play both upward and downward in price via call and put options, respectively.

I have used words like “predict” and “play” because while the movement of the stock market certainly has some logic, that logic is rather limited. On one level, it’s no different than gambling – arguably, at even higher stakes – with high levels of luck and risk involved. This is why it is important to know why, how and who is investing.

There is an inherent elitist connotation associated with the stock market, often tied to Wall Street, with corporations and big fortunes rigging the game in their favor. However, there is clearly more to this puzzle: My Uber driver, along with the aforementioned Reddit traders, remains a testament to the ever-growing presence of average Americans in the stock market. Especially since the founding of Robinhood, a gamified brokerage firm with a commission-free, zero-balance requirement trading model that has made it widely attractive to new investors, the democratization of the stock market has become a hot topic in the world. world of finance.

While Robinhood made investing easier, it also increased the levels of speculation from inexperienced traders. The recent wave of Gamestop is just another event that has many Americans wondering: can financial capitalism ever be democratized, or have gamifying stocks oversimplified? ‘investment ? With limited knowledge of the stock market beyond the basics and a small but generous grant from my father to learn how to invest, I set out to explore this issue on my own.

In my first two weeks of options trading, I was able to generate a return of almost 12.5% ​​on my portfolio. For reference, the average annual return of the S & P5o0 is 13.6%, meaning that I had easily exceeded the annual return of a top performing index that investors often compare themselves to. These quick returns are becoming a constant expectation for many investors like me, which makes the temptation to keep buying a big factor.

With the money my parents generously provided me, I hesitated to make risky bets. As appealing as buying the Gamestop Rally is, I’ve never done it, despite friends, social media, and even my Uber driver taking the opportunity. Yet thousands of new traders continue to engage in the practice of trading highly volatile stocks every day, even more than usual during the pandemic.

For many, the stock market has become the means to remedy public policy failures.

The other factor that we need to recognize is that for many, the stock market has become the vehicle for remedying public policy failures. Poverty and other social issues have become increasingly apparent in our communities. The inability of public institutions to meet the needs of those in need has further prompted new traders to try their luck with “YOLO” games, putting them in vulnerable positions where they often end up losing their winnings or all of their money. money invested. As a result, the market is no longer a place where people put their savings, but rather their stimulus checks or student loan money. Desperation has succumbed to volatility while disrupting traditional market mechanisms at the expense of long-term retail traders, proving that this is far from a lasting marriage.

This is further exacerbated by the fact that profit making, as you would expect, is much easier when you are able to buy larger volumes. Larger volumes also mean that larger amounts of money are invested by traders. For a retail investor, this carries great risks. On platforms like Robinhood, the inherent ease of trading combined with this basic principle often leads traders to buy on margin. In simpler terms, a margin is a loan, and as with any loan, the money is expected to be paid back. However, when things don’t go as planned, the trader goes into debt.

Financial inclusion remains an ongoing challenge, and responsible and effective democratization of the stock market is one of them. Democratization goes beyond providing easier ways to participate. As easy as it is for me and others to invest, it is much harder to invest responsibly. If the first interaction people have with the market is based on a lack of understanding, not only do we set them up for failure, but we also create an experience that will likely make them never return to the market, even if it doesn’t. is not immediately.

Financial literacy remains crucial. We certainly need to grow, improve and continue to educate young people and those belonging to groups often excluded from financial systems such as people of color and immigrant populations. At the same time, we have to recognize that education is often passive and does not really give people the skills and knowledge to overcome obstacles. While I have watched many YouTube videos and read various articles to understand trading instruments and mechanics, I only started to understand them better after using this information when actually investing. And while it is certainly helpful to use trading simulators to familiarize yourself – which I did too – there is still a psychological and emotional difference between losing fake money and losing real money.

Financial inclusion remains an ongoing challenge, and responsible and effective democratization of the stock market is one of them.

It would be dishonest to suggest that I know everything I need in the market. My journey continues. I learn with every trade I make – break down my failures and my losses while finding patterns in my successes. I see the flaws in the system while being able to appreciate the value that the market adds to society.

However, that wouldn’t be the case if I hadn’t secured the support of my family with what is no different from a baby bond – bonds designed to “attract ordinary investors who may or may not have.” no large amounts to invest ”, as defined by Investopedia. While my parents have supported my learning process, many families cannot or will not. The stock market may not be for everyone, but it should be a product of choice rather than the result of a societal disparity in wealth, access or knowledge.

The solution lies in empowerment: government-sponsored baby bonds for students, serving as an introduction to the financial world and eventually to the stock market. By providing students with even a small amount of money coupled with knowledge on how to use it through greater financial literacy, we are giving young people a stake. As students would not be able to access this money before the age of 18 and could easily be exempt from tax, these obligations would also allow us to move towards financial independence and equality, which remains an issue. for a large subset of Americans. .

I am concerned that the market continues to be treated like a casino. And while they may seem similar in that you are either a winner or a loser, the value of the market lies in its ability to generate long term growth for the average person. Today, nearly half of the nation is still not involved in the market. I imagine that number will drop dramatically as the market becomes more accessible. We have the potential to ensure that financial democracy is achievable, and that starts with investing in the American people.

Contact Vishwaa Sofat at [email protected].

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