New trading applications that democratize access to financial markets are facing great success with younger generations. In spite of the uncertain economic context, many millennials and young people of generation Z have started trading through these applications during the confinement, but this is not without risk and controversy.
Three million new users in six months! That is the impressive record set by Robinhood, a new trading application that is all the rage across the Atlantic. Founded in 2013 by Vladimir Tenev and Baiju Bhatt, two former members of the Occupy Wall Street movement who wanted to democratize access to financial markets, Robinhood offers a fun, intuitive, and interactive interface to perform transactions exempt from the usual brokerage fees. With this application, investing in the stock market becomes as easy as child’s play, and each transaction is even greeted on the screen by a shower of confetti! With its revolutionary approach to trading similar to a game, Robinhood has attracted 13 million users since its launch, most of whom are under the age of 35, and was valued at $8.6 billion last summer.
This millennium craze for trading has strengthened considerably with the pandemic, with young people spending more time on screens and the need to find a hobby driven by the hope of making quick profits in the context of a sluggish job market. This situation has fully benefited the new players of trading that are Robinhood and its competitors, and since March 2020, the figures are dizzying: the assets deposited by Robinhood users have been 17 times higher than in the fourth quarter of 2019. From February to March 2020, activity grew by 60%, with an average of 4.3 million daily transactions, and the application has succeeded in attracting half of the new investors. Other trading applications with similar concepts, such as eToro or Raging Bull, have met with the same success, offering a new approach to financial markets adapted to millennials and Generation Z: easy use, total or partial exemption from the usual brokerage fees, and highlighting the most successful users to the community as real influencers, at a time when Twitter and other social networks are capable of strongly influencing stock prices. Subscribers can exchange with each other and copy portfolio models to hope to replicate their performance, without the need for complex knowledge of financial mechanisms. In the first quarter of 2020, the Robinhood, eToro and Raging Bull trading applications achieved growth of 300%, 220% and 158% respectively, attracting a large number of first-time investors. In March 2020, 56% of new Robinhood users were investing in the stock market for the first time and most of them were under the age of 35. In the months following the outbreak of the pandemic, the average age of individual investors decreased between 10 to 15 years.
The investor profile of millennials reflects their generation. Having had little or no experience of the 2008 crisis, and having experienced a generally favorable evolution of stock market indexes in recent years, they show more appetite for risk and more optimism than their elders. Thus, Generation Y invests more than the general population in derivatives, as highlighted in a recent study by E-Trade. A survey by broker Schroders also reveals that 18-to-37-year-olds expect average annual returns of 11.7%, compared to 7.5% for baby boomers and 10.7% for investors of all ages. As for the preferences of the millennials, they naturally favor sectors and companies that are familiar to them, notably digital services or technology, with companies such as Tesla, which is at the top of the list of the most popular stocks, or values to which they are sensitive, such as those related to responsible investment. Confident in recovery after the pandemic, they did not hesitate to invest in stocks that were badly affected by the crisis, such as air transport, or other sectors that, on the contrary, took full advantage of the acceleration of digitalization caused by the pandemic, such as start-ups offering videoconferencing services.
The young generation’s sudden enthusiasm for investment has not failed to stir up resounding controversy in the face of the risks incurred by these millennials with no real experience of the stock market. Although they are presented in an intuitive and entertaining way, the transactions remain very real, as do the potential losses or gains generated, even though the financial products on offer are not limited to shares alone: options, CFDs, and other leveraged investments are accessible in just a few clicks, without users being aware of the risks involved. Some people, developing a form of addiction, have quickly swallowed up all their savings, suffering a loss without making a profit!
In addition, faced with the influx of new users, Robinhood experienced certain problems, including technical bugs, that led to downtime that could last several days, making all operations impossible. These malfunctions sometimes had dramatic consequences, such as during the summer when a 20-year-old student killed himself after noticing that his account showed a negative balance of -$730,000 … while a few days later, this balance turned out to be the consequence of a technical error related to transactions not yet accounted for: the account was actually positive! Following the setbacks encountered with the trading application, users did not hesitate to go directly to Robinhood headquarters to confront the teams. Since then, armored windows have protected the entrance to the start-up’s headquarters in California.
In addition to the potential problems related to the investment choices made by these Y and Z generation traders, the interactions of their community on trading applications may also have increased the volatility of the markets and of certain securities. For example, paradoxically, Hertz shares rose 800% a few weeks after the company was declared bankrupt in May 2020. It turns out that these shares were among the most popular shares on Robinhood, held by more than 160,000 users.
More recently, at the end of January, the speculative boom in Gamestop’s shares shook the financial markets and hedge funds, highlighting the power of this new generation of “stockbrokers.” Communicating on social networks, such as Reddit and its forum r/wallstreetbets, these users banded together to support Gamestop, a struggling video game company, putting a damper on funds that, by short selling, were betting on the stock’s downfall. Out of sympathy for the company, or the hope of winning, and for many of them, motivated by the desire to counter actions symbolizing financial capitalism, these new generation traders massively bought back Gamestop shares, raising the price from $20 to $492 in the space of 15 days. By raising the price, they forced short selling funds to cover themselves by buying Gamestop shares at a rate hundreds of times higher than the initial price, causing them colossal losses – $3.75 billion for the Melvin Capital fund alone – even forcing the Robinhood application to limit transactions.
Although Robinhood is not yet live in France, other competing applications, such as eToro, are already available, and this new millennial interest in trading is prompting other players to enter the niche, such as Trade Republic, a German brokerage application that has just announced its launch in France. So, tomorrow, we’re all stockbrokers? What is certain is that the world of trading has entered a new era!
