Robinhood and its users have been getting a lot of attention, as analysts and large investors point to the rise of retail investment now that people are stuck at home, and sports and gambling are largely grounded. Robinhood boasts a staggering 13 million accounts, but a great many of those accounts are used by younger people. Younger people don't have much money. It's a great thing to see younger investors learning how things work, but relative to the scale of capital in the stock market, Robinhood's user base is inconsequential.
More than anything, the trades are drawing attention because of how concentrated they are in battered stocks.
Not enough capital
According to JMP Securities, the average account size for a typical Robinhood account ranges from $1,000 to $5,000. The app passed 13 million users this year.
Let's be liberal and say the average account balance is $5,000. Keeping the math straight with 13 million users, that would give Robinhood's community of retail investors a capitalization of $65 billion on the high end of the spectrum. Sixty-five billion is a lot of money for anyone, but for the market, it's not much at all.
Between February 19 and March 12, the U.S. stock market lost $11.5 trillion in market capitalization as COVID-19 hit. That's right --trillions. Netflix (NFLX 2.22%) shares hold a market capitalization of $196.57 billion. That's roughly three times the size of all of Robinhood's assets under management if each account holds $5,000, and the number of accounts is still close to 13 million.
When you look at it from this perspective, it's really tough to make the argument that Robinhood users have any real influence on the market.
They're chasing cheap stocks, which can make some waves
On June 18, Robinhood's list of 100 most popular stocks included names like Ford (F 2.95%), General Electric (GE 3.85%), American Airlines Group (AAL -0.04%), Disney (DIS 3.12%), Delta Air Lines (DAL 1.00%), and Carnival (CCL -1.64%). Airlines and cruise lines have been some of the most volatile stocks in recent weeks. Robinhood's clientele are interested in cheap stocks that have had a rocky start to the year. Those are stocks that have been battered by COVID-19 and have offered big volatility in a short period of time. You can make the argument that Robinhood's assets under management might carry influence over a smaller grouping like this, although even here, the market capitalizations of these stocks are substantial. It's good for trading but not necessarily for investing.
In April, the most popular stock on Robinhood was Aurora Cannabis (ACB 1.23%). The last two years have not been kind to Aurora's stock price, which is down 84% since June 2018. Like many marijuana stocks, expectations were a bit high. Sales and earnings have failed to live up to the hype. The fact that this stock was the most popular on Robinhood shows you the choices that many of its users are making.
Combine that with some truly huge daily moves on nearly unknown micro-cap stocks, and it's easy to understand where people are getting the idea that Robinhood's users can move markets. It's true that they're investing heavily in some of the battered names that are making headlines. As good as it is for younger people to get involved in investing, though, it doesn't equate to moving the entire stock market.