Robinhood: You either love it or hate it.
Its fans point out that it's made investing easy and affordable by offering a mobile trading platform, zero-fee trades, and fractional shares. Its critics cite the lack of guardrails, a confusing interface, and potentially misleading promises.
Given the strong feelings on both sides, I signed up for a Robinhood account and found it to be surprisingly boring. But my first trade on the platform showed that both sides have a point. Here's what happened.
Image source: Getty Images.
The shopping list
After I got my Robinhood account up and running, I wanted -- of course -- to start investing right away. To buy a stock in the app, you click on the stock's listing to open a page with info on the stock and click a "buy" button.
Sounds simple, except that the easiest way to get to a stock's listing is to search for its ticker symbol. But what if you don't know any ticker symbols? What if you have no idea which stocks you want to invest in?
In that case, unless you want to leave Robinhood and do some research, you're limited to clicking on tickers that already exist in the app. These are found in pre-selected "lists," just under the search bar, and include such subjects as "100 Most Popular," "Top Movers," and "Cannabis." Right under those is the app's news feed, in which each article features related clickable tickers. I looked at the news feed. That was my first mistake.
The bandwagon
The leading item in the news feed was about biotech company Moderna's (MRNA -0.58%) COVID-19 vaccine. Moderna's shares were rising in after-hours trading on the news that the U.S. government had upped its contract to buy vaccine doses from the company to $2.5 billion. This sounded like a great opportunity for a novice investor to jump into. And lucky for me -- or so I thought -- Robinhood offers "after hours" trading, allowing investors to place orders outside of the usual market hours of 9:30 a.m. to 4 p.m. EDT.
At this point, it was about midnight -- well past the "extended trading session" that Robinhood offers between 4 p.m. and 6 p.m. EDT, and well before its other "extended session" from 9 a.m. to 9:30 a.m. EDT. I checked the fine print about after-hours trading on Robinhood, and found a notice that, "Any market order placed while all sessions are closed will be queued for the opening of the next session."
"Cool," I thought. "The order will go in at the 9 a.m. EDT extended session opening, and take advantage of the half hour before market open, and then if things start to drop right when the market opens, I can sell it quick and cash out."
At least, that's what I thought would happen...
The other fine print
Turns out, even though I read the fine print -- and Robinhood features a lot of fine print -- I read the wrong fine print. A different batch of fine print went into more detail, specifying, "If you place a market order during extended-hours (9 a.m. to 9:30 a.m. or 4 p.m. to 6 p.m. EDT) your order will be valid during extended-hours. If you place a market order when the markets are closed, your order will queue until market open (9:30 a.m. EDT)," (emphasis added).
After placing my buy order for $50 of Moderna shares (a fractional order for less than a share; one whole share was trading for about $72 at the time), I got an email notice that the order had been placed, but it didn't specify when it would be executed. So, at 9:02 a.m. EDT the next morning, when Robinhood sent me the alert "MRNA is up 9.7% in pre-market," it brought a smile to my face.
That smile got wiped away at 9:30 a.m. EDT, when I opened the app to cash out my lucrative trade... and saw that Moderna's stock had opened at $75.74 and was dropping fast. And that's when I got the notification that my trade had been executed... at 9:30 a.m. EDT for $75.74!
By the time I got back in to sell, shares had already fallen to about $70. Rather than selling immediately at a loss, I did what any good novice stock picker would do: held on to the shares in case they went back up again. Which, of course, they didn't: Moderna's price has since fallen to about $68 per share.
Lessons learned
Even if I had been able to execute my Moderna trade exactly as planned, it wouldn't have amounted to much -- $50 of Moderna stock would have been worth about 0.7 shares. Even if I'd managed to sell at the opening price of $75.74 per share, my gain would have been about 5.2%, roughly $2.60.
On the one hand, a 5.2% gain in less than 10 hours -- most of which I was asleep for -- is pretty good, especially if I'd been able to buy, say, $1,000 or $10,000 of stock instead of $50. But it also would have required everything to be executed perfectly. Even a minute's delay in processing the sell order would have severely cut into that 5.2% profit. And it took less than five minutes for the shares to drop below the $72 that I thought was my entry price, which would have resulted in a loss regardless.
I'll get into this in more detail next article, but orders placed on Robinhood are processed by a high-frequency trading company. The changes in price during the slight delay between order placement and order execution can allow that high-frequency trader to profit off of your order, with Robinhood taking a cut.
Tiny incremental profits like those can really add up for a high-frequency trader who's processing thousands of trades per second. It's a lot harder for an ordinary investor who can only make one trade at a time. Rather than chasing that kind of tiny short-term profit over and over and over, wouldn't it be easier -- and less stressful -- to invest in long-term positions in winning stocks and let your money do the work for you? That's the Motley Fool way.
