Reimagining financial democratization: Filling gaps Robinhood missed

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Andreas Poike/Creative Commons

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Usually, Uber rides are filled with silence or periodic conversation followed by silence. No wonder each ride gradually blurs together. That wasn’t 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. Though I am not sure whom he was speaking with, he explained how the price of heavily shorted stocks had risen. As he elucidated the short squeeze orchestrated by Reddit traders and what it meant, what stuck with me the most was him sharing that he had successfully profited off option contracts for Gamestop the day before.

To quickly clarify how option contracts work: Essentially, they allow a buyer to purchase 100 shares of a stock (per contract) at a fraction of the cost you would otherwise have to pay. Contracts also have a defined time period in which they must move in the direction you predicted. This differs from traditional trading, which is fundamentally premised on the buyer being able to make money as the value of a stock rises. With options, you can play both the rise and fall in price through call and put options, respectively.

I have used words such as “predicted” and “play” because while the movement of the stock market certainly has logic to it, that logic is rather limited. At some level, it is no different than gambling — arguably, at even higher stakes — with high levels of luck and risk involved. This is why it matters why, how and who is investing.

There’s an inherent elitist connotation associated with the stock market, often connected to Wall Street, corporations and big money rigging the game in their favor. However, there’s clearly more to that puzzle: My Uber driver, as well as the aforementioned Reddit traders, remain a testament to the ever-growing presence of average Americans in the stock market. Especially since the founding of Robinhood, a gamified brokerage with a commission-free trade and zero balance requirement model that has made it largely attractive to new investors, democratization of the stock market has become a hot topic in the finance world.

While Robinhood made it easy to invest, it also increased the levels of speculation coming from unseasoned traders. The recent Gamestop surge is just another event that makes many Americans question: Can financial capitalism just never be democratized, or did “gamifying” stocks oversimplify investing? With limited knowledge of the stock market past the basics and a small yet generous grant from my father to learn how to invest, I set out to explore that question for myself.

Within my first couple of weeks of trading options, I was able to yield nearly a 12.5% return on my portfolio. For reference, the annual average return of the S&P5o0 is 13.6%, meaning I had easily outpaced the annual return of a top-performing index that investors often use to compare themselves with. These quick returns become a constant expectation for many investors such as myself, making how tempting it is to keep buying a significant factor.

Using money my parents had generously provided, I hesitated to make risky bets. As luring as buying into the Gamestop rally was, I never did, despite seeing friends, social media and even my Uber driver capitalize on the opportunity. Yet, thousands of new traders continue to engage in the practice of trading highly volatile stocks each day, even more so than normal during the pandemic.

For many, the stock market has become the avenue to address the failings of public policy.

The other factor we must acknowledge is that for many the stock market has become the avenue to address the failings of public policy. Poverty and other social issues have only become ever more apparent in our communities. The failure of public institutions to adequately provide for those in need has further pushed new traders to take their chances with “YOLO” plays, putting them in vulnerable positions where they often end up losing their gains or all their invested money. Consequently, the market is no longer a place where people put in 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 retail traders in the long run — proving this is far from a sustainable marriage.

This is further exacerbated by the fact that profit-making, as one would expect, is far easier when you are able to buy at larger volumes. Larger volumes also mean larger sums of money being invested by traders. For a retail investor, this comes with great risks. On platforms such as Robinhood, the inherent ease of trading combined with this basic premise often results in traders buying on margin. In simplest terms, a margin is a loan, and as with any loan, there is an expectation to pay the money back. However, when things don’t go the way the trader expected, they fall into debt.

Financial inclusion remains an ongoing challenge, and responsible, effective democratization of the stock market is part of that. Democratization extends beyond providing easier means to participate. As easy as it is for me and other people to invest, it is far more difficult to invest responsibly. If the first interaction people have with the market is based on a lack of understanding, we are not only setting them up for failure but also creating an experience that will likely make them never return to the market, even if not immediately.

Financial literacy remains crucial. We must certainly grow, improve and continue to educate young people and those belonging to groups that are often left out of financial systems such as people of color and immigrant populations. At the same time, we must recognize that education is often passive and does not truly equip people with the necessary skills and knowledge to tackle barriers. While I watched many YouTube videos and read various articles to understand trading instruments and mechanisms, I only began to better understand them after utilizing that information through actually investing. And while there is certainly value in using trading simulators to acquaint yourself — which I, too, did — there remains a psychological and emotional difference between losing fake money and actual money.

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

It would be dishonest to suggest that I know everything I need to about the market. My journey is ongoing. I learn with each trade I make — breaking down my failures and losses while finding patterns in my successes. I see the flaws of the system while also being able to appreciate the value the market adds to society.

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

The solution lies in empowerment: government-sponsored baby bonds for students, serving as their introduction into the financial world and subsequently the stock market. By providing students even a small sum of money coupled with knowledge on how to use it through greater financial literacy, we give the youth a stake. As students wouldn’t be able to access this money until they are 18 and they could easily be made tax-exempt, these bonds would also enable us to make strides toward financial independence and equality, which remain an issue for a large subset of Americans.

I worry that the market will continue to be treated much like a casino. And while they might appear to be similar in that you are either a winner or loser, the value of the market lies in its ability to yield long-term accrued growth for the average person. Today, nearly half the nation remains uninvolved in the market. I imagine that number will greatly decrease as the market becomes more and more accessible. We have the potential to ensure financial democracy is attainable, and it begins with investing in the American people.

Contact Vishwaa Sofat at [email protected].