Do-it-yourself online brokerage firms have been laser-focused on delivering convenience, speed and accessibility, but less so on providing the necessary education or guidance to empower investors to make smart — not just fast — trades. That could hurt them.
As online brokerages including Robinhood, E-Trade, Interactive Brokers and Webull Financial rushed to restrict trading in GameStop, AMC and Blackberry last week, amid a viral frenzy of trading, it became all too clear that speed and convenience alone are not enough to carry their brands.
By Friday, the online brokerages were being named as defendants in a series of lawsuits asserting that the firms were “depriving retail investors of the ability to invest in the open-market” while protecting the industry establishment.
There is an important angle to this story that has received less attention, which is that many individual investors participating in this rally are young and inexperienced traders who have piled into the market in record numbers since COVID.
Many of them bought shares in these companies at prices that far exceed any rational assessment of future earnings potential, responding to online chatter or just trying to take advantage of short-term market momentum. Many of these investors will wind up losing money and becoming disillusioned with investing, or worse, as we saw with the suicide of a 20-year-old Robinhood customer last July.
Read the full J.D. Power byline How Online Brokers Can Help Protect Investors From Costly Mistakes on ThinkAdvisor from Mike Foy, senior director of wealth and lending intelligence at J.D. Power.
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