How to Use Robinhood and Other Investing Apps to Build Wealth

So you want to start investing because you’re a smart, money-savvy woman who knows that your money isn’t working unless it’s growing. Maybe you feel like you’re coming late to the investing party and like you’re miles behind everyone else. Relax girl, you’ve come to the right place at just the right time. With financial technology at our fingertips and investments being more accessible than ever, it's pretty simple to get started. 

Back in the olden days being a new investor was hard. You had to go to an actual library and borrow books to get a feel for the ins-and-outs of the investing world and check the paper to keep up on stock performance. Needless to say, not many people were too keen on the idea of spending their free time doing research just so they could understand a system that may or may not make them any money.

But now thanks to a little thing called the internet, investing is easier than ever. Just a few clicks and you can keep up with stock performance, build an investing portfolio, and buy and sell stocks before you’ve even finished your morning latte.

The newest and possibly most revolutionary addition to the investing industry has been the dozens of investment apps that are cluttering up the app stores with their promises of easy money and effortless trading. Bringing the stock market to your mobile device is a huge advantage for everyday investors, particularly new investors who want to make their money grow on their own time. 

As a newbie investor, you may have a lot of questions about buying and selling stocks. Fortunately, easy-to-use investing platforms like Robinhood, Webull, and others provide an affordable alternative to picking stocks, ETFs, options, and even cryptocurrency on your own or paying a financial advisor to invest your money for you.

As an investor it's a good idea to play to your strengths and place trades that make the most sense based on your research. Ideally the goal is to be putting money into your account and watching your money grow over time without having to fork it all back over to the government each year when tax season rolls around. This is where investing apps can also have their downside. 

To avoid getting hit with crazy tax rates, it's a good idea to be investing in tax-favored retirement accounts such your employers 401(k) plan or your own traditional IRA, that allow you to invest without paying taxes until you withdraw money from the account during retirement. And if you invest within a Roth IRA or Roth 401(k) you will pay taxes when you contribute to those accounts but qualified distributions of your investment earnings won’t be taxed as income. By understanding how taxes work on your investment income, you can take advantage of greater compounded growth.

Although investing in tax-favored retirement accounts is the most advantageous move for investors of all experience levels, IRA's aren’t always offered through investing apps. While investing apps are convenient, investing apps with self-directed trading only allow you to invest in taxable accounts. Meaning if a user buys a stock and quickly sells it for a profit, that's a taxable event. Cashing in on profits on an investment held less than a year is called realizing a short-term gain. Taxes are higher on realied short-term gains than on realized long-term gains, positions held longer than a year.

So should you just quit investing apps cold turkey?

It depends on the type of investing you want to do. Investing apps with self-directed trading are best for individual stocks you plan to hold for at least a year as well as index funds and ETFs which are more tax efficient investments. They are not ideal for day trading stocks, or stocks that you are buying and selling quickly (flipping), even though that’s what many people are using them for.

Misunderstanding how these investing apps work is costing users a pretty penny. Actually more like thousands of dollars. 

According to recent studies, the monthly returns of those investing in the suggested top ten newly purchased stocks on the app Robinhood, were “horrific.” The study showed that if one were to continue to conduct day trading with the top ten stocks of the day everyday for two years, users would end up losing 97% of their investment due to taxation and inflation on their returns. 

Now I’m not saying you need to delete those apps off your phone right now in order to save yourself from utter financial ruin. I’m just saying that you should make sure you understand how trading works, especially the basic tax rules, with investing apps before you start making impulsive decisions. That way you are making the most out of every investment and aren’t losing your profits to unnecessary taxes. 

Maybe you like using investment apps because they're convenient and feel more hands off. They let you buy and sell the securities you want without having to put in too much effort. If you like the hands-off investing approach and you still want to take advantage of tax-favored retirement accounts, you can look at utilizing a robo-advisor like Ellevest, Wealthfront, or Betterment. That way you can just sit back and relax and let your money do it’s thing without thinking about tax implications.

Just to break it down and make it easier to understand all this money jargon, here are so simple pros and cons of self-directed trading investment apps:

PROS

1. Easily accessible -- you can bring them with you on your phone wherever you go!
2. User friendly and easy to use -- they are designed to make trading and investing easy for everyone. 
3. Great features -- they offer bonus features like alerts when there’s a change to your stocks, recommendations of which stocks might fit your personal investing style, and require no minimum deposit so it’s totally free. 

CONS

1. Not always tax friendly -- these apps don’t always offer you the most tax-savvy investment accounts so you could end up losing money in the long run. 
2. “Game-ify” stock investing and trading -- seeing a burst of confetti after you trade and pressing flashy buttons can make investing seem like a harmless game, when in reality it’s your real money on the line!
3. Encourages day trading which isn’t always the best option -- these apps encourage you to buy, and sell stocks everyday without any consideration as to whether or not this is smart for your portfolio or investment strategy. 

So, Robinhood and Webull are not the root of all investment evil, they just might not be what’s best for you if you're just starting your investing journey. Before you jump onto the investing app bandwagon, make sure you’ve done your research and understand the advantages and disadvantages of using these apps. 

At the end of the day it all comes down to what investment choices are best for you -- and how you can make all that hard-earned money work for you (minus the shock of seeing your annual 1099 tax form)!

Sources:

Answers to Common Questions from New Investors -- Turbo Tax 

How to avoid losing all your money on investing apps -- Recode, Vox