3 Important Lessons I Learned Firsthand by Using Robinhood
In recent months many Financial bloggers and YouTubers have been talking about Robinhood and how it is an accessible way to begin investing and trading stocks. I've been on the platform for over a year and I can say my experience has been positive. I threw some money in, made some decisions about what to buy and let it sit for a while, and watch my money grow. What was more important to me was the learning experiences I got from using the platform. My education background is in finance and I believe I understand financial markets better than most people, but there is a different perspective and different lessons learned when you are using your own real money to invest in these individual stocks. Because this is Scale Financial Education, today I’m going to tell you about the valuable lessons that can be learned first hand from a trading app like Robinhood:
Stock Price Fluctuations
During the days after I got my first free stock for joining and purchased a few more with the $100 I put into the app, I learned how quickly and how often prices for stock can change. Some cheaper stocks can fluctuate up and down 6% on any normal trading day, whereas other stocks may only shift by less than 1% most days. If a Company has good press that has investors believe the company is more valuable, the price will go up substantially. With Robinhood, you get to see all these events happen in real time with the money that you put in yourself, which leads you to be more invested in learning about the information so you can stay informed on how to make your next investing decision.
Diversification is Important!
Everyone always says how diversification is important when investing your money. Many people pick out their 401k allocations by picking different groups of companies to invest in, ensuring that the investment is spread across different types of companies because it reduces risk. With Robinhood, I made sure to diversify my (very small) portfolio by investing in companies of different sizes and industries. I started my portfolio by putting in what I could afford at the time. With only $100 or so, my choices were limited. of the stock side shows of the time, two stuck out: Tencent (TCEHY) and Novavax (NVAX). During the last year or so Novavax (a pharmaceutical company) had lost more than half of its value because one of the vaccines the company was in the process of researching and developing had failed during its trials. This is when I learned the hard way that not every stock you pick will be a winner, and that I will lose out on some money while investing. I was saved over time because my investment in Tencent had gone up by over 30%. At the end of the year I had come out on top, with the gains from some stocks offsetting my losses from other stocks. This experience really put the phrase “diversify your portfolio” into perspective for me because it was the first time that I could really see the stocks that I chose winning and losing at the same time.
Dividend Reinvestment
If you've read our other blogs, you've probably seen the effects of compound interest and how it can really add up over time. I was speaking to my friend when I had some extra money to put into Robinhood and he suggested that I invest in more dividend paying stocks because they provide a consistent return on investment. One of the REITS iI’m invested in: Starwood Property Trust (STWD) paid a dividend of $0.48 per share. Because I bought the shares at an average cost of $10.61, my annual return for the dividend alone (not including a large amount of stock appreciation) would be 4.53%, which is more than twice the rate I earn from my high yield savings account. But the story isn’t over there, because I took that dividend and used it immediately to help buy more stocks to hopefully receive more dividends in the future (to buy more stocks). By looking out for these dividend paying stocks, I was able to experience first hand the process of taking a dividend and investing the return for more value in the future.
If you are interested in using Robinhood to learn about investing and would like a free stock, check it out using my referral link. Beyond the obvious potential for financial return by using the app to invest your money, I believe it is more powerful as a method to teach personal finance and investing to new investors. So what are you waiting for? Get started and start learning today!