Covid-19: Jumping on the Bandwagon to Invest? Think Again. | Jacqueline Lor
Updated: Mar 21, 2021
(A picture of the late Alex Kearns)
We at WomenINVEST, are deeply saddened by the news of the recent demise of Alex Kearns, a Robinhood trader who had committed suicide due to the confusion and dismay he felt when he first saw approximately $1 million of losses racked up in his trading account.
Alex’s story is a cautionary tale for the many new investors out there. Lately, we observed that many have picked up stock investing amidst the Covid-19 pandemic as retail investors seek to look for bargains. This is evident through the record numbers of new accounts opened with brokerage firms in the last few months. Robinhood has been one of such recent popular platforms targeted at Millennial retail investors.
Robinhood’s zero-commission business model had greatly disrupted the brokerage industry, and attracted many first-time investors to sign up as its users. It has given young, first-time investors easy access to a wide range of financial instruments, including complicated financial instruments which are usually used by more sophisticated investors.
However, Robinhood has recently come under fire due to the suicide by one of its customers – Alex Kearns – over the exposure on its app. In a note to his family, Kearns revealed that the tremendous loss shown on his account (-U$730,165) was the breaking point for him to end his life. He even questioned how Robinhood could allow himself, a 20 year-old with no income, to be assigned almost a million dollars worth of leverage.
It has since surfaced that Kearns, who had been trading options, may have misinterpreted the amount of debt he actually owed because of an issue with the user interface. Option traders on the Robinhood app sometimes see a negative cash balance until the other side of the trade is processed.
This raises questions within the industry on the obligation of Robinhood to explain such issues to its users, and many have also criticised the “gamification” approach adopted by Robinhood, where its customers may not feel the actual effects of their exposures in actual cash.
At WomenINVEST, we aim to deliver value-adding content and experience to our members in their investing journeys and would like to share some lessons learnt with you:
1. Know your instruments
It is fundamental to understand the risks and returns associated with a particular financial instrument and whether it suits your own risk profile. The rule of thumb is, if the instrument appears to promise higher returns, chances are the risks involved are higher too.
Kearns had been experimenting trading options, which is an instrument that can multiply your leverage. Beginners often misuse leverage in their option contracts and are unaware about the risks involved in such a strategy.
2. Adopt a stop loss in your trading
Historically, the economy follows cyclical movements i.e. ups (economic booms) and downs (economic bursts, or recessions). However, we are currently witnessing a period of massive volatility within the markets. Having a stop loss can provide a protection to your trade, preventing your losses to increase to a dangerous level that can result in you losing all your capital.
3. Avoid a herd mentality
If you have come across friends sharing on social media who claim that they have made ‘big bucks’ through trading, do stop and think before you decide to jump on the bandwagon. Trading can be profitable, ONLY if you know what you are doing. It is often said that you lose more than you gain through trading/investing. Hence, it is important to know that when you are starting your own trading portfolio, you know what you are in for and that you make your own informed decisions independently.
All in all, educating yourself and gaining sufficient knowledge in the area of finance or personal finance management is key. Please check out our webinar series, where we aim to provide you with basic knowledge tools to better equip yourself in navigating through the world of investing. You may also want to follow us on instagram @womeninvest.ig or subscribe to our telegram channel @womeninvestchannel to receive bite-sized news and financial concepts to increase your financial literacy.
You may wish to learn more about the tragic story of Kearns in the links below: