Leverage ‘can rip your arms off,’ former TD Ameritrade boss says in warning to meme-stock retail traders

Joe Moglia
Joe Moglia, former CEO of TD Ameritrade and current chair of FG New America Acquisition.

  • “Leverage on the way up is a great thing. Leverage on the way down can rip your arms off,” former TD Ameritrade CEO Joe Moglia tells retail traders in meme-stocks in a CNBC interview.
  • Brokerage firms and financial houses dealing with retail investors must be better at educating their clients about the risks of leverage or using loans from brokers to buy stocks.
  • Moglia on Thursday addressed retail investors as AMC shares have rallied sharply in the last two weeks.
  • See more stories on Insider’s business page.

Using leverage, or borrowing money to buy stocks, can pay off for retail investors participating in the explosive rallies in AMC Entertainment, GameStop and other so-called meme stocks but they need to be aware that those trades can quickly turn and burn them financially, the ex-head of TD Ameritrade said in a CNBC interview on Thursday.

“My biggest concern is what’s going on with the individual investor … and that they’ve got to be able to understand when they use leverage what that really means,” Joe Moglia, a former CEO and chairman of the online discount brokerage, told CNBC’s “Squawk Box”.

In using leverage, or margin trading, investors borrow cash from their brokerage companies to buy stocks and pledge securities in their accounts as collateral. Margin trading increases buying power and expands profits.

“Leverage on the way up is a great thing. Leverage on the way down can rip your arms off,” Moglia said, referring to losses that can hit investors when a stock price falls. He said investing platforms and other market professionals need to improve upon educating individual investors who day trade about the risks they face from market declines and how to handle them.

“A quick example: if you bought AMC at $10, and it goes to $20, is that not enough of a profit? It goes to $30, it goes to $40. At what time do you start to trim that position or, in effect, get rid of the position altogether? There are things that we’ve got to do a better job of with day traders,” said Moglia, who is the current chair of FG New America, a blank-check company, or SPAC, that targets opportunities in the fintech industry.

Moglia spoke as retail investors have launched AMC’s price up by more than 500% since late May in defending the movie-theater chain’s shares against hedge funds selling the stock short. The rally is reminiscent of the January boom in GameStop’s price as retail investors battled hedge funds betting against the video-game retailer’s stock. GameStop shares eventually retreated sharply from an all-time high of $483 apiece.

Investors can be vulnerable when the value of the stocks they’ve purchased drops significantly. Those declines can trigger margin calls, or demands by brokers for clients to repay some of the money they borrowed. Brokers can liquidate a client’s assets to cover the debt if they fail to meet a margin call.

Retail investors have lately overpowered short-sellers betting against AMC. Short-sellers lost nearly $3 billion on Wednesday alone as AMC’s share price more than doubled, according to data from analytics firm Ortex.

“What we’ve got to be conscious of is, at some point, the market is going to turn around. The technicals are going to wear out and [retail investors have] got to be prepared for a down move in that. But so far, I think they’ve pry made a little bit of money,” Moglia said.

Investors this year are borrowing all-time high amounts against their portfolios, with margin debt reaching $847 billion at the end of April, according to data from brokerage industry regulator FINRA.

Retail trading volumes, meanwhile, have been climbing on the back of growth in commission-free brokerage accounts and user-friendly trading apps and as millions of Americans forced to stay home because of COVID-19 turned to the stock market to make money.

Moglia said retail day traders overall should learn more about long-term investing strategies which can enhance discipline.

“If they love what they’re doing and they get burned a bit, that shouldn’t send them away from the market although I recognize that’s a risk. That should tell them they need a better education, a better understanding that day-trading alone is not going to be good enough to ride out the ups and downs of what’s going on with the economy and the markets over the next several years.”

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Coinbase is giving away $1.2 million in dogecoin as it starts letting users trade the meme cryptocurrency

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Dogecoin is a cryptocurrency based on the Doge meme, started seemingly as a joke

Coinbase said on Thursday that it plans to give away $1.2 million in dogecoin to encourage users to take advantage of its newest cryptocurrency trading option.

Users must buy or sell $100 in DOGE through Coinbase by June 10 to be eligible for the sweepstakes, the company said. Coinbase said it plans to give out one prize worth $300,000, 10 prizes worth $30,000, and 6,000 prizes worth $100 by around June 17.

The sweepstakes follows the company’s announcement on Tuesday that it would start letting Coinbase Pro users trade dogecoin on its platform.

The announcement, along with a tweet from Elon Musk referencing the meme currency, sent dogecoin’s value climbing by as much as 41%.

At $52.3 billion, dogecoin had the sixth-largest market cap among all cryptocurrencies as of Thursday evening, according to CoinMarketCap, after seeing a massive rally in May that sent its market cap soaring to more than $85 billion.

Dogecoin was started as a joke by two engineers in 2013, but has since gained immense popularity thanks to Redditors as well as endorsements from Musk and other high-profile celebrities, leading other crypto trading platforms like Robinhood, eToro, and Gemini to start accepting trades in recent weeks.

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Robinhood’s Chinese competitors want to get into the crypto frenzy by expanding into the US and Singapore – even as their local government cracks down

Visual representations of digital cryptocurrency Bitcoin (BTC) are arranged on a circuit board
Yuriko Nakao/Getty Images

  • Chinese apps Futu and Tiger Brokers want to add crypto trading to their platforms in the US and Singapore.
  • The announcements follow a crack down from Chinese regulators on digital currencies.
  • The customer base for both apps has grown in the past year, the companies reported.
  • See more stories on Insider’s business page.

Chinese trading apps Futu and Tiger Brokers are working to bring cryptocurrency trading to customers in the US and Singapore, even as regulators in their home country crack down on digital assets.

The Robinhood rivals said in their most recent earnings calls that they will apply for digital currency trading licenses in both countries. Futu also applied in Hong Kong.

“What we know for sure is that we will not offer digital currency trading services to mainland China users,” said Futu Senior Vice President Robin Li Xu, according to a transcript from the Motley Fool. Tiger Brokers chief executive officer said the same, according to a Seeking Alpha transcript.

Chinese regulators and institutions have cracked down on cryptocurrencies recently. The country said it would thwart mining operations in order to reduce carbon emissions, and it even set up a reporting system for the general public to report suspected mining activity.

The People’s Bank of China also said financial institutions can’t use digital tokens as a form of payment.

China’s announcements aided in a sell-off in cryptocurrencies last month that caused Bitcoin to fall as low as $30,000 – a more than 50% loss from its all-time high of $65,000 in April.

The retail investing app space has multiple players, like Robinhood, WeBull, Public, and others, competing for customers.

Robinhood, which opened up crypto trading in early 2018, had 13 million users at the end of 2020. Futu said it has tripled its number of users in a year to 789,652, and Tiger has doubled customers in the first quarter from a year ago to 376,000, CNBC reported, noting that both companies are increasingly focused on customers outside China.

Futu’s chief financial officer told CNBC previously that the company has heard interest from users worldwide around crypto and he’s listening. On the earnings call, Futu said it aimed to offer crypto trading at some point in the second half of the year.

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I used Robinhood, WeBull, and Public for the first time. They all have their advantages, but WeBull outshines the competition with its resources for new traders.

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  • I opened brokerage accounts with three trading apps this week and compared the experience of using each.
  • Robinhood by far has the best looking app. But if you want more resources to help you make investing decisions, use WeBull.
  • Robinhood launched in 2013 and is now seeking to go public. WeBull and Public both launched in 2017.
  • See more stories on Insider’s business page.

Robinhood launched in 2013 and quickly gripped new and young investors wanting to try their hands at retail trading.

The trading app, which is seeking to go public with a valuation as high as $30 billion, had about 13 million users at the end of 2020.

But the app came under intense scrutiny from lawmakers, regulators, and customers after it halted trading of GameStop as retail traders drove up the stock price to all-time highs in January.

Some have said the app makes investing too much like a game, as others complained of market manipulation amid the GameStop frenzy.

The situation has allowed competitors to muscle in.

WeBull, the Chinese-owned brokerage that launched in 2017, said it saw a 16-fold jump in new account signups following the Robinhood backlash, Bloomberg reported at the time. Meanwhile, Public, which also launched in 2017, has doubled in size year-to-date with more than 1 million users.

These trading apps are all competing for attention from Millennial and Gen Z investors alongside more established brokerages, like TD Ameritrade, Fidelity, and others.

For this story, I downloaded each of the three apps to compare the user interface, the variety of features, security, and the educational resources, to see which one came out on top.

The bottom line? Robinhood was hands down the most enjoyable to use and interact with, but WeBull came out on top with readily available data and resources to help me improve my investing strategies.

My view as a first-time retail investor

I will start by saying I’ve never done this before. I started my professional journalism career at Bloomberg and am now the Millennial Investing reporter on the markets team at Insider. Those roles come with strict rules on what I can and can’t do in terms of investing.

For example, I write a lot about meme stocks like GameStop and AMC. If I were to invest in one, that would be a conflict of interest and would land me in hot water with my employer. Besides contributing to a 401(k), I’ve stayed away from any other investing.

To open accounts with each of the apps, I had to answer a lengthy list of questions, from my investment experience to a lot of personal identifying information, and then input my banking information. This experience is standard across all services.

Though I did not claim the offer, all of the apps I tested award users one free stock as a perk of signing up.

Also, importantly, all of these services are commission-free. This is the case for both stocks and crypto on Robinhood and WeBull, while Public does not offer crypto trading at this time.

Read more: BANK OF AMERICA: Buy these 36 dirt-cheap small- and mid-cap stocks that will soar as the global economy reopens and inflation heats up – including 5 expected to surge at least 60%

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Screenshot from Public app

I see why Robinhood has been described as “gamifying” investing. The app is well-designed and exciting.

My retail investing journey began with Robinhood. I got the go-ahead to transfer exactly $1 to my new brokerage account to invest in an exchange-traded fund. I chose the Vanguard S&P 500 ETF, which trades under the ticker VOO.

With $1 in buying power, I received .002602 shares, the app said. I swiped up to submit the purchase. It said my order was completed and showed me a summary.

When I clicked “Done,” a full-screen graphic appeared saying, “Congrats on making your first trade, Natasha!”

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Screenshot from Robinhood app

As someone who writes about markets for a living, this was extremely fun. If I’d had more than $1, I would have clicked the shiny green button on the bottom that read, “Continue your journey” to buy more.

I started to understand how young people could become addicted to an investing app.

Public made the buying experience just as easy. Instead of the bright white-and-green color scheme on Robinhood, Public has a sleek black-blue-and-white design.

I easily found the Vanguard ETF, input my $1 of buying power, and clicked “confirm.” No confetti, but it was straightforward and easy.

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Screenshot from Public app

WeBull was more of a challenge. I transferred my $1 from my bank account only to discover the app doesn’t offer fractional trading, meaning I had to buy a whole share, which would have cost $386.91 as of 2:45 p.m. on Friday.

The discovery was a let down. I would either have to find an ETF trading at $1, which does not exist, or transfer more money for something more expensive.

I decided on a single share of the Financial Select Sector SPDR ETF, trading under the ticker symbol XLF, for $37.54.

After transferring more funds, I hit the blue “trade” button on the ETF’s main page, input the quantity as 1, and hit “confirm.” It brought up a receipt page that read “working” and would allow me to cancel or modify my order in the meantime. Again no fireworks, but a relatively simple process.

WeBull has everything a young investor would need – except fractional trading and a fun user interface

If you overlook the lack of fractional trading, which can be a great way for investors to own otherwise prohibitively expensive stocks, WeBull felt like the most serious investing app. Here’s why.

First of all, it had the most security features. I opted to set an unlock pattern for each time I open the app. On top of that, when I decide to go into my brokerage account within the app, I have to enter a six-digit pin.

It felt like bank-level security, which is something I found important out of a broker that has all of my personal information and bank account details.

Robinhood and Public have security features, too, just not as many. Robinhood requires my phone passcode each time I open the app. On Public, I opted to turn on the face-ID feature for more security.

WeBull also provided the most market data.

Though the deluge of data meant the app wasn’t as sleek as Robinhood, it also meant I had more access to important information before investing.

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That’s not to say Robinhood and Public don’t have market data. They do (on Robinhood investors can pay $5 for a subscription to market research and level 2 data), but neither app has near the amount of information WeBull provides up front.

In terms of educating young or new investors, WeBull also wins. The app regularly sent me messages with how-tos on investing and explainers on topics like initial public offerings.

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Screenshot from WeBull.

There wasn’t much for educational resources within the Robinhood app. Public offered some. All three gave access to relevant news articles.

WeBull also had a social media feature, where users can share their views and investments.

Public, though, has a much more visible social aspect, and markets that as a selling point. Its slogan is “Public makes the stock market social,” and it recently launched a live audio feature, similar to that of the Clubhouse app.

Among the apps, investors have to choose among a sleek and exciting platform with Robinhood, a less sleek yet more informational app in WeBull, or a social-media driven platform in Public.

Overall, my experience would lead me to choose WeBull if I was in the market for a trading and investment platform.

Read the original article on Business Insider

New rules could tackle the ‘gamification’ of trading on popular apps following GameStop, SEC chief Gary Gensler says

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Gary Gensler is the new head of the Securities and Exchange Commission.

New rules may be needed to tackle the “gamification” of trading on popular apps, which can prompt users to make bad investing decisions, according to the new head of the Securities and Exchange Commission.

Gary Gensler said in written testimony to Congress on Wednesday that many of the US’s regulations on trading were created before fast and commission-free apps started to dominate the retail investing landscape.

In particular, Gensler expressed concern about the “gamification” of retail trading. Apps are increasingly using features like points, rewards, leaderboards, bonuses and competitions to boost user engagement, he said.

Gensler is set to appear before the House Committee on Financial Services on Thursday, as part of its investigation into January’s GameStop saga, which saw retail traders unite to pump up the video game store’s stock.

Some lawmakers have become concerned about the influence of Robinhood, the commission-free trading app that has boomed in popularity and was at the centre of January’s volatility.

The new boss of the SEC – the powerful regulator that oversees US financial markets – said the gamification of trading could be costly to users.

“If we watch a movie that a streaming app recommends and don’t like it, we might lose a couple of hours of our evening,” he said.

“Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position. A big loss could have immediate implications for the app user’s ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement.

“Many of these features encourage investors to trade more. Some academic studies suggest more active trading or even day trading results in lower returns for the average trader.”

Gensler said these issues may require new rules. “Many of our regulations were largely written before these recent technologies and communication practices became prevalent. I think we need to evaluate our rules, and we may find that we need to freshen up our rule set.”

The House will begin the third of its hearings into the GameStop saga on Thursday. It is particularly focused on the impact of modern trading apps and the power they can have, after many of them suspended trading and shut out users during January’s market volatility.

Apps like Robinhood argue their popular and easy-to-use platforms have broken down barriers to investing.

Speaking before the House during an earlier part of the hearing in February, Robinhood CEO Vlad Tenev said: “The mobile app provides the intuitive experience customers want, while also providing them with tools and information to learn about investing and keep tabs on their finances.”

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Stocks now represent a record-high percentage of financial assets among US households, reports say

Stock Market Bubble
  • Stocks now represent 41% of US households’ financial assets, according to data from JPMorgan and the Federal Reserve.
  • Robinhood tripled its revenue from payment for order flow in the first quarter amid a rise in retail traders.
  • Warren Buffett warns investors are “just as sure” of themselves as they were in 1989 before a mini-crash.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Americans are now holding a higher percentage of their net worth in stocks than ever before, the Wall Street Journal reported on Monday based on data from JPMorgan and the Federal Reserve.

US households increased their equity holdings to a record 41% of their total financial assets in April.

Nikolaos Panigirtzoglou, an analyst at JPMorgan, released the findings from data going back to 1952 that includes 401(k) retirement accounts. The analyst said appreciating share prices coupled with increased buying were the main factors for the elevated allocations.

The news comes just two weeks after FINRA announced margin debt – the amount of money investors borrow from their brokers – hit another record high in March, topping $822 billion.

The rise in interest in equity markets and the use of debt to invest in them comes amid a boom for retail traders.

New apps like Robinhood and Webull have taken the market by storm, adding millions of new investors and traders over the past few years.

Robinhood has grown so much it was able to more than triple the revenue it earns from payment for order flow in the first quarter of 2021.

The rise in revenue from active trading came after Robinhood added some 3 million new members in the first quarter of 2020 alone during the height of the pandemic, per Bloomberg.

A new study from the University of Western Australia found that trading activity among retail investors spiked during the pandemic as investors had more time and money to invest in online trading.

Robinhood and other trading apps have repeatedly graced the top of Apple and Google’s app stores amidst the meteoric rise in retail trading.

And while many market commentators are cheering the inclusive move, some have issued warnings.

Warren Buffett warned about the self-confident nature of Wall Street and the new breed of retail investors in Berkshire Hathaway’s annual shareholder meeting on Saturday.

“We were just as sure of ourselves, and Wall Street was, in 1989 as we are today. But the world can change in very, very dramatic ways,” the ‘oracle of Omaha’ said.

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Warren Buffett slammed SPACs and Robinhood for encouraging gambling on stocks at Berkshire Hathaway’s annual meeting

warren buffett
Warren Buffett.

  • Warren Buffett criticized SPACs and Robinhood at Berkshire Hathaway’s annual meeting.
  • The investor said they encourage gambling and treating the stock market like a casino.
  • Charlie Munger, Buffett’s right-hand man, damned both trends as well.
  • See more stories on Insider’s business page.

Warren Buffett blasted special-purpose acquisition companies (SPACs) and the Robinhood trading app for encouraging gambling on stocks at Berkshire Hathaway’s annual meeting on Saturday.

The famed investor and Berkshire CEO said that SPACs, also known as blank-check companies, were taking advantage of amateur investors and making unrealistic promises. “You stick a famous name on it and you can sell almost anything,” he said.

Buffett’s right-hand man, Charlie Munger, said that the proliferation of SPACs was a “moral failing” to an extent.

“The easy money made by SPACs and derivatives and so on – you push that to excess, it causes horrible problems for the civilization.”

Buffett bemoaned the fact that Wall Street profits most when markets are rife with speculation.

“You have this incredible, huge asset to humanity but it really makes its money when people are doing stupid things,” he said.

Buffett said that a rising number of people are treating the stock market like a casino, and reiterated his analogy that day traders and speculators are like Cinderella at the ball.

“More people are entering the casino than are leaving everyday,” he said. “It creates its own reality for a while, and nobody tells you when the clock will strike 12 and it all turns to pumpkins and mice.”

Buffett also shared his thoughts on Robinhood, which many amateur investors and day traders have flocked to in recent months.

“It’s become a very significant part of the casino group that has joined to the stock market” over the past 12 to 18 months, Buffett said.

The investor doesn’t see buying and selling put and call options – leveraged bets on whether stocks and other assets will rise or fall in value over a period of time – as illegal or immoral. “But I don’t think you build a society around people doing it,” he said.

Munger went further in criticizing Robinhood and other trading apps for enabling speculation.

“It’s not just stupid, it’s shameful,” he said. “It’s deeply wrong.”

A Robinhood spokesperson provided the following statement to Insider:

“There is an old guard that doesn’t want average Americans to have a seat at the Wall Street table so they will resort to insults. The future is diverse, more educated, and propelled by engaging technologies that have the power to equalize.

“Adversaries of this future and of change are usually those who’ve enjoyed plentiful privileges in the past and who don’t want these privileges disrupted. Their criticisms are unfortunate but they prove why Robinhood’s mission is in fact critical.

“The new generation of investors aren’t a ‘casino group.’ They are tearing down old barriers to investing and taking control of their financial futures. Robinhood is on the right side of history.”

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