The GameStop frenzy in late January inspired many questions about investing

With the recent market frenzy around GameStop and other stocks, we’ve seen several trading tools highlighted in the news. Robinhood, Webull and others have been growing in popularity as investor downloads skyrocket.

Q: What are these online trading apps we’ve have been hearing about and how do they differ from traditional investment accounts?

A: The first key difference is that Robinhood and other similar tools are mobile app-focused compared to website trading tools that many have used in the past. Zero transaction fees to trade stocks and the ability to purchase fractional shares are other differences. These set the companies apart from the competition.

Q: Gamification of investing. What does this mean and how are they different from traditional investment accounts?

A: Robinhood, for example, strives to maximize engagement with the app. They do this by using vivid colors, graphics, confetti animation and reward programs for signing up and referring friends.

Other apps, such as Webull, Trade Station, Interactive Brokers and eToro, compete to be the leader in this category.

Q: How do they make their money?

A: These investment apps make money, but that’s not easily visible to the daily investor.

They are paid to direct trades to certain market makers, known as order routing. They also make money by lending out idle cash, margin loan lending and charging for premium account subscriptions.

Q: How have trading apps influenced the recent market frenzy?

A: Trading apps have become very popular with individual traders, and this accelerated recently. Downloads of apps like Robinhood and Webull exploded during the GameStop frenzy in late January.

Robinhood added over 1 million accounts in three days from Jan 27-29. Webull’s new account signups increased 1,578% on Jan. 28 over its seven-day average.

Q: Are these trading apps helpful to individual investors?

A: These apps do provide benefits. They offer investors access to stocks, ETF’s and sometimes mutual funds without transaction costs or account fees.

They will also present opportunities for new investors to build habits of saving and investing for goals and other life dreams.

For some individuals, it can make investing less intimidating. A person can open an account in 10 minutes and be trading the next day.

Q: What are the drawbacks?

A: The apps are designed to incentivize activity and trading, which is often counter-productive to investment results. And questions arise about execution prices with these apps. It may be beneficial to look at all available options before placing your first trade.

Some app providers only offer certain types of investment accounts. They may not be what an investor needs or wants.

Q: What’s the difference between speculating and investing?

A: There are distinct differences between the two. Let’s examine a couple.

Investing is often referred to as long-term, saving for the future. Speculating, on the other hand, is short-term. Speculating also often presents a higher level of risk compared to investing.

Investing is commonly driven by fundamental analysis and basic factors, while speculating is based on technical charts, momentum and individual opinion or “gut” feeling.

Q: Can a short-term trading strategy be part of a more traditional investment portfolio?

A: A more speculative component can be a part of an overall investment strategy. It is important to think through a couple of questions first.

How much risk are you willing to take? What does your emergency fund look like? If your investment choice doesn’t not go as planned, can you afford to lose the money?

It’s also recommended to seek professional help and guidance, when needed.

Nolan Keim is a Certified Financial Planner professional and an active member of the Financial Planning Association of Greater Kansas City. He serves as an Associate Wealth Advisor for Mariner Wealth Advisors in Overland Park.