Not too long ago, I opened a brokerage account with Robinhood. I have been curious about the app given its popularity among younger investors and wanted to give it a try.

Opening an account as a brand-new client was easy and fast. It was also easy to get approved to trade options without even appearing to have read the regulatory disclosures.

I bring this up because total options volume reached a record 3.0 billion contracts last year, according to the Chicago Board Options Exchange (CBOE). This was a 19% increase in volume from 2020. CNBC cited data from Alphacution Research Conservatory estimating that individual investors accounted for more than 25% of total options trading activity.

Options are riskier and more complex than stocks. Most options contracts expire worthless. These derivatives depend on a stock moving in a certain direction by a certain amount (or not moving more than a certain amount by a certain time) to earn a profit. Guess wrong and the money spent on purchasing a contract will vanish. Get on the wrong side of an options contract, and the losses could be very large.

Despite these risks, Robinhood promotes options trading. Not explicitly, but in how it has designed its app. For instance, when I click on a stock ticker to place a buy or sell order, the first choice that comes up is “Trade Options.”

These and other nudges are having an impact. During the first nine months of 2021, options trades placed by clients accounted for 46% of Robinhood’s total transaction-based revenues. Trading in stocks accounted for just 21% of transaction-based revenues, trailing not only options but also cryptocurrency.

Robinhood offsets the cost of commission-free trading by getting compensated to send its clients’ trades to certain firms. And options orders are more lucrative than stock orders. While other brokers take advantage of payment for order flow, this is a main source of revenue for Robinhood. When a broker encourages you to trade more frequently, realize that it isn’t in your best interest.

None of this alone means that Robinhood should be avoided as a broker. The app is easy to use. Those with smaller portfolios might appreciate that the default for placing orders is in dollar amounts instead of number of shares. Still, given the gamification element of the app, investors should quote Fred Schwed’s classic 1940 book and ask Robinhood, “Where are the customers’ yachts?”

Other brokers have apps and some also offer fractional share purchases. You can see which ones in our updated broker guide in this issue. It discusses costs, research, services and more.

In putting the guide together, we asked AAII members which broker they used. Charles Schwab slightly edged out Fidelity as the most used broker (27% of members versus 26%). TD Ameritrade was third (14%) followed by Vanguard at 8%. TD Ameritrade was purchased by Schwab in 2020, and updates on the merger can be found in the guide.

Remembering Edie Cloonan

We sadly lost Edie Cloonan last month. Edie was more to AAII than just our founder James Cloonan’s wife. She played an integral role in helping to launch and run AAII in the early years. Edie also attended many AAII conferences and events as well as being a strong supporter of the arts.

Many longtime members of AAII had the chance to meet and speak with Edie. To the AAII staff, she was family. She will be missed. Our hearts and prayers go out to her children, grandchildren and great-grandchildren.

An Update on the Paper Market

Finally, I want to share an update on the paper market: It’s gotten worse. According to our printer, one paper mill has eliminated “quarterly price protection going forward.” Another mill updated their force majeure terms, which could lead to cost increases. There are also ongoing delays of orders for paper with “orders being cut altogether even after acknowledgments have been received.”

Our printer has asked us to be open to using a different quality of paper for the AAII Journal.

Many AAII members have switched to digital delivery and are now receiving the AAII Journal at the start of every calendar month, among other benefits. (Even our printer is now suggesting we encourage the switch to digital delivery.) If you haven’t opted for digital delivery yet, contact Member Services either at members@aaii.com or 312-676-4307. Alternatively, you can go to My Account, scroll down to My Subscriptions and click “Opt Out” by AAII Journal to take advantage of digital delivery.

Wishing you prosperity and good health,