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Robinhood is trying to get more people to play the stockmarket

Regulators are worried many of them may lose money.

To make money from a business you usually have to put money into it: to buy stock, to pay staff, to advertise your product, and so on. But how should you go about getting this money? One option would be to reinvest your existing profits. Another would be to go get a loan from the bank. And a third option, one that you’d be particularly likely to plump for if you were a big company who wanted to get hold of a lot of investment money, would be to list some shares on the stockmarket.

Here’s how it works. A ‘share’ is an ownership stake in a business. Businesses put shares up for sale in marketplaces called ‘stock exchanges’, and the people who buy those shares are known as  ‘shareholders’. Shareholders can be individuals or, more often, companies like hedge funds and pension funds. In return for the money they give the company they’re buying part of, shareholders get various perks. Most commonly, they are entitled to part of any profits the business subsequently makes (these payments to shareholders are called ‘dividends’). They may also get to vote on big company decisions, such as senior staff hiring. Importantly, stock exchanges don’t just facilitate businesses selling their shares directly to shareholders. They also let shareholders buy and sell shares generally, and these transactions can happen within the blink of eye.

A common criticism of the stockmarket model is that it has led to many businesses being owned by people who are not super representative of, or connected to, the economies the business operates in. For example, the majority of UK shares (54.9 percent) are foreign-owned. Individual investors are also disproportionately likely to be male, older, white and on the wealthier end of the socioeconomic scale. Recently, however, there have been some attempts to change that. One of the best-known is the financial company Robinhood, whose USP is to encourage new groups to get into stockmarket trading. It currently has 31 million users and has particularly targeted Millennials and women.

Whether it’s a good thing if more people invest in the stockmarket is an open question. Some say it depends on why those people become shareholders. If they invest because they really like a company and want it to succeed, or because something about the company aligns with their other interests, then more stockmarket participation could make the business world more representative of more people’s values. A lot of eco-conscious Millennials financially backing environmentally-friendly companies might push other businesses to go green to attract their investment, for example.

Of course, a lot of people primarily get involved in the stockmarket in order to make money. Dividends is one way to do this, but another - and more potentially lucrative way - is to buy shares and then sell them when their price increases. Share prices are based on how in-demand they are, because the more people want to buy a certain company's shares, the more valuable they think the company in question is.

Share prices are constantly changing because the value of a company is constantly changing. For example, shares in Zoom became much more expensive during the pandemic, because loads more people working remotely meant loads more customers wanting Zoom’s products. Importantly, however, the price of a share isn’t just based on what is currently happening with a company. It’s also based on what shareholders think is going to happen to a company. Right now, nobody knows how many people will be working remotely in 2022. But people will be buying and selling Zoom shares based on their predictions. Those who believe remote working is here to stay are more likely to keep hold of their Zoom stock and maybe even buy some more. Those who think everyone will head back to the office en masse might instead sell off their Zoom stock off on the assumption the price is about to drop.

Playing the stockmarket can offer big returns on an investment in a way that is pretty hard for ordinary people to come by these days. That’s why companies like Robinhood argue that opening up the stockmarket would give economically-disadvantaged groups access to a financial tool that could help them increase their personal wealth. Savvy investing also provides a way for low-income people to improve their lifelong financial wellbeing by, say, building up a retirement fund or paying off their student loans.

But the thing about predictions is that sometimes people guess wrong. Some of the worries around increasing stockmarket participation are that (1) the new investors are more likely to guess wrong, because they don’t have as much access to things like economics education or financial advisors, and (2) being less well-off may mean any losses will have a larger negative impact on the life and wellbeing of new investors.

Read our explainer on: the financial system

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