College students are buying stocks – but do they know what they're doing?

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CNBC’s “College Voices 2020” is a series written by CNBC summer interns from universities across the country about coming of age, launching new careers and job hunting during a global pandemic. They’re finding their voices during a time of great social change and hope for a better future. What money issues are they facing? How are they navigating their student loans? How are they getting work experience, networking and applying for jobs when so many opportunities have been canceled or postponed? How important is diversity and a company’s values to Gen Z job seekers?

As the coronavirus has roiled the market and forced people to stay in their homes for the past few months, young people, including college students, have found themselves with more time on their hands. They are increasingly picking up investing, thanks to user-friendly investing apps.

Robinhood, an app that lets users invest in individual stocks, gained 3.1 million users, half of them first-time investors, in the first quarter of 2020. Charles Schwab and TD Ameritrade, two other financial-services firms, both reported adding around 600,000 users in the first quarter.

Trevor Hassel, a 22-year-old senior at Cal State Fullerton, says setting up an online-trading account is easy.

“As a beginning investor it was really intimidating. I felt like you have to have a finance degree. I felt like you have to be on Wall Street and know these complex terms,” Hassel said. “So, logging on and seeing how simple it was, that was my main draw.”

Trevor Hassel working on a startup in Orange County, Calif.

Source: The Hassel family

Though Robinhood has not released data specifically on college students, the median age of its users is 31, according to the company.

Yet as these new amateur investors made their moves, Wall Street pros questioned their judgment. Reports of Robinhood users piling into bankrupt companies like Hertz and J.C. Penney, buying up buying up oil ETFs that did not actually track the price of oil, and betting heavily on cruises and airlines have led pros like Leon Cooperman to worry, “They are just doing stupid things” that “will end in tears.” “Mad Money” host Jim Cramer suggested that Wall Street professionals are playing with amateur investors. “It’s a game,” Cramer said on CNBC’s “Squawk Box.” “Pick a couple of stocks, you gun them in the morning, and then you hope people are stupid enough and they buy them.”

So, how are students making their investment decisions?

Turning to the Internet is one obvious answer. Online communities like r/RobinHood and r/RobinHoodPennyStocks on Reddit have gained around 70,000 and 20,000 members respectively since March. A quick search reveals posts from newbies, including those who specifically label themselves as college students, looking for advice and sharing their gains. Penny stocks in particular can be attractive to younger investors with less money to put in. One stock gaining traction on these subreddits was Digital Ally, a company that produces body cameras for law enforcement. Users in June bet that protests and greater interest in police reform will push police departments across the country to invest in such cameras. Digital Ally’s stock hit a 52-week high on June 9 but has given back half its value in the weeks since.

Some college students leverage their studies to pick stocks. One student majoring in government and economics says he often monitors legislative developments such as bill proposals and committee hearings to see what types of stocks might benefit from imminent government action. A big play he made this year was buying Charlotte’s Web Holdings, a CBD company, after investigating a proposed House bill that would allow companies to market CBD products as dietary supplements. Shares of Charlotte’s Web rose around 40% in May 2020, although they have since fallen back.

Another strategy is to buy what you consume. Hassel built his portfolio to $130,000 from an initial investment of a few hundred dollars (and has put more money in since then). He invested in Spotify last month because of his positive experience with the product as a musician. Hassel, who shares his portfolio on his YouTube channel, Trevor Hassel- Investing and Personal Finance, said Spotify’s blockbuster podcast deals with Joe Rogan and Kim Kardashian West have reinforced his optimism about his investment.

Of course, while ease of access is the great appeal of a lot of investing apps, there has also recently been controversy over just how easy—and dangerous—it is to invest, especially in more complicated investment types like options. Options are contracts that give investors the right to buy or sell the stock (or other financial instrument) at a set price within a certain time period. It’s possible to make a lot of money, but also to lose a lot of money. Following a customer’s suicide that may have arisen from a misunderstanding over his option trade’s financial statement, Robinhood pledged that it would increase guardrails on options trading.

Several students said they are staying away from options. They feel less comfortable with the underlying concepts and more concerned about being manipulated by experienced traders. One student who had previously traded options in part because of their low prices also pointed out that the influx of new investors raised demand so that they were no longer as affordable for college investors.

Trading behavior comes down to risk tolerance. Some students are fine playing with penny stocks because they are mostly doing so for a mix of entertainment and education, and they have opened separate retirement accounts – they’re not betting with their entire future. Hassel describes himself as a “long-term investor” who would not day trade or speculate. Yet another student said he has made high-risk options trades with a few thousand dollars using an investing app because he sees it as a controlled trading environment, whereas he uses his six-figure Fidelity account to focus on serious investing goals. The questions seem to be: what fraction of their money are they putting into trading individual stocks, and what are their ultimate goals?

Investing directly in individual stocks can be risky. E-Trade, TD Ameritrade and Charles Schwab are other online investment brokers that offer managed accounts, more types of investments such as mutual funds, access to banking services, and retirement accounts. Acorns also may be appealing for more passive investors because it allows users to choose their risk level and invest their money in pre-set portfolios composed of ETFs. Those interested in socially responsible investing may be drawn to Stash. Young investors thinking long-term can also turn to retirement accounts such as the traditional or Roth IRA.

The key takeaway for young investors is to set their own limits.

“Whatever channel you use to select, buy or sell investments, you still need to have clarity on your saving/investing objectives, timeframes, and level of risk that you can tolerate,” says Nan J. Morrison, the president and CEO of the Council for Economic Education and a member of the CNBC Financial Wellness Council.

“Only pursue trading as a casual hobby,” recommends Josh Brown, the CEO and co-founder of Ritholtz Wealth Management and a CNBC contributor who regularly appears on CNBC’s “Halftime Report.” “There are professionals who have spent decades learning the market and devote a full-time work week to the pursuit of beating the market, and they still can’t do it.”

Instead, Brown says, “The more rational goal should be learning and gradually becoming more educated. Be humble, read books about the best investors ever, and recognize how big of a role both luck and randomness play in your outcomes.”

For college students looking for new entertainment and some money, perhaps this is the best way to see the market — as yet another educational venture.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.