{"id":135101,"date":"2021-02-08T01:30:41","date_gmt":"2021-02-08T08:30:41","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=135101"},"modified":"2023-03-31T03:09:11","modified_gmt":"2023-03-31T09:09:11","slug":"robinhood-vs-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/robinhood-vs-real-estate","title":{"rendered":"Tired of Market Manipulation? Skip Robinhood\u2014Invest in Real Estate Instead"},"content":{"rendered":"<p><iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC5611523546&#038;light=false\" width=\"100%\"><\/iframe><\/p>\n<p><span style=\"font-weight: 400;\">Trust by the American public is in short supply these days. Distrust in the government, Wall Street, and tech and media elites is at all-time highs\u2014and it\u2019s easy to see why the ordinary citizen feels like nobody has their back. The elites, it seems, only want to protect each other.\u00a0\u00a0<\/span><\/p>\n<p>This distrust hit a fever pitch last week when popular online broker and Silicon Valley startup <a href=\"https:\/\/robinhood.com\/us\/en\/\" target=\"_blank\" rel=\"noopener\">Robinhood<\/a> limited trading of Gamestop (GME) stock. This was an unprecedented move.<\/p>\n<p><em><strong>Related: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-vs-stocks-performance?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" target=\"_blank\">What Offers the Best Return on Investment? 145 Years of Real Estate vs. Stocks<\/a><\/em><\/p>\n<h2>What&#8217;s going on with Robinhood?<\/h2>\n<p>So why did Robinhood limit Gamestop trading? <span style=\"font-weight: 400;\">To understand all this, you have to go back to the beginning of this entire episode: <\/span><a href=\"https:\/\/www.reddit.com\/r\/wallstreetbets\/\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">WallStreetBets<\/span><\/a><span style=\"font-weight: 400;\">, a popular<\/span> <a href=\"https:\/\/en.wikipedia.org\/wiki\/Subreddit\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">subreddit<\/span><\/a><span style=\"font-weight: 400;\"> of with 2.1 million renegade day traders<\/span><span style=\"font-weight: 400;\">.<\/span><span style=\"font-weight: 400;\"> Members of the subreddit are often young retail traders. They use Robinhood\u2014a popular day-trading app\u2014and typically ignore fundamental investment practices<\/span><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Tired of what they considered hedge fund manipulation of stock prices through short sale activity, the members of<\/span> <span style=\"font-weight: 400;\">WallStreetBets<\/span><span style=\"font-weight: 400;\"> decided to strike back. Their target: Hedge funds, who have long bet on companies they view &#8220;in decline&#8221; by shorting their stock.\u00a0\u00a0<\/span><\/p>\n<h3>What is shorting?<\/h3>\n<p>Shorting a stock is essentially selling borrowed stock at current prices with the anticipation of a price drop and then paying back the borrowed stock at the lower price. When the market sees massive shorting activity, it considers this a sign of decline. It drives down prices and, in a way, fulfills the hedge fund&#8217;s prophecy.<\/p>\n<p><span style=\"font-weight: 400;\">This practice runs into a major problem if the price goes <em>up<\/em>, not down. This causes a short squeeze: Legally, the hedge fund must return the borrowed stock but now at a higher price\u2014resulting in losses.\u00a0\u00a0<\/span><\/p>\n<h3>So where does Gamestop come in?<\/h3>\n<p><span style=\"font-weight: 400;\">Gamestop, a brick-and-mortar video game store, attracted hedge fund attention because of declining sales due to the pandemic. The stock steadily declined throughout 2020 with no expectations of reversal in 2021, so investors pounced\u2014shorting the stock to the tune of billions. The members of WallStreetBets noticed this intense hedge fund activity. Tired of this type of market manipulation, they <\/span><span style=\"font-weight: 400;\">banded together in a concerted effort to drive up GME stock and put a short squeeze on the hedge funds. It worked\u2014to the tune of $13 billion in losses.\u00a0\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Four months ago, <\/span><span style=\"font-weight: 400;\">GME was trading at $6 a share. During January 2021, its share rose from $17.25 to a record high of $469.42 on January 28. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s when Robinhood decided to step in and halt Gamestop trading on its platform. As of early February, GME has fallen to $100.\u00a0\u00a0<\/span><\/p>\n<p>To understand why Robinhood intervened, you have to understand its business model. While its motto is \u201cInvesting for Everyone,\u201d that\u2019s a front for what the company really does behind the scenes. To encourage trading, Robinhood doesn\u2019t charge commissions and offers liberal margin policies. It makes money by turning those trades over to high-volume traders\u2014market makers\u2014who execute the orders in bulk and make money from the price spreads. These market makers pay Robinhood more for options trading than for straight buy-and-sell orders.<\/p>\n<p>Hedge funds are some of the company&#8217;s biggest traders. So, if hedge funds are losing billions of dollars due to the actions of Robinhood retail traders, where do you think the pressure came from for Robinhood to halt GME trading?<\/p>\n<p>The hedge funds.<\/p>\n<p><em><strong>Related: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/speculate-vs-invest?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" target=\"_blank\">4 Ways It\u2019s Possible to Speculate in Real Estate (&amp; How to Make Sure You\u2019re Investing Instead!)<\/a><\/em><\/p>\n<h2>Why smart investors choose real estate<\/h2>\n<p>Truly wise investors flock to an investment class that can\u2019t be manipulated\u2014real estate.<span style=\"font-weight: 400;\"> The high barrier to entry, illiquid nature, and private market prevent real estate from hedge fund-esque manipulation. Here&#8217;s a little more detail.<\/span><\/p>\n<h3>1. Real estate requires a capital commitment<\/h3>\n<p>Acquiring real estate, whether directly or passively, requires a capital commitment that prevents many investors with limited capital\u2014like the ones flocking to Robinhood armed with stimulus money and unemployment checks\u2014from participating.<\/p>\n<p><span style=\"font-weight: 400;\">Even direct investments acquired with a bank loan require minimum capital commitments. Typical passive investments also have typical minimum investments starting around $30,000. Investing in real estate isn&#8217;t necessarily prohibitive, but the high barrier to entry deters the casual, speculative investor who would prefer to trade on Robinhood for free.<\/span><\/p>\n<h3>2. Illiquidity insulates real estate from market volatility<\/h3>\n<p><span style=\"font-weight: 400;\">The fact that day trading has replaced sports betting as America\u2019s favorite pasttime should tell you all you need to know about the mindset of today\u2019s stock market investor. This mentality is consistent with every other aspect of modern life\u2014everything is expected in an instant. <\/span><span style=\"font-weight: 400;\">Buying and selling real estate doesn\u2019t happen instantly, and that prevents investors from making snap decisions. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Passive investments are even more illiquid, with typical lockup periods of five years or more. <\/span>The illiquid nature of real estate prevents the herd mentality that rules Wall Street. That insulates the real estate market from the volatility of the broader markets.<\/p>\n<h3>3. Private markets prevent collusion<\/h3>\n<p><span style=\"font-weight: 400;\">Because real estate and passive real estate investments are not traded on public exchanges and online platforms, where buy and sell orders are executed in an instant, real estate prices are insulated from extreme volatility. Private markets prevent collusive behavior by hedge funds and subreddits, which\u2014as we saw with Gamestop\u2014can easily disrupt prices.\u00a0\u00a0\u00a0<\/span><\/p>\n<p>You can\u2019t buy real estate for a dollar and you can\u2019t buy it and sell it on the same day. Because real estate isn\u2019t traded on Wall Street, it can\u2019t be shorted\u2014and that\u2019s why it can\u2019t be manipulated.<\/p>\n<p><span style=\"font-weight: 400;\">To avoid market manipulation, avoid Wall Street. Return to Main Street, where real assets still offer the surest and safest path to wealth.<\/span><\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/store\/wealth-magazine-one-year\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-123232 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/03\/Blog-700x120-v2.jpg\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/03\/Blog-700x120-v2.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/03\/Blog-700x120-v2-300x51.jpg 300w\" alt=\"Blog ad for Wealth magazine\" width=\"700\" height=\"120\" title=\"\"><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Gamestop recently demonstrated how easily the stock market can be manipulated. Don&#8217;t want to risk your investments? Try real estate instead. <\/p>\n","protected":false},"author":408607,"featured_media":135153,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5528,7119],"tags":[],"class_list":["post-135101","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-news","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/135101","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/408607"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=135101"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/135101\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/135153"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=135101"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=135101"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=135101"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}