Editor’s Note: This article was updated on March 24, 2021, to correct the source of a quote from Crediful.
It has been a year of standout growth for Robinhood. The company’s brokerage app has become extremely popular with the younger generations. They have also shown a willingness for aggressive investing strategies.
Part of this is that yields on bank accounts are zilch. What’s more, the novel coronavirus pandemic has certainly had a major impact. With large numbers of people staying at home, there is more time to devote to stock trading.
But Robinhood has also leveraged “Silicon Valley” magic to create a highly compelling app. It can be downright addictive. Then there are the zero fees that make it possible for engaging quick trades.
Founded in 2013, Robinhood already has more than 13 million customers — making the company a worthy competitor of much older brokers like Charles Schwab (NYSE:SCHW) and Morgan Stanley (NYSE:MS). During the latest round of funding, the company was valued at a hefty $8.6 billion.
So then, with Robinhood, what are some of the aggressive investing strategies to help boost returns? Let’s take a look at seven:
Aggressive Investing Strategies to Consider: Options
An option is a contract that allows you to buy or sell a stock at a fixed price for a period of time, say three months. There are also two types of options. A call option gives you the right to buy a stock while a put option give you a right to sell it.
Let’s take an example: Suppose you want to purchase an option on Docusign (NASDAQ:DOCU). This means that you can buy 100 shares at $240 each and the premium is $3,000, which is the cost of the option. If the stock price goes up by $10, then the value of the option will increase by $1,000 (or $10 times 100 shares) or 33%. By comparison, if you made an outright purchase of DOCU stock instead, the return would have been only 4.2%. In other words, the option provided significant leverage.
But of course, if the stock price falls, you may suffer big losses. In fact, it is common for call options to expire worthless.
As for Robinhood, you can purchase options without having to pay commissions or per-contract fees. But you need to be cautious.
Again, options can be quite risky. They are perhaps one of the most aggressive investing strategies available.
If anything, before engaging in this type of investment, it is a good idea to take some courses. Note that there are a myriad of strategies that you can use, such as bull-call spread, the protective collar, the long straggle, the covered call and so on. But they all are for those who have a solid understanding of how options work.
Margin means borrowing against the value of your Robinhood stocks and investments. This can certainly magnify your gains. But then again, it can do the same for your losses!
To use margin, you will sign up for a Robinhood Gold account — and this is a relatively straightforward process.
Let’s take an example. Suppose you want to buy $20,000 in Okta (NASDAQ:OKTA) stock. You use $10,000 of your cash and borrow the remaining through your margin account. If your OKTA stock position goes to $5,000, then your return would be 50% ($25,000 divided by $10,000). This would compare to 25% if you used all cash for the transaction.
But there is a risk: If the stock falls significantly, Robinhood will initiate a “margin call.” This means that you will need to put up more cash and if you cannot do this, the firm will close out your position. In some cases, you may lose everything.
This is why you need to be cautious with margin. The best approach is for the margin loan to represent a small portion of your portfolio, like 10% or lower.
Cryptocurrencies are one of the aggressive investing strategies that is relatively new. A cryptocurrency is based on a sophisticated technology system — usually blockchain — that has a ledger to track the transaction. By doing this, there is transparency but also no need for a traditional banking system. There are many types of cryptocurrencies like Ethereum and Dogecoin. Although, Bitcoin is the most prevalent.
And yes, these cryptocurrencies can be extremely volatile. In the case of bitcoin, it has gone from $19,000 in 2017 to $3,600 in 2019 to $11,400 now.
Keep in mind that Robinhood has a robust app for cryptocurrencies. The interface is easy to use and the payments do not have fees or transaction costs. However, you cannot use the cryptocurrencies for purchasing goods or services. The focus is only on investing.
Now the volatility is not the only risk for cryptocurrencies. There are also complex issues about taxes and regulations. Oh, and there have been occasional situations where there have been hacks. Bottom line: You need to be careful with cryptocurrencies.
Because there are so many of these assets available, a good idea is to focus on those with higher volumes. “The higher the trading volume, the more liquid the instrument,” said Vic Patel, who is the founder of Forex Training Group. “This means that you will have a much easier time buying and selling a crypto without incurring large slippage cost.”
Over the years, exchange-traded funds (ETFS) have exploded in popularity. Just some of the reasons for this include: low costs, diversification and taxes (unlike traditional mutual funds, there is no risk having large capital gains distributions).
An ETF is basically like any other stock. You can trade it on a major exchange, borrow against it by using a margin account and even short it (this allows you to make money if the value of the security falls). What’s more, an ETF will represent a basket of stocks.
Some ETFs employ aggressive investing strategies, which often involves leveraging the portfolio. So if the value of the underlying securities in the ETF go up 1%, then the stock price will increase by 2% and vice versa. Then there are inverse ETFs, in which a 1% decrease in the underlying stock will translate into a 2% increase in the portfolio.
These are 1X funds. But there are even 2x and 3X flavors!
If you are particularly bullish or bearish on the market, for example, a 1X ETF could be an approach to use. But as with any aggressive strategy, it’s important to not get too carried away. Leveraged ETFs should be used sparingly.
Foreign investing can be an aggressive strategy. Let’s face it, there is often less research available. Then there could be the political risk. In some cases, a company could be subject to nationalization.
But foreign investing can also lead to strong returns — so long as you do your research. “While the economy in your current area may not be doing as well at the moment, trading and owning shares in other countries that are doing better could really increase your returns as well as diversify your portfolio,” said Lucas Robinson, CMO of Crediful.
Then how can you invest in foreign stocks using Robinhood? There are several ways to do this. For example, you can invest directly in stocks known as American depositary receipts (ADRs). This is where a company lists on an American exchange.
Next, you can invest in an ETF. Of course, there are many that cover different parts of the world and market segments. Some examples include the following: Vanguard Emerging Markets Stock Index Fund (NYSEARCA:VWO), Franklin FTSE China (NYSEARCA:FLCH) and SPDR Portfolio Europe (NYSEARCA:SPEU).
Gold is a unique commodity. On the one hand, its price is driven by supply-and-demand fundamentals, such as those for jewelry and industrial systems. But then there are other factors that harken back to gold’s traditional role as a basis for a currency. Because of this, investors may look to gold as a safe haven if there is a surge inflation or there is geopolitical uncertainty.
“It’s prudent for any investor to have some exposure to gold, even a modest amount, because it is a non-correlated asset,” said Everett Millman, who is the Precious Metals Specialist at Gainesville Coins:
“In other words, the movement of the gold price doesn’t tend to have any strong correlation with the prices of other assets, such as stocks and bonds, which makes it the ideal way to diversify a portfolio. The only strong correlations the gold price exhibits are 1) the strength of the U.S. dollar, which has been proven like all fiat currencies to depreciate in value over time due to the inflation; and 2) real interest rates, that is the nominal interest rate minus the rate of inflation. Right now, with interest rates around the world near or even below 0%, even a tiny bit of positive inflation makes the ‘real rate’ slightly negative. Negative real rates are good for gold because it eliminates one of the few drawbacks of having exposure to gold — the fact that gold offers no yield or dividend.”
There really isn’t a clear-cut definition for momentum stocks. It’s more like the old saying: “You know it when you see it.”
For the most part, momentum stocks seem to defy gravity. When you take a look at the charts, it seems that the only direction is up. This usually involves heavy amounts of volume.
For Robinhood, the app has certainly been associated with momentum stocks. “Beyond penny stock price volatility, we have another factor in the markets, a pandemic. The uncertainty exacerbates volatility in less reliable market options,” said Laura Gonzalez, Ph.D., who is the associate professor of finance at the California State University, Long Beach.
Regardless of the reasons, momentum stocks can be a great way to make money. During the past year, if you had invested in companies like Zoom Video Communications (NASDAQ:ZM) or Shopify (NYSE:SHOP), you would have realized huge gains.
Yet momentum stocks can quickly go out of favor. And when this happens, the losses can be significant. This is what happened in the dot-com boom-bust. So, as is the case with any aggressive investing strategy, it’s very important to have some prudence.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.