: Trader beware: Read this before buying stocks with investment apps like Robinhood

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As social media has stoked interest in an assortment of stocks that recently were being shorted by hedge funds, Robinhood and similar, low-cost trading and investing platforms have served as an important tool.

On Reddit, in particular, a community of day traders has organized to send the price of multiple stocks skyward, from shares in companies such as GameStop GME, +2.68% and AMC AMC, +14.71% to commodities such as silver SI00, -0.94%. This activity was enabled by these apps, which have made it significantly easier to trade investments.

Throughout this saga — even after some of these platforms temporarily prohibited buying and selling of stocks like GameStop — Robinhood saw record growth, according to an analysis from JMP JMP, -0.47%. On Friday, traders downloaded the Robinhood app more than 600,000 times, well above the record set last March.

But Robinhood isn’t the only trading or investing platform seeing customer growth lately. Competitors like Webull and SoFi saw similarly elevated numbers of app downloads last week, JMP noted.

“While there is intense focus today, over the long run we believe firms that offer their customers the best experience, the most innovative tools and services to manage their finances, and competitive pricing will continue to enjoy the strongest growth in the industry,” JMP Securities analyst and head of business development Devin Ryan and vice president of equity research Brian McKenna said in the research note.

Here are five considerations wannabe day traders and investors should make before using an app to tap into the markets:

Investment apps can be good learning tools if used properly

Some financial experts say platforms like Robinhood, Acorns or Stash can be great learning tools for novice investors.

“Anything that democratizes saving and investing for your future is a good thing,” said Scott Hammel, a certified financial planner with Apeiron Planning Partners, an advisory firm based in Dallas, Texas. “If a robo-platform lowers the traditional ‘old guard’ barriers, and allows the consumer to feel more in control, they will be more engaged in their financial life.”

Given their low-cost and easy access, folks will use these apps as a platform to learn more about investing or stock trading. And because they are popular with novice investors, many of these platforms work to provide educational content to their users to help them learn the basics — especially during volatile periods in the market.

Stash, for instance, has published posts explaining the concept of a “short squeeze” in light of the GameStop frenzy, and the company’s founders have hosted an Instagram Live discussion to answer customers’ questions. Additionally, when customers search volatile stocks such as AMC, they receive in-app pop-up messages flagging the risks involved.

“Although we believe everyone should have access to investing, we do not advocate day-trading and have never promoted it to our customers,” a spokeswoman for Stash said. “We caution against stock speculating and trying to time the market, which is why we have always operated with only four trading windows throughout the day.”

Other digital investing platforms limit where customers can direct their investments. Betterment, for instance, doesn’t allow users to trade individual stocks. Instead, customers invest in a diversified portfolio of ETFs that are tailored to their needs, a spokeswoman said.

“One of the biggest concerns is newer investors seeing a ‘hot’ stock, but not fully understanding the ramifications of investing in it and producing serious risk,” said Dan Egan, vice president of behavior finance and investing at Betterment.

These apps can encourage riskier behavior if you’re not careful

Many have compared the ease and access offered by platforms like Robinhood as having “Vegas in your palm.” That’s become especially true in recent weeks, as retail traders have made risky bets on companies like GameStop.

“This type of trading is closer to gambling than it is to investing,” Hammel said.

But studies have shown that investors can find themselves unwittingly engaging in riskier behaviors when they buy and sell investments through mobile apps.

A recent working paper distributed by the National Bureau of Economic Research found that using a smartphone for investing encouraged the purchase of riskier assets. People trading with their phones were 67% more likely to buy so-called “lottery stocks.”

Part of the problem is that trading apps give you instant access, said Joe Sallee, managing partner and financial adviser at Bay Capital Advisors, based in Virginia Beach, Va. “This allows investors to make trade decisions without looking at the complete picture of why they are buying or selling a stock,” Sallee said. “Too many people make investment decisions based on their emotions instead of on the fundamentals of a company.”

Making matters worse, there’s evidence that the riskier behavior smartphones promote is translated into other platforms. The NBER paper noted that the investors that were studied — who were 45 years old on average — sought risky investments on more traditional platforms as well.

A Robinhood spokesperson said Robinhood  was designed “to be mobile-first and intuitive, with the goal of making investing feel more familiar and less daunting for an entire generation of people previously cut out of the financial system,” adding that the company’s focus was on breaking down barriers to investing.

Remember, $ 0 commissions can come at a price

No one likes to pay more when they can pay less, so it’s understandable why $ 0 commission fees at Robinhood — or a wide number of other trading platforms — can be so eye-catching.

But investor protection advocates say costs may still be in there, albeit unseen ones.

Broker-dealers owe their customers a “duty of best execution.” That means they have to try to get their clients and users the best terms on a trade. Price and speed are two important factors, but not necessarily the only ones.

For retail investors, it boils down to two points, said Tyler Gellasch, executive director of the Healthy Markets Association, a nonprofit association of pension funds advocating for investor protection. Best execution is about carrying out a trade “fast and getting the best price,” he said.

In December, the SEC announced a $ 65 million fine against Robinhood for allegedly not meeting that duty, and also not being forthright with customers on how it made its money.

When the fine was announced, Robinhood said the scrutinized conduct had to do with “historical practices that do not reflect Robinhood today.”

But Gellasch and others say the larger industry-wide problem hasn’t gone away.

The duty of best execution to the customer might collide with a broker’s revenue source from what’s called “payment for order flow.”  That’s where the companies actually executing the trades pay brokers for the privilege of doing the trades — and it could cause brokers to put their own financial interests ahead of their clients.

“The SEC and FINRA have inexplicably allowed payment for order flow to continue for years,” Gellasch told MarketWatch.

Disclosures about duties of best execution and their specifics might be tricky for average investors to understand, Barbara Roper, director of investor protection at the Consumer Federation of America, previously said. That’s why it may be important for regulators to step in, she said.  

They will try to sell you other financial products

In recent years, most digital trading and investing platforms have rolled out bank-like accounts. In most cases, the platforms have partnered with banks to offer the accounts. For instance, Stash partnered with Green Dot Corp to offer FDIC-insured banking services.

By design, these accounts can be appealing. Most carry attractive interest rates — when Robinhood unveiled its cash accounts (after a criticized initial announcement) the accounts offered an annual percentage yield of 2.05%. Today, the APY has fallen with interest rates and now rests around 0.3%, still well above the average interest rate on savings accounts at large banks.

Some companies have taken other approaches though. Stash’s accounts don’t bear interest. Instead, the investing platform offers debit rewards, providing customers with fractional shares in individual stocks based on where they spend their money. So if you spend money on Amazon AMZN, -2.00%, for instance, you’ll be rewarded with fractional shares of Amazon stock.

These platforms aren’t offering these accounts out of the kindness of their hearts, though. Bank accounts can be treasure troves of customer data — providing insight into people’s spending and savings habits, which could help the apps hone their investing pitches.

Plus, bank accounts are rather “sticky,” meaning that people are disinclined to open and close bank accounts regularly. So an investing platform that captures a banking customer could have less worries about them taking their money elsewhere.

The catch for consumers is that these bank accounts may not be best suited to their financial needs. From a savings-rate point of view, multiple online banks offer savings accounts with higher yields than are typically offered by these companies, according to Bankrate.

If you are unhappy with your service, you may have trouble taking an app to court

Many retail traders were up in arms over Robinhood’s decision to limit trading of stocks popular on Reddit. And some opted to attempt to pursue class-action lawsuits against the platform. It’s not clear though whether they will even have their day in court.

That’s because Robinhood includes an arbitration clause as part of its customer agreement. “By signing an arbitration agreement, the parties agree as follows: (1) All parties to this Agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed,” the agreement states.

When a case is resolved in arbitration, the documents are not publicly filed, and there is no jury to render a verdict. Some have argued that the process favors businesses, though business advocates argue it is fair and efficient.

Whatever the case, arbitration clauses are extremely common. “I’ve never seen a firm that didn’t have one,” said Samuel Edwards, a partner at Houston-based Shepherd Smith Edwards & Kantas and a past president of the Public Investors Advocate Bar Association.

Indeed, Acorns and Stash both have arbitration clauses as a part of their service agreements.

Customers can attempt to circumvent arbitration clauses by engaging in a class-action lawsuit, but they must first convince a judge not to decide to send the case back to arbitration instead.