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Robinhood is Making the Stock Markets Accessible to Everyone with Commission Free Trading

What student doesn’t dream of becoming the next, young trading prodigy?  During my junior and senior years of high school, my friends and I had a competition to see who could make the most practice money on UpDown, a simulated portfolio management site.  By the time I turned 18, I couldn’t wait to try my hand in the real markets.  Unfortunately, I had very limited financial experience at the time and was unaware of how steep trading commissions were in the real world.  Paying $10 a trade is not appealing when you only want to invest $100 into the stock market.  Of course, one can always open a self-directed IRA or get a job with a 401(k), but what about personal investment portfolios meant for practice and experimental strategies?  Up until fairly recently, the only way to trade commission free was to have an account at a bank that allows you a set amount of free trades per month or to take advantage of new brokerage account specials. This is no longer the case.

Enter Robinhood, the stockbroker messiah we’ve all been waiting for.  Their platform has been available for nearly a year provided you were lucky enough to be high up on their wait-list.  It’s already one of the fastest growing brokerages to ever open up shop, having already surpassed 2 billion in transactions.  The app is available on iOS and Android devices, making it very user-friendly for millennials. There is no minimum deposit on opening an account, and users pay no fees or commissions for using the base platform. Instead, Robinhood makes money via interest on cash account balances, and in the future will offer margin trading with a low fee as well as phone-assisted trading for $10/trade.  Upon launch, users had to wait 3 days for deposits to clear and for the money from a sold position to be available in their account.  However, this is slowly being phased out via Robinhood Instant.  Understandably, Robinhood can’t afford to provide brick-and-mortar locations or the professional financial advisers some larger companies can, but for millennials, these features aren’t all that necessary.

What makes Robinhood revolutionary is that it allows low net worth individuals equal access to the markets.  As Techcrunch puts it:

Robinhood is changing stock trading. First it democratized it, because while rich people would hardly notice those $7 fees, they might erase the upside potential for younger and less wealthy traders. On Robinhood you can trade as little as you want without the fees eating your profits.

Now, it’s making stock trading as instantly gratifying as ordering a meal from Sprig or requesting an Uber.

This brings up a key point. The wealthy used to have a great advantage over those with limited means.  Commissions may not have accounted for even 1% of what they planned to invest in the stock market.  Someone with only $10, however, would be lucky to be able to buy a share of anything taking into account a $5-$10 fee. Now they can actually make a profit and grow that $10 into a much larger sum if they prove to be a skilled trader.

There are a few downsides to Robhinhood’s platform, but they seem to be adding new features and fixing things every day.  Charts are a little limited in functionality and only extend back 1 year.  There are also some funds you might find easily on other platforms that can’t yet be traded on Robinhood.  When a split or merger occurs, users are not notified and have to deduce what’s happened simply by looking at their account.  This could mean that they see a temporarily lowered account balance in the case of cash-in-lieu settlement or that they notice the new number of held shares in their portfolio has changed.  You also can’t set price alerts yet. Despite these downsides though, Robinhood’s user interface and functionality are both extremely polished and are good enough for those who just want to try their hand in the markets.  They offer multiple order types including limit orders and stop losses, and provide convenient descriptions and aggregated news regarding your watched tickers.  It will be exciting to see how the app evolves over the coming year, especially since Robinhood was named one of the Most Innovative Companies of 2016.

You may notice a common theme surrounding some of the latest startups and fin-tech services—the democratization of money.  This is the result of money finally catching up to technology as well as the increasing dissatisfaction with the legacy economy.  Millennials, the unbanked, and the financially disenfranchised deserve the ability to participate in this new, global economy by means other than consumption and traditional labor. They need easy access to do so though, and Robinhood seeks to help with this by being at the forefront of a line of convenient, egalitarian companies.

 

Written by Alex Duplessie


Youtube video courtesy of the Wall Street Journal.

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