Photo: Michael Daddino/Flickr
Back then, free stock trades weren’t possible
Free stock trading isn’t exactly new. In fact, plenty of companies have tried and failed in the process. Any number of problems have beset these pioneering companies. From beginning to charge commissions and fees to questionable management to poor corporate reputations, they haven’t stood the test of time.
When I first started investing and researching individual stocks, I was a wee middle schooler. As I tried to understand the markets, my burgeoning interest was dampened by trading fees. With only a couple hundred dollars to my name, stock trading fees of about $50 made it financially oppressive. I couldn’t invest in Apple (ticker: AAPL) right after the iPod was released, but I wanted to.
Fees destroy profits and wreak long-term havoc on investment returns — especially for those getting started. Thankfully, fees have been on a precipitous decline in recent years. From that abominable $50-fee time to now, you can see great change. Most online brokerage companies are around $10 or less per trade.
Unfortunately, if you’re an average investor — or even a day trader — you’ll spend money every year rebalancing your portfolio to better diversify. Whether you choose individual stocks (more risky) or exchange traded index funds (more diversified), you’ll be spending about $20 per stock to get in and out. And that should be frightening to anyone. Heck, that’s 10% of my monthly food budget!
The hope for fee-free stock trades
The lingering question: Is there actually a non-scammy, reputable way to trade for free? Until very recently the answer was still no. Unless you had gobs of wealth ready to trade, investment and brokerage companies had no interest in providing for the little guy or gal. Free didn’t really exist; the handful that tried, failed.
Today, there’s good news for everyone — at every income level — because data and tech companies have solved this wretched problem. Today, I’m making a rather lofty prediction: nobody in the United States will pay to trade at average investor levels within 7-10 years. Today, there’s hope on the horizon for a more affordable, accessible investing world.
The cost of everything tech-related has fallen. We can store more and get data faster than ever before. It makes all of our consumer products less expensive to purchase, and has the added benefit of making cloud applications cheaper, too.
We are just beginning to benefit from these reduced costs, as many cloud-based providers have opted to slash costs for services. For instance, Google Drive offers 15GB free and for $2.00 per month, you can receive 100GB. Think about it, only a few years ago we were working with floppy disks that stored about 1.5MB!
As technology prices decline, the consumer has benefited appreciably. And it’s leaving room for innovators to save us even more when trading stocks. If a company can utilize the latest technology, reduce brick and mortar costs by only having an online presence, make money off of user data, and turn cash-on-hand into interest for them, then you could have a success story.
Robinhood saves money for everyone
The other day I was reading up on a new tech startup that’s aiming to do everything I mentioned. They have an office — not hundreds or thousands of offices. They have a staff of coders, developers, graphic designers, and technical support to make something for the 21st century.
The company’s called Robinhood. I don’t know if they could come up with a better name than that! They aim to “democratize” stock trades by removing the “$10 [fees] for every trade.” Now, the wealthy and the hopefully-soon-to-be wealthy can participate in the market without being eaten alive by trading fees.
Instead of porting over old ways about investing, Robinhood revolutionizes everything about trading. All you need is a smartphone (iOS only, Android coming soon). With a few taps, anyone can invest for free.
Here’s where I want you to ask, What’s the catch, Sam? Nothing in life is free, right?
True. Nothing in life is completely free. There’s always some trade off. The fees that used to be captured by older brokerage houses are eliminated; instead, the company profits off of unused cash balances in portfolios. For instance, say you deposit $1,000 in a Robinhood account. Until you formally invest in a stock, that money is borrowed by the company and put in an interest-bearing bank account for them. As you research and decide on a stock to buy, they scoop up a little interest in the process.
Additionally, Robinhood uses advanced technical features that will likely be able to track user data far better than stodgy companies. I’m always cautious about data-based companies, but the potential gain is worth the information loss.
Robinhood is backed by some of the biggest names in Silicon Valley, including Andreessen Horowitz and Google Ventures. That has provided them with some much needed funding to get off the ground and running. With Google behind them, I trust their platform and user-focused future. This isn’t a company that will crash and burn like Zecco did.
First impressions on this new app and trading platform
I deposited my first funds into Robinhood’s iOS app a few days ago. Trading stocks and ETFs were easy. As if conditioned to wince over the costs like before, I clicked and beared for some strange $7-10 trading fee. It never came.
Robinhood is an honest platform with some exciting energy. When I reached out for support via their FAQ forums and Twitter account, responses were delivered within 24 hours — usually in a couple hours. That’s impressive for a small staff with plenty of new accounts. The company seems to understand that if it’s to appeal to younger, more tech savvy generations, they’ll need to meet them where they are — Twitter included.
Reducing these trading is a wonderful first step towards a more accessible, affordable stock market for all. The dangers of stock market manipulation are still ever present, but being able to enter the market without these fees is amazing. And having a terrific platform on top of it is a wonderful thing!
Want to try it out? Unfortunately, it’s invite-only at this stage, but I have 3 invite codes up for grabs! Comment below and share this article on Twitter. I’ll email the codes to 3 people within 7 days of this article.
