For the average beginning investor, getting into the stock market can be a daunting task. Not only do you need to send your money to a stock broker, but you’ll have to pay fees for every trade that is initiated. There are terms like “margins” or “bear market” that may be confusing at best. People are told that investments need to be made for real wealth to be obtained, but how can one get started when there are so many barriers in the way?
That’s where Robinhood comes in. This Palo Alto, CA based online stock broker allows the average person to start purchasing stock in the brands they love without fees. As an added benefit, investors can also gain access to IPOs when they become available.
Why Are There No Fees on Robinhood?
The first question that many people ask about Robinhood is this: how can there be no fees to buy or sell stock? Anyone even remotely familiar with Wall Street knows that there are fees associated with the trades. Some online brokers even have fees that reach $20 per transaction. Commercials for competitors to Robinhood talk about having $7.99 fees for unlimited trades. Yet here’s this stock broker, saying that all investors get a fee free experience.
How? Robinhood is an equity building organization first and foremost. What they’re looking to do is help companies be able to move into a position where they can offer an IPO. Robinhood charges these companies fees for the services they provide, which means it isn’t the average trader that is going to be paying for each transaction. It’s the company who wants you to hold equity in their business in the first place that will be paying for your transaction.
This means that 100% of what you invest through this stock broker will go toward buying stock.
How Did Robinhood Get Started?
Robinhood is a relatively new provider in the stock trading field. They were launched in 2013 specifically to provide a new model for investing. There aren’t any sophisticated trading tools involved and you won’t find expert advice for your finances. What you are going to find is an easy platform for young adults to get started with a diverse financial portfolio.
The direct purchase model isn’t something new. Robinhood is just expanding on what has been around for some time by offering values in fractions instead of in whole amounts. Imagine being able to invest in an IPO for as little as $100. That’s where this trading platform can really help out an investor. Are the available brands a little limited? Sure. Only stocks are offered as well, which means there is no real way to have a single diversified portfolio on this platform.
Why Is Robinhood The Best Online Broker For Beginners?
The problem with traditional investing goes beyond just the trading fees. There are often buy minimums instituted which require investors to have thousands of dollars deposited for trading before they can begin to grow their wealth. That just isn’t the case with Robinhood. People can get started on this platform for just $10. This is because they offer fractional shares of available companies, including IPOs, no matter what the share price might be.
When you’re investing in smaller amounts, the fees typically outweigh the actual investment. A $100 stock purchase on a traditional platform could mean paying 10-20% in fees. At best, that means getting 100 shares of a brand that you want and it’s going to be a high-risk brand because you’ll be purchasing stock that trades in the $1-$2 range.
Robinhood makes the big brands, the stable brands, accessible to the beginning investor who doesn’t have a whole lot to invest. Think about the big IPOs as of late, like AMC Theaters or Facebook. With Robinhood, you could get involved with that. Instead of investing in a start-up coffee brand, you could put your funds towards fractional shares of Starbucks.
How Does Robinhood Work?
The app doesn’t trade directly like the traditional stock brokers do because they are offering fractional trades to consumers. The advantage of this is that anyone can get involved in their favorite brands for as little as $10 and it all goes toward stock. The disadvantage is that these trades must occur in batches so that full stocks can be obtained. This means that the combined order process will typically be run just once per day. This means that an order might be placed in the morning to purchase stock in McDonald’s, but the batch process might not be run until later that afternoon. This means that stock prices could vary dramatically from the time the buy or sell orders are placed.
Robinhood runs one batch for sales daily and two batches for purchases, typically one in the morning and a second in the afternoon.
All of the accounts using the app are given an extra measure of encryption to make sure that all user data is protected. This stock broker uses a military grade encryption so that personal account information is kept secure. Combined with the easy-to-use dashboard that helps users be able to transfer funds, buy or sell stocks, and view their statements and investments with one click simplicity, it could be the perfect tool to use to start getting familiar with the demands of Wall Street.
You Do Have To Be a US Resident To Hold an Account?
The one primary issue that some uses are going to face with Robinhood is that they need to be a citizen of the United States to hold an account on this platform. You can be a US citizen and trade from overseas if you wish, but those without the citizenship are not going to be able to execute trades in this unique batch styling.
Who benefits the most from the Robinhood app? This is going to be the user platform for someone who has $500 to invest, but wants to earn more than the sub 1% interest that a bank account is going to provide. Because it is a trading platform, the stocks received can still be treated as a liquid cash asset, but they also provide the same benefits of stock. If you invest into McDonald’s, for example, and the company pays out a quarterly dividend, then you’ll receive your share of that dividend because of the equity that you are holding.
Who won’t benefit from the app? This platform is not for those who want to stay in direct control of their trading needs. Because stocks purchases or sales don’t necessarily execute immediately upon request, it can lead to problems of profitability that could be bothersome to high value investors. For those at the low end of the value spectrum, it can provide an avenue into being able to getting into stable stock investments. Those who want immediate transactions for high value transactions, however, may find the delays to be untenable.
There is some truth to the concept of getting what you pay for when it comes to Robinhood. You’re not paying any fees for stock transactions, which means everything you have can go into a stock. The disadvantage is that you’ve got to wait until there is enough purchase or sale orders for Loyal3 to initiate the order. If a fractional order is in place, that’s not something that the app will be able to initiate. They’ll need to wait until additional orders are available.
The Robinhood app is a great financial platform. It’s very suitable for small investors and the fee-free environment is perfect for those who are looking to start small and build up from there. It’s for the buy and hold investor who wants to build some long-term profitability. It is not for the traders who wish to fulfill regular trades in order to build wealth. You aren’t going to be making a quick buck off of trades though. You are going to be able to create some long-term wealth if you stick with your purchases.
Our Verdict: If you’re looking to invest in the long run with a small amount of cash, then Robinhood is a viable option. You can’t lock in specific market prices or even do shorting, but you can get involved in some stable brands. If you look for undervalued brands on this platform and get involved with a low-level buy order, then you’re going to enjoy what this app can do. The IPOs are a great addition to the trading platform and could help the average person build up some real-life net worth. As this company continues to grow and gets more companies involved, then there’s a great chance that Loyal3 will transform the way people can access Wall Street every day.
Being fee-free means that Robinhood Markets is not a full service broker. As long as that is remembered, then the trading experience on this platform will be fun, educational, and potentially profitable.