Is This App Brokerage Showcasing the Future of Trading?

By Tyler Higgins

The future of trading may be far different from the way investors buy and sell stocks now and a past reliance on traditional brokers.

Certainly, the amount of information about the markets keeps growing, and many of the traders in this day and age are actually computers. A person with a pencil and paper can’t guess a stock’s future as certainly as you could in the day of British-born American investor, economist and professor Benjamin Graham.

The increased use of smartphones has ushered in investment applications, also known as apps, that a new generation of investors are viewing as a viable way to trade quickly and conveniently from their mobile phones. Could the use of apps become the future of trading?

Robinhood is an app that makes it cost-effective for investors without much in the way of savings to do a little trading and learn the ropes of the market by experiencing its mood swings for themselves. After all, experience is truly the best teacher. How is a college-aged or slightly older would-be investor to experience the tossing and turning of the market firsthand when an $8 commission costs 1% of their cash?

Enter Robinhood — the app that offers completely free trading. Suppose an investor only has $50 to trade? No problem. Load up this app, buy your one share of Coca-Cola and watch what happens. Or, like many new investors, be tempted by the allure of penny stocks as a gambling machine and risk your $50 that way.

The upside to the latter choice is learning. I’ve read countless stories in the app’s community about investors who lost most of their small amount of money, learned their lesson and made most of it back with better choices. It is better for a person to make those mistakes when they are young.

No-commission trades allow investors to buy or sell shares more often than is typically considered wise. There are also some fun little moves mega-small-time investors can make with free trades. One example is getting a few dollars for free by buying one share of a company that’s about to have a reverse split that rounds up the number of shares.

To add to its millennial appeal, the developers have recently introduced a refer-a-friend program that will give one share of a semi-random stock to both parties if you use a referral code when signing up. Supposedly, it’s possible to score a share of Apple this way. That adds a networking piece that is quite popular and gets more users interested. If this idea might catch the eye of yourself or someone you know, feel free to click here.

As to how the company makes money, the brokerage offers some margin trading options, branded as Robinhood Gold, for a somewhat reasonable fee. I’ve done the math and, as a rule of thumb, if you as an investor make at least 0.5% per month and are fully invested, the margin part pays for itself. More than that is just a bonus.

Of course, if you’re losing money, the penalty and being more than 100% invested will cause losses to accumulate quickly. Personally, my strategy is to check my monthly performance at the end of each month and see whether I beat that mark before deciding whether to maintain my Gold subscription. In this market, the answer has been a resounding yes.

Of course, there are some downsides for serious investors. Trades can be slower than you might expect from a major broker, so if you’re worried about minute changes in price, this app is not for you. That trading fee is buying something, after all! There are essentially no analytical tools in the app — you can get quotes, look at simple charts, check on the performance of your portfolio and a watchlist and get notifications about upcoming earnings reports. That’s about it. Many users choose other sources for analytics.

Finally, there is no options trading, and some more obscure securities can’t be bought either, including many foreign companies. However, exchange-traded funds (ETFs) are fair game. And if you only have, say, $2,000 to trade, or are a beginner, you probably shouldn’t be trading options anyway. That’s a quick way to turn that money into $0. Stocks and leveraged ETFs have more than enough volatility for me, thank you!

If you know or are a young or tech-savvy person with the analytical mind required to enjoy the stock market, this accessible tool might just be a good way to get started.

Tyler Higgins is an editorial staff member of Eagle Financial Publications and a writer for www.StockInvestor.com.