If you need to buy stock, you have a lot of options for brokerages (the people who go and buy it for you).
The creation of the internet brought along online brokerages – companies who made the stock market available to everybody. They brought the cost of trades down by 80% over the years. You can now make trades for $4.95 instantly.
This is a big deal.
Buying stock hasn’t always been this easy and cheap. It was something reserved for the wealthy and those with connections. The fact that stock trading has never been more attainable is a sign of the amazing times we live in. What used to be advanced financial tools are now normal everyday products that everyone uses.
Low fees make equity (aka stock) investing more accessible to everyone, opening another option to generate wealth.
Fees can significantly impact your ability to make money trading stocks when starting out. They can rob you of your profit if you aren’t trading enough money. Every time you place an order to buy or sell stocks, you have to pay a fee. Most online brokerages charge between $5 and $7 per trade.
The Problem Brokerage Fees Cause
To explain the issue with brokerage fees, let’s run through an example. Let’s say you are starting out and have $500 to invest. The pros, like Warren Buffett, recommend buying a good low-fee index fund of US stocks, such as VTI. Today, it’s trading at $126.23. So, let’s get four shares for $504.92.
I use Charles Schwab for most of my trades. They now charge $4.95 for me to buy or sell any stocks or ETF. This means it will cost me $9.90 to buy and eventually sell the stock…$4.95 x 2.
Now, $9.90 is 2% of $504.92. This means you have a 2% loss as soon as you enter the trade. Now, you have an extra 2% return you need to hit before making a profit, and we all know profit is the goal.
If you are trading large amounts, this almost doesn’t matter at all. If we jump to 80 shares at $10130.40, then the $9.90 drops to .09%, which is negligible. But when you are starting out, brokerage fees can rob you of valuable returns.
Avoiding fees with Robinhood
I stumbled across Robinhood a few years ago before they launched. There was an article announcing some startup looking to offer absolutely free trading. I didn’t believe they would make it work but signed up for the beta anyway.
Well, several years and rounds of funding later, Robinhood is up and running. I had the opportunity to meet the founders and hear more about their mission and how they are able to offer trades for free, and I was impressed. I now recommend them to anyone with a low balance whose looking to get started buying stocks.
Robinhood is an app focused on us millennials. The app is simple (too simple for some, which I’ll talk about later) and helps make the idea of buying stocks significantly more approachable. It really is $0.00 for every trade, avoiding all trading fees. They also have no account minimums, meaning you could drop in $126.23 for 1 share of VTI, and officially be a diversified stock investor in a few minutes.
Where Robinhood Falls Short
I continue to use Charles Schwab & Wealthfront for the majority of my stock investing, but I do keep money and shares in Robinhood and recommend it to those starting out. There are a few things stopping me, with well over $100k in stocks & ETFs, from switching over to Robinhood.
Limited research options
I’m not a day trader. I do about 10 trades a year. I find stocks in companies I like, and I invest for a few years in normal long positions. So before I find a company or ETF I’m excited about, I need to do some research. I look at analyst opinions, read up on current news, and look at the fundamentals of the company.
Robinhood, in their search for simplicity, decided to forgo the tools and research you find in other brokerages. A lot of it is free and available on the internet, but some reports I only get from my brokerage and I miss those with Robinhood.
It’s just an app
I spend all day on my phone and have traded stocks from it as well, but most of my orders come from a laptop where I have multiple windows open looking at different pieces of information before buying something. I like a web interface for trading, and Robinhood doesn’t offer that. So, I need to go to my phone and enter in any trade into the app for it to work, which annoys me.
No IRAs or retirement accounts
Robinhood doesn’t support Traditional or Roth IRAs, which is how most Americans participate in the stock market. The tax-free growth that the government provides is a huge benefit everyone should participate in. Robinhood doesn’t offer these accounts, which could be an issue for many.
Doesn’t sync with budgeting and net worth trackers
I live and die by my net worth. I track it daily to make sure the decisions I’m making are moving me in the direction of financial freedom and generational wealth. The fact that my Robinhood information won’t automatically be pulled and analyzed next to my 401k & Schwab account is a dealbreaker for me. I mentioned this to the founders, they have their reasons, but I hope they come around to my way of thinking.
Proceed with Caution
If you do no research, throw a bunch of money into a brokerage and start trading…YOU WILL LOSE MONEY (well, you probably will).
Buying individual stocks is a risky and complicated game. Just because Nike sells a lot of shoes, does not mean Nike stock is a good investment. An investment must make more money than it costs to make sense. If Nike gets hit with a scandal tomorrow, it could easily drop and cause serious harm to your financial goals, but there’s not much that will significantly raise the value of Nike’s stock this late in the game.
As I said before (along with countless other financial advisors and wealth managers), buy boring. If you are starting out, buy ETFs like VTI & BND. They are made up of thousands of individual stocks or bonds, spreads the risk out across a lot of companies, and doesn’t shoot up or down by 40% overnight. You can also buy them for free on Robinhood.
The “idea” of trading stocks is sexy. The “reality” of trading stocks isn’t. Ninety-nine percent of people just need to reliably save money, put it into good investments, and forget about it. Then, in 20, 30, 50 years, you will wake up a millionaire.
If you are interested in trading stock, consider Robinhood as a new tool to help you on your journey to wealth. Leave a comment or question on stock and trading.
Damien is a Personal Finance Nerd and former Facebook Product Manager who started Wealth Noir to help others find wealth. He actively invests in stocks, robo advisors, and cryptocurrency … but loves real estate investing. He holds an MBA from MIT and a Comp Sci & Econ degrees from Unv. of MD. He’s a proud dad, which is his biggest accomplishment.