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 could then make trades for $4.95 instantly.
This was a big deal.
Buying stock hasn’t always been easy and cheap. It was something reserved for the wealthy and those with connections, as you needed a stock broker who was willing to work with your money. The fact stock trading has never been more attainable is a sign of the amazing times we live in. What used to be advanced financial services are now normal everyday products for you.
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 buying stocks, especially when you are getting started. 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. Whatever money you earn when you sell the stock, you have to subtract the cost to purchase and sell the stock shares.
The Problem With Brokerage Fees
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. As of this writing, it’s price is $126.23 per share. So, let’s get four shares for $504.92.
I use Charles Schwab for most of my trades. They will charge $4.95 for me to buy or sell any stocks. 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.
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.
When I started out, I wasn’t making $10,000 trades. Sometimes $500 for a single trade felt like too much. For anyone starting out with smaller trades, these fees can become a significant cost. Owning stock shares is an important part of a good diversified investment portfolio.
Free Stock Trades 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.
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 and website focused on us millennial investors. 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.
You can read Nerdwallet’s review of Robinhood for more information, or this video review on youtube.
Your money is SPIC insured up to $500,000, in case the company goes under or something odd happens. Robinhood talks about their protections on the site, and it’s worth a quick check.
Is Robinhood Right for you?
I think Robinhood is the perfect solution for many people. They do lack some features found in more expensive brokerages, but the lack of fees and simplicity may make them perfect for you if you fall into one of these categories:
New To Stock Investing
$0 brokerage fees is a huge benefit when you are learning to invest in stocks. As I showed you, brokerage fees make becoming profitable harder, especially with smaller trades. Most people aren’t going to jump into stock investing with $10,000 trades. At smaller values, these fees hurt your return and can discourage you from learning and trading.
Additionally, Robinhood Snacks helps present financial news in an easy to read format. When you are getting started, consuming information about stocks, the markets, and investing is the second most important thing you can do (actually investing is #1).
Lastly, the super simple interface Robinhood has designed makes buying stocks, bonds, and ETFs approachable and unconfusing.
I got to meet with the founders of Robinhood and visited their offices. Making stock investing more approachable was a key goal of creating the company and it’s apparent.
You Don’t Have A Lot To Invest
When you’re making small stock purchases, brokereage fees can quickly eat away at your gains. Since you pay around $5 to buy or sell a stock normally, buying stocks $100 at a time is very expensive. If you buy $1000 worth of stocks buy making 10 purchases at $100, you would spend $50 of your $1000 in brokerage fees.
Robinhood’s $0 fees mean it doesn’t matter how many purchases you make, you won’t pay any brokerage fees. If you don’t have a lot to invest, this can help a lot as you purchase one share at a time.
Where Robinhood Falls Short
I continue to use Charles Schwab & M1 Finance 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 looks as paying for Robinhood premium will
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.
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.
Jonathan F says
Hey Damien, this is a great article. I have accumulated a large amount of debt for medical school. I wanted to know what your thoughts on putting some money on the side to invest in stocks while paying off student debt?
Damien Peters says
I do believe you should always be investing, even with student debt. Credit cards should always be handled first, but student debt can be treated differently.
Stocks are a great place to start investing, but don’t try and day trade or beat the market. I’ve had many friends lose a lot of money this way. Stick with some index funds (like VTI) or a robo advisor. I did this while paying off student debt, and I still have student debt because the rates are very low and I’m better off investing the money.
Jonathan F says
D. Rose says
What do you like about Wealthfront that seperates it from a Betterment or Robinhood?
Damien Peters says
I talked more about my thoughts on Wealthfront compared to Betterment in my Robo advisor article, but Robinhood is a very different product all together and I wouldn’t compare against Wealthfront.
I left Betterment for Wealthfront because of Betterment’s fee structure makes it more expensive. I use Robinhood for some of my stock trading, but mainly Schwab because of the things I mentioned in this article.