Traditionally, stock market investing has had the reputation of being riddled with fees and a climate where brokers and dealers prioritize their own personal gain. This, along with lofty minimum investment amounts and other barriers, has scared off the average American looking for an alternative to a savings account. Robinhood, the Silicon Valley brainchild of co-founders Baiju Bhatt and Vladimir Tenev, recently valued at over $11B according to Forbes, has been a disruptive force in the brokerage industry.
Making investing accessible to all
Bhatt and Tenev’s app-based zero-fee brokerage platform is changing the status quo of financial investment services. They have given way to the “retail investor”, a name for an individual investor that generally trades in much smaller increments for their own personal gain. Robinhood has done this to democratize America’s financial system as they started this venture amid the 2008 financial crisis, a time when investing seemed to only benefit the wealthy.
CNBC explained how Robinhood is based on the English fairy tale character who took from the rich and gave to the poor. Robinhood investing is far from “stealing from the rich” but it is clear to see how this concept coincides with democratizing the financial system by giving everyone access to lucrative investments. They’ve accomplished this by creating a brokerage platform not only with zero-fee trading but also with access to fractional shares, and no minimum account balance, all in a very user-friendly fashion.
The fees involved in trading have been steadily decreasing for decades. Before the ’70s, you could be paying hundreds of dollars per trade. In the ’70s and ’80s, we saw that margin come down well under a hundred. In the ’90s, we saw even more progress to an average of under $20 per trade, followed by $5-10 trades in the 2000s. Now, here we are in the new age of zero fees.
Robinhood spearheaded this movement, and caught the eyes of big players in the game such as E-Trade, Fidelity, and Charles Schwab, to name a few. These firms knew they had to follow suit before losing any more market share to the new player in the game. Zero-fee quickly became the standard in trading across all custodians, which has opened doors to a new group of investors who were previously too discouraged or intimidated by high commission fees to try before.
Zero-fee trading is not the only reason for Robinhood’s unprecedented success. Fractional shares have been allowing the platform’s users to buy portions of a share. For example, a person confident in Netflix can buy as little as $1 worth of their stock, instead of having to pay $500 a share, the price it’s been hovering around since about July. This gives individuals the chance to invest in companies that they simply couldn’t afford to otherwise; it also provides an inexpensive way to diversify.
As recently as this month, we now see behemoths such as Charles Schwab and Fidelity introduce their own fractional shares, called “Share Slices”. This is another way Robinhood has been ahead of the game, changing the fabric of the whole brokerage industry. As a result of their efforts, trading has been made available to everyone, regardless of socioeconomic factors. Fractional shares and zero-fee trading both take down considerable barriers to that goal.
An inviting app-based design
The platform itself is another differentiating factor of Robinhood. The platform is app-based, launched during a time when Americans are more glued to their phones than ever, and is so user friendly that at times it can feel like you’ve won in a video game when you’ve actually just purchased a stock. The bright colors, infographics, access to information including the basics of investing, overall market trends, etc can be seen as a stark contrast to online platforms offered in the past offered by the usual suspects. The inviting nature of Robinhood has further driven their goal of democratizing the American financial system because they have built a platform that you don’t need a finance degree to understand and use. They make it fun and easy to invest, something everyone can take part in.
Over the past few years, Robinhood has taken the guise of first-mover in the brokerage industry time and time again. Seemingly every move they make is later imitated by brokerage giants who are trying to keep pace. These changes to the foundation of our financial system have transformed the public perception of investing, pumped more money into the market, and allowed for a climate that is suitable for any American to invest funds, as long as you have at least a dollar and a smartphone. Robinhood is well on its way to democratizing America’s financial system.
Have you tried investing with Robinhood? How do you feel it compares to the other investing platforms? Let us know in the comments!
This article originally published on GREY Journal.