An investor has multiple arenas that they can play on or multiple brokerage and service providers they can use. With so many out there, it can make one’s decision on which one to choose extremely difficult. This is similar to buying a laptop for blogging or even purchasing a car – there are so many, pros and cons for each one and then it comes to personal taste/goals. With the continuous technology advancement – investing has become easier, cheaper and more intuitive than ever before with research tools that try to customize a stock or portfolio to your characteristics and long/short term goals. We wanted to analyze an application/service providers for the readers, and that my friends is – Robinhood.
Robinhood is a member of FINRA and SIPC, as well as having real–time quotes occurring on stock exchanges. Currently they offer brokerage accounts but do not offer IRA-based accounts for investors. Therefore, taxable accounts only at this time through their system/application! Their application on Apple and/or Android is very intuitive and has a very seamless use process – a few of our co-workers are using them, and we cannot lie – the app has somewhat of a sexy appeal. We really liked it, to be straight up honest. Their company is approximately 2 years old and was discovered/created in the technology hole of Palo Alto, home of many other technology based companies. We figured we had to learn more about this new app. Below we will list out the pros-and cons of what I see with the application and service provider, whom uses APEX as their clearing of transactions.
PROS of Robinhood:
1.) $0 Commission – The obvious reason why individuals have been using this platform – NO cost at all to trade/transact with Robinhood. Phenomenal if you ask us. For the young investor who does not earn/have large cash flow to make big purchases, this is very intriguing. Example – if you have $35 and want to buy one share of AT&T (T) or $28 and want to buy one share of KMI, boom – you can buy them and not worry about your expense fee on the transaction or expense ratio % when you make a trade. This is something that we always keep in mind with our brokerage, as $6.95 a trade on $1,000 is 0.695% fee essentially. Here, 0% fee, a very big pro.
2.) Application Friendly – The application is sleek. Bar none. The technology based company really did well here, making it easy to flow through, make a transaction, review the highs/lows and ratios before making the trade. Security over the app is high on this and makes use of finger print reader to access on the apple phone. Further, it appears to be very, very easy to monitor the market, create watch lists, etc.
3.) Main Order Types – You have your main order types – Market, Limit, Stop-loss and Stop-Limit. This can be a pro and a con depending on how complex of an investor you are. We consider this a pro in here due to reducing the # of transactions to choose from, at the time being, without limiting the basic investing options offered by other brokerages. This would be considered a pro for a basic/beginning dividend growth investor.
4.) Pays for Things – What do I (Lanny) mean by this? Well if you’re an investor that typically transacts, lets say two times per month at $7.00 (rounded) each trade. That’s $14/month for trading fees X 12 months = $168/year that Robinhood could save you. Now I (Lanny) have now transacted 21 times this year through my brokerage service at $6.95 each time. That is a cost to me of $146 (rounded) already! Given that I still have 2+ months remaining, I appear to be on track to spending between $160-$200 in fees. Think of what you could spend or what typical monthly expenses you could cover with the extra cash? You essentially could be a tablet for $300 and then trade for a year on robinhood and this would virtually pay for that device. Does that make sense? Or if you upgrade your phone for $200, using this App would pay for it. It’s interesting when you view transaction fees from a different lens.
5). Allows Investors to Diversify Without Purchasing a Mutual Fund or ETF – This is an added benefit only available because of Pro #1. Think of how many times you have found yourself in the situation where you have limited capital and want to purchase multiple stocks that are trading at a discount. For example, if I (Bert) had $500 and suddenly saw a downturn in the market. I would be able to purchase all five stocks on my “Always Buy” list for $100 without having to incur excessive trading fees ($6.95 * 5 = $35.95 if I traded through a different broker). If there were commissions, there is no way I would purchase all five stocks and would most likely opt for one. The $0 commission would allows investors to spread their money and diversify their portfolios through smaller purchases without being penalized. now, an investor with a $1,000 can own a portfolio that is as diversified as an individual investor that has a $100,000 investor.
CONS of Robinhood:
1.) No Dividend Reinvestment Plan (DRIP) – As dividend investors, one would love to have the DRIP feature to not worry about reinvestment or waiting until cash piles up enough to purchase a whole share. As of right now Robinhood does not have a DRIP feature and therefore, if you earn $2.00 in dividends, it will sit in cash until you have capital to purchase a full share.
2.) No retirement accounts – As dividend and regular investors, one would love to have this feature to bring all accounts to Robinhood. Essentially, if you were to use this and wanted an retirement account – you’ll have to have multiple brokerages being used. Right now, we each have 3 at the moment – 1 for work – 1 old ROTH and our current Individual/Roth accounts through the same brokerage and it’s not that much fun (Yes, the two of us have the same layout). Checking multiple sources can become burdensome and time consuming, which can come at a premium for some of us as we balance a full-time job, blogging, and life!
3.) Limited Trade options – As discussed in the pro section above – you do not have the ability to trade options, foreign domiciled securities or mutual funds. I (Lanny) do own one ETF and not being able to invest into a fund could turn people off.
Robinhood Target Audience
We would say the target audience for Robinhood can be clear cut and can fit into this arena/genre of individuals:
1.) Young/Technology Based individuals – Individuals who want everything on an Application on their phone, Robinhood could be of high usage for you. This is huge because you cannot access the application from a web address.
2.) Individuals with limited capital but want to be a part of investing – This is easy with $0 trades. If a stock is $5, then that’s all you’ll need to own a share, not $11.95 with the fee in there. I (Lanny) think of my mom here, where it’s hard for her to save money, and we have to save a lot to make the fee pallatable. Here, she could essentially save $35 and buy the one share of AT&T (T) stock as discussed above, adding to her dividend income. It’s interesting and may be used for her. For me (Bert), I think of myself and Lanny in college. My interest in stocks began much earlier than our website and I was trading (although, not dividend stocks), way before Lanny convinced that dividend growth investing is the way to go. In college, resources are at a premium and having an apps like Robinhood would have allowed me to begin investing at a much younger age. Imagine what our projected annual dividend income would be now if we started investing as teenagers! Our annual dividend goals would hopefully be much higher, that’s for sure.
3.) Individuals who Transact Frequently on the Buy Side – This could pay for devices, as individuals could save $100’s of dollars a year. Think new phone/tablet, etc. as discussed above.
Overall, we think if you are a combination of wanting a pure individual brokerage account, want technology to be a main part of your accounts and do not mind not having a retirement account with the trade off of $0 fees, this investing platform would be for you. However, as of right now, neither of us are going to open an account with them simply because our main brokerage platform has both – Individual and Retirement. If this changes though, we would strongly consider opening a trading account through Robinhood!
What does everyone else think of this system? Do you use it? Anyone have any other reactions to using them or pros/cons to add? Always curious here and we thank you again for coming by to read our post!
Photo Credit: www.robinhood.com