You Don’t Make Money from Markets

Buying stocks has never been easier, cheaper and more accessible.

Companies like Robinhood, Stockpile and Stash are removing the toll booths and all the barriers.

Robinhood is a mobile app that allows you to buy stocks without paying anything. That’s right, no commissions.

The company can do that because they’ve trimmed all the fat, no storefront, no account managers; it’s all electronic.

Robinhood generates money from the interest on the cash which is just sitting around in your trading account.

They also make money on a gold service where you can buy shares on margin. It allows users with a minimum balance of $2,000 to trade on borrowed money, as much as two times what they have on deposit, for a flat fee depending on the amount.

Robinhood says its users check the app 10 times a day on average. That kind of engagement could also be lucrative for a company who wants to monetise those users.

What’s really appealed to people is the fact that using Robinhood is less like a usual brokerage product, where you have paperwork and you have to wait. You can sign up from your mobile device in just a few minutes.

The company, which was initially rejected by 75 venture capitalists, is now worth $5.6 billion.

Robinhood and Stockpile make trading stocks easy

The trading app is visually minimal. It’s meant to be. It displays little more than price action, a chart and a buy button. The experience is meant to be easy for first-time investors and makes competing platforms look like relics.

It’s probably why a third of their four million users have used the app to make their first-ever stock purchase.

What’s more, the median age of Robinhood users is just 28.

If you think that’s young, consider Stockpile. Over 60% of its user base is under 30 and 30% are children, who can get set up with custodial accounts.

Stockpile is bringing stock trading to the masses.

It makes money, in part, by charging a flat fee of 99 cents a trade. But, for that amount, investors can get fractional shares in a company and often their first taste of stock ownership.

For young investors who want to buy into Amazon at roughly $1,600 a share, just buying one share of Amazon can be a stretch.

It’s giving young investors the opportunity to buy quality stocks when they’re just starting out. You can’t do much with 50 dollars at a traditional brokerage. But at Stockpile you can. No more bottom fishing for cheap penny stocks any more. With Stockpile, every stock is in your price range.

A fractional share more or less works like a full one would. If a full share goes up in value by 10% in a day, so does the fractional share. Dividends are paid to shareholders according to the number of shares they own. If you only own half a share, you only get half the dividend payment.

Then there’s stash, which describes itself as investing simplified.

They hand pick the investments they offer on the platform. This curated list is comprised of well-known investment themes and lets you start investing with just $5, at the swipe of a screen and the click of a button.

Robinhood and Stockpile force brokers to lower fees

These companies are onto something, if their growth is any guide.

Robinhood’s growth is notable. It’s reached 4 million accounts, double what it had last year, and more than E-Trade’s 3.7 million. Remarkable considering institutions like E-Trade have had decade-long head starts.

It’s hard to know how the traditional online brokers will respond. But when millions of millennials are saying, ‘yes sign me up,’ the incumbents have to pay attention.

Certainly it’s forced them to lower commissions to around $5 a trade. That narrows the advantage that the new apps have on that score.

When you read all these stories, it’s easy to get caught up in sweeping statements about the death of traditional online brokers.

But when I brought up the stock charts of Charles Schwab Corp [NYSE:SCHW], TD Ameritrade Holding Corp [NASDAQ:AMTD], E-Trade Financial Corp [NASDAQ:ETFC] and Interactive Brokers Group Inc [NASDAQ:IBKR], I didn’t see any warning bells there.

All have been on a tear over the last few years. Still, it’s a space to watch. And if there is trouble ahead for traditional online brokers, it will show up in the charts first.

A possibility is that the established players could look for acquisitions in this space. It would be a way to acquire the new investors which, they hope, are the next generation of customers. And they could then be upgraded to the better research products and tools.

One of the downsides of apps like Robinhood is you can’t short individual stocks, but of course you can go short on the myriad of ETF’s which go short on the indexes.

But that brings me to a point.

Never before are people trading markets at an earlier age. Never before has trading markets been more accessible to a larger audience.

Over the last few years, the millennials have been piling into the market.

These young investors have only known one market. A strong bull market.

You buy a stock and it goes up in value. I mean, how hard is this stock market game?

Trading stocks for free, making it quick and easy, could turn it all into a bit of a game. And at the major market extremes, they’ll find it’s not.

Because what I have come to find is this.

You don’t make money from markets. You earn it.

You earn it by doing the hard work and the hours of study.

And when you earn money from the market, that’s a very satisfying feeling.

Those traders who treat it as a game will be wiped out at the market extremes.

The market will give you the lessons you need to learn. And I suppose for these millennial investors, it’s best to get those lessons out the way early, while they’re still young.

Because trading markets is not a game.

Terence Duffy,
Lead researcher, Cycles, Trends and Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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