Giorgio Delgado

Robinhood, The Finance Industry's Newest Innovation

February 28, 2014

If you already haven't heard, a spankin' new brokerage firm called Robinhood has just opened. What is a brokerage firm you ask? A brokerage firm is the intermediary between you, the investor, and a company whose shares you intend to own. The problem with the typical brokerage is that they are companies with a physical presence in many locations with lots of staff, buildings, etc, that carry with them large costs. This means that in order to stay in business, there must be commission charges per trade on top of optional service charges. Depending on the brokerage, you may get charged a flat rate or a per share rate that caps at a max fee per trade.

The problem with commissions is that individuals looking to create a new and much needed source of income generally don't have enough money (or "capital" as the head honchos like to call it) in order to negate the corroding effects of commissions. For example, lets say that you are with TD Waterhouse, which charges you a flat rate of $10.00 per trade (hypothetically). You decide to purchase $490.00 worth of stock, which ends up totalling you $500.00 with the commission.

Because you purchased such a minuscule amount of shares relative to the commission charge, you are now 2% down on the share before the stock has even moved (10 / 490 = 0.02). You need a 2% upward move on the stock before you break even on the investment. This may seem trivial, but these small losses per trade will cost you an arm and a leg over time.

Compounding 2% losses over a prolonged period of time significantly decreases your potential gains. But thats an entirely different topic. Just trust me on this one. 2% is a really big deal.

Now, if we look at a person who chooses to invest $1,000,000.00 in the same company with the same flat $10.00 fee, they have only lost 0.001% from the get-go (in other words, the commission is ___negligible_ ).

Enter Robinhood:

Robinhood has the potential to turn the game on its heels, allowing mere mortals like you and I to invest on a level playing field because they charge nothing per trade. As a startup funded by Google ventures and other investors, they have the capacity to focus on expanding their customer base while looking for alternative sources of revenue such as premium services and deals with developers.

So if you're looking to start investing, first I'd strongly advice that you do your due diligence and find what fits your investing needs best. Secondly I'd suggest you look at the new and revolutionary Robinhood!

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