I owe a great deal of gratitude to my father, for not just showing me “dad” things like how to throw a football, but teaching me about the value of money. He gave me my first book about investing. It was a brochure-shaped paperback from The Wall Street Journal called, Guide to Understanding Personal Finance and a second book called, Guide to Understanding Money & Markets. I have still made plenty of financial mistakes in my life, and still continue to do so on occasion, but it probably would have been a lot worse without his guidance.
In college, while interning during the summers, I learned about DRIPs - Dividend ReInvestment Plans that you could open directly through Fortune 500 companies. My father was a big fan of DRIPs and how the recurring reinvestment into the same value stocks could growth your wealth substantially over time. There was even a newsletter you could subscribe to called the DRIP Investor - yes, a physical newsletter that came in the mail! By the time I graduated college, I thought I was an investing master and waltzed into a Charles Schwab office to open my first brokerage account. I no longer wanted to just do DRIPs. I wanted to trade all stocks and even try options. I don’t even remember how much I opened the account with, but it was the bare minimum I could scrape together.
My “broker” commended me on taking such initiative at a young age. I don’t think I ever heard from him again, probably because my balance was so low, it was not worth trying to offer me any equities to buy.
Today, I see lots of millenials interested in financial independence through stock trading and bitcoin. I think it’s great to see, and I firmly believe I can learn just as much from the old brokers as I can from the “new guys and gals” coming up. In fact, I was late to the Robinhood game and the idea of commission free trading. I was a long-term E-Trade customer when they first came out. While Schwab and E-Trade are still around, Robinhood has more customers than both of these firms. Why? Commission free trading of course!
When I started out, you would speak to a broker to “place” your trade. When I moved to E-Trade I thought that was a game changer - being able to buy and sell on my computer without an intermediary. Commissions were around the $10 range and have come down to around $5 today. But even at that level, it can be a killer for young investors. Hence, why Robinhood and mobile apps are the future.
Think of it this way. Everyone knows which stocks have a really good chance of going up in value. I can put money on Google tomorrow at around $1,193 per share and have a pretty good chance that in 2-3 years it will definitely be worth more. But most investors, young and old can’t afford even a single share of Google stock. A commission is nothing more than a fee for being able to acquire a share of stock from the company through a given brokerage. Many companies allow you to buy stock directly, but the process is not nearly as convenient as going through a broker where you can buy almost any stock instantaneously. So the brokerage is basically charging you a convenience fee to use their system for purchasing your piece of Google. Being charged $5 to buy one share of Google is only 0.4% of the price. That’s less than 1%. But in the real world, the average investor is buying stocks that are much lower. On Robinhood, the most popular bought stocks are most likely to be less than $50 per share. A traditional brokerage will charge the same commission regardless of the price of the stock. So a $5 commission on a single share of say AMD stock at $32 a share is 15%. Yes, you just paid $5 to buy one share of AMD stock. So even if that stock never moves, you are 15% in the hole because of your out of pocket cost. Oh, and when you sell, there is a commission for that too. So even if you decided to hold AMD for a while, the stock would have to go to $37 to make your $5 back. Having your portfolio growth 5-10% in a year is considered a decent year. With your purchase of one share of AMD, you’re needing a gain of 3x.
A brokerage that offers commission free trading allows investors to try their hand at owning equities with little risk. You simply need enough money to buy the price of one share and you’re instantly a stockholder of that company. If the stock moves even a few percentage points, you’re profitable. The bigger advantage is when you add to your position over time. If you slowly build up a portfolio, you would be paying $5 many times over. In several years you could easily rack up hundred if not thousands of dollars in commission fees. That money could have gone to buying more stock. This makes the argument for apps like Robinhood, Stockpile, and M1 Finance really compelling.
While there is always room for people to abuse the system, I think there is more benefits to these new platforms than downside. Consistently investing over-time and using dollar cost averaging is a perfect way to use platforms with zero commissions (i.e. they’re not designed for day trading). While you may not get a full selection of stocks, they offer access to all the big names that you should be looking at anyway. If you’re looking for obscure equities and/or foreign stocks all the time, then you need to be on a more advanced trading platform and pay more advanced trading fees.
With the barrier to stock trading so low nowadays there is no reason not to try and build your wealth plan. You don’t have to be married to any one platform either. Most people I know have several brokerage accounts for different purposes - even a mix of traditional and ebrokers. Some of these platforms will even give you a free share when you sign up. Check our blog sidebar for details.
Welcome to StepChange (StpChg). A blog about personal finance, small business, and investing.