There is no denying the fact that the Coronavirus Pandemic had a lasting impact on almost all aspects of our lives. It affected millions of individuals and businesses financially. The world saw record job losses and pink slips being affected in almost every conceivable industry.
Everyone wondered that being dependent on just one source of income can backfire when a crisis of the magnitude of COVID-19 hit us. This made everyone use Google Search for ‘side hustles’ and ‘passive income’ opportunities to establish a more secure source of income.
One area that saw a lot of attention was the world of stock trading and investments. For the longest time, this was the domain of rich and successful professionals and businesses that took help from Wall Street firms to invest in national and international stocks.
This changed when the stock trading app, ‘Robinhood’ made an entry. In the shortest possible time, it emerged as a market disruptor, upending established systems and attracting an entirely new set of individuals and small businesses to the stock market and investment fraternity.
In this resource, we look at how free stock trading platforms have altered the paradigm of investing in stocks. We also shed light on whether there is a catch to everything that is being advocated in the name of ‘free’?
Robinhood: Did It Really Live Up To It’s Name?
Accessible, easy, colourful…
These are just a few of the terms that the founders of Robinhood, Baiju Bhatt and Vlad Tenev used when they started what became the world’s biggest free and commission-free trading app.
The ease of using and investing in stocks using a simple app attracted the attention of first-time novice investors looking to make a fortune in this unexplored world. The result? Stocks of old and dusted companies like Hertz Global Holdings or AMC Entertainment or GameStop soared and soared before coming crashing down.
During the lockdown, Robinhood created such a buzz that it attracted the attention of everyone- financial institutions, government authorities, businesses, investors, and enthusiasts. The Robinhood model spun several similar platforms and models in countries like India and Canada.
When Robinhood first started, brokerage platforms and traders were charging a price of $5 to $10 on every single trade. Robinhood did not charge anything, and there was no minimum. The option to get the best of stock trading without any additional payments was attractive.
The Robinhood Effect: Canadian Brokerage Firms Jump in on the Action
Just across the northern borders of the US, Canada’s brokerage companies were keenly witnessing what was one of the biggest and most dynamic opportunities in the world of trading and investing.
What did they do? They started pushing for the free stock trading model. It should be noted that some of the platforms already had this option, but it was publicized as much as it was in the pre-Robinhood period.
Several stock trading platforms like Qtrade, Questrade, Wealth Simple Trade, and Direct Trading worked hard on creating an app that was simple in terms of the usability and convenience just like the Robinhood app. The result- Canadian brokerage firms started offering free stock and ETF trading.
Even well-established banking and financial institutions like the Canadian Imperial Bank of Commerce (CIBC) and Bank of Montreal (BMO) are jumping on the free stock trading bandwagon.
The Free Stock Trading Effect: Is there any catch?
When we were kids, our elders would always tell us that nothing in this world comes for free. In other words, everything has a price.
When it comes to the world of free stock trading apps, deeper investigations reveal some inherent problems with the system. If nothing is being charged, how do these platforms make any money?
Surely, they have to pay for the tech, maintenance, personnel, office rent, and other overheads/ Is there a way they are making money without the customer or investor knowing about it?
The simple answer is that there is a problem in the way such platforms are structured and make money. Let us turn our attention to some of the risks as has been pointed out by the critics-
- Free stock trading platforms make money by making intentional delays in executing market orders. The time they save can be used profitably to self-serve their own interests. Robinhood had to pay a fine of $65 Million to the SEC for this problem.
- Selling purchase information is another major way how supposedly free stock trading platforms make money. They sell user information and trade projections to bigger investment companies. This is information that is sensitive in nature.
- Since the cost of operations need to be kept at a minimum, investors and traders might have to wait for several days regarding any information that they are seeking from the trading platform. Service costs are reduced leading to wastage of critical time.
- There is also a problem of creating unnecessary delays in accessing payments. While you might think that this is too small a window, when millions are moved, every second delayed might result in the platform making thousands of dollars.
- Finally, such free stock trading platforms are not completely under regulation. Every time a problem happens, the regulatory authorities try to tighten the noose and clamp down. The same happened with Robinhood and many other similar free platforms.
There are many individuals that are lured into the promise of being successful. They are not trained that market carries several risks. One study pointed out that around 80% of retail day traders (buy and sell stocks in a single day) lose their money!
The Future of Free Stock Trading: What you should expect?
While there is no doubt that free stock trading platforms have attracted new individuals into the field, it has not been able to educate them about market dynamics and volatility. The lure of tech, apps, and engagement is there, but there is still a long way to go in terms of providing novice investors with a proper understanding of stocks, options, and even cryptocurrencies.
Most experts believe that in the coming months and years, while free stock trading platforms will continue to soar in popularity, regulators will start keenly observing whether financial propriety is being maintained and followed or not. If you have any doubts that you would like us to address on free stock trading platforms, please reach out to us in the comments below.