Last year, a mobile stock brokerage named Robinhood opened to a small number of beta testers. At a time when most brokerages charge $7 to $10 for stock trades, Robinhood offered those trades for free. Its elegant mobile app for iPhone was built to appeal to a younger generation of investors, who would never pick up the phone to call a broker but might happily buy stocks if it could be done in just a few taps.
The pitch proved irresistible to the half a million people who signed up on Robinhood’s waiting list, and the company has raised $16 million from investors including Index Ventures, Google Ventures, and Andreessen Horowitz. Today, Robinhood is officially opening for business — the company is rolling out access to everyone who signs up over the next couple of weeks.
Buy and sells stocks for free, with just a few taps
I’m no stock trader, but there's plenty to like about Robinhood’s app. A dead-simple interface lets you buy and sell stocks with a minimum of taps, and no fees. Elegant charts show you a stock’s performance over time; in a nice touch; the color of the sparkline changes from red to green when the markets are open. The app’s home screen shows you the performance of your entire portfolio.
So now anyone can actively manage their own stock portfolio — but whether you should is another story. Most studies of investor performance suggest the average person is far better off investing in index funds, which tend to track the market’s overall performance, than in individual stocks. Most people can’t time their trades well enough to take advantage of a stock’s highs and lows; one oft-cited academic paper on the subject is titled "Trading Can Be Hazardous to Your Wealth." (Its study of 66,465 households found that heavy traders earned an annual return of 11.4 percent, compared to the market’s returns of 17.9 percent.)
An Android version is coming
Robinhood’s founders say that one reason investors tend to underperform the market is that they pay substantial fees to brokerages, which Robinhood largely eliminates. Instead, the company charges for the ability to buy stocks on "margin," or credit, and also makes money by collecting interest on users’ cash balances. It also plans to offer premium advisory services.
The lack of transaction fees may tempt you to make a lot of trades, but Robinhood's founders say they don't encourage any particular strategy. "We by no means promote just an active investing strategy, or just a passive one," says Baiju Bhatt, a Robinhood co-founder. "I think the ideal strategy is to do a little bit of both." Bhatt suggests investors consider putting 70 percent of their money into diversified securities like index funds and actively manage the rest.
Actively managing a stock portfolio brings on some risk, but millions of Americans do it already. And much of the existing mobile software on the market falls somewhere in between hideous and unusable. An Android version of Robinhood is coming in the first half of next year, and the company is also working on an API that would bring its trading functionality to other apps. Meanwhile, if you’re already making stock trades on your iPhone, Robinhood is well worth a look. And if you’re not, it might just get you hooked.
Robinhood can be downloaded here.
Update, December 12th: This article has been updated to reflect the fact that Robinhood has raised a total of $16 million from investors including Index Ventures.