What Robinhood.com Can Teach Us About Investment Costs

Wall Street Two Signs

Am I paying too much?

This is the number one question that most investors ask themselves. In fact, we all ask ourselves this question when we buy a product or service we don’t know a lot about. I don’t know about you, but I wonder about this same thing with car maintenance. That’s because I don’t know anything about car repairs.

This question causes anxiety. But some people- young people in particular- are taking action to control the costs they pay for investing.

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The young investor viewpoint

As I’ve written in other blogs, young people are pushing down the costs they are willing to pay for investment advice. This generation lived through the dot-com tech bubble burst of 2000/2001, and the mortgage, derivative collapse of 2008/2009.

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This group generally has a lot less trust in financial institutions generally- and they don’t believe that financial advisors can justify their rates. This group would rather pay less, buy index funds– and make their own investing decisions. They favor passive investing (buying an index), rather than active money management (picking specific stock and bonds).

Robinhood.com

I’ve blogged about Wealthfront, which exists to meet the needs of investors who simply want to buy a portfolio of index funds. Robinhood.com does you one better.

Free stock trading.

Now, if you read the fine print, there are some conditions.

  • Self-directed: The investor is using a self-directed cash or margin account.
  • Margin accounts: Buying on margin refers to borrowing money to buy securities. The securities themselves serve as collateral for the loan. Caution: If the value of the securities (collateral) declines, you will be asked to deposit more money to secure the loan.
  • Listed securities: Robinhood allows you to trade US-listed securities that can trade via mobile devices. “Listed” means that a security is listed (part of) an exchange, such as the New York Stock Exchange or NASDAQ. Many securities do not trade on exchanges.

If you’re willing to accept those parameters (and some others), you can trade using Robinhood.

Is third-party advice necessary?

Technology is certainly pushing down the cost of investing. The capabilities of tech also make investing information much easier to access. I still have one concern, however.

Do you need a calm third-party to advise you during market turmoil?

As mentioned above, we’ve seen huge market declines in the past 15 years. Looking back, an investor who held their investments during the decline (or even bought more at the bottom) may have been better off.

Here’s an example: You own IBM common stock at an average investment cost of $40 per share. A market calamity hits. IBM’s sales and earnings are still steady- but the stock is dragged down by the overall reaction to the calamity. IBM’s stock price goes down to $25.

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Now, a financial advisor might say: “IBM is the same company at $25 a share that it was at $40 per share. Hang onto your stock. IBM still generates good sales and earnings. In fact, if you bought more at $25, you would lower your average cost per share.”

My concern is that a do-it-yourself investor may not have that conversation with themselves. They sell IBM at $25- taking a big loss. Five years later, the stock is up to $50 a share. They made a poor decision- a decision out of panic.

It’s up to you

If you feel that you have the self-discipline to make rational investment decisions, do-it-yourself investing may be the solution for you. You can use these great new tools and minimize your investing cost.

It’s up to you- and it’s really about understanding yourself.

Do you use one of these services? I’d love to hear from you.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) http://www.accountingaccidentally.com/

(you tube channel) kenboydstl

Image:

Wall Street Two Signs

Terrapin Flyer, Wall Street (CC BY-SA 2.0)

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6 thoughts on “What Robinhood.com Can Teach Us About Investment Costs”

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